                 T.C. Summary Opinion 2010-100


                      UNITED STATES TAX COURT



          ARTHUR E. AND CONNIE M. BOYCE, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 26288-08S.              Filed July 26, 2010.



     Arthur E. and Connie M. Boyce, pro sese.

     John D. Davis, for respondent.



     GERBER, Judge:   This case was heard pursuant to the

provisions of section 7463 of the Internal Revenue Code in effect

when the petition was filed.1   Pursuant to section 7463(b), the

decision to be entered is not reviewable by any other court, and




     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue.
                                  -2-

this opinion shall not be treated as precedent for any other

case.

     Respondent determined an $8,939 deficiency in and a $61

addition to petitioners’ 2004 Federal income tax.    After

concessions, the sole issue for decision is whether petitioners

are entitled to a section 179 expense deduction.

                              Background2

        Petitioners resided in Idaho when they filed their petition.

During 2004 petitioners acquired the use of a 2004 Ford

Expedition (truck) from Dan Wiebold Ford, Inc. (Dan Wiebold), for

business purposes.     The truck had a gross capitalized cost of

$43,745 and an adjusted capitalized cost of $39,518.53.       The

contract between petitioners and Dan Wiebold was entitled “MOTOR

VEHICLE LEASE AGREEMENT--CLOSED-END” and called for monthly fixed

payments of $607.06 over a 48-month term.     The amount of the

monthly payments was based on estimated depreciation of

$22,256.53 and an estimated residual value of $17,262.       The

contract permitted petitioners to drive the truck only 11,294

miles per year and imposed an 18-cents-per-mile fee for any

mileage in excess of that amount (excess mileage fee).

Petitioners were required to maintain the truck, have all

necessary repairs made, provide insurance coverage, and pay all



     2
      The parties’ stipulation of facts and the attached exhibits
are incorporated by this reference.
                                 -3-

taxes imposed in connection with the truck.     At the end of the

48-month term, petitioners had the right to make a fixed payment

of $17,612 to acquire unconditional ownership of the truck

(option).   In the event petitioners did not exercise that option,

they were required to pay a $395 termination fee instead.

     Petitioners timely filed a Form 1040, U.S. Individual Income

Tax Return, for 2004.   On the tax return, petitioners claimed a

$28,749 section 179 expense deduction with respect to the truck.

     In an October 10, 2008, notice of deficiency respondent

determined, among other things, that the truck was not a

depreciable asset and that petitioners were therefore not

entitled to a section 179 deduction.     On October 28, 2008,

petitioners timely filed a petition with this Court.

                            Discussion

     Section 179 allows a taxpayer to elect to treat the cost of

section 179 property as a current expense in the year the

property is placed in service.   See sec. 179(a).    In order to

deduct a section 179 expense related to the truck, petitioners

must be the owners of the truck.

     Petitioners contend that they were the owners of the truck

in 2004 because the contract produced a conditional sale rather

than a lease.   Conversely, respondent contends that petitioners’

transaction was a lease, both in substance and form.
                               -4-

     The parties disagree about the approach that the Court

should use to characterize the transaction.    Respondent suggests

we focus on Rev. Rul. 55-540, 1955-2 C.B. 39, whereas petitioners

ask us to focus on Rev. Proc. 2001-28, 2001-1 C.B. 1156.    While

both may provide us with helpful guidance in reaching our

decision, we are not obligated to adhere to either one.

     The attributes of a lease and a sale are often the same or

similar, sometimes blurring the distinction between them.       Many

factors (including petitioners’ obligation to maintain and repair

the truck, carry insurance, and pay all associated taxes) may be

consistent with either a sale or a lease.     See Kanetzke v.

Commissioner, T.C. Memo. 1991-152 (“some of these burdens are of

the type that might normally be required of a lessee as security

or for protection of the interests of a lessor.    And while it is

true that bearing all these expenses may be indicative of

ownership * * * that circumstance is not conclusive.” (Citation

omitted.)).

     In the line of cases involving the issue of whether a

“lease” is in fact a conditional sale, two important

considerations emerge:

     First, if the nominal lessor “retains significant and
     genuine attributes of traditional lessor status, the form of
     the transaction adopted by the parties governs for tax
     purposes.” Frank Lyon Co. v. United States, 435 U.S. 561,
     584 (1978). However, if the benefits, obligations, and
     rights of the putative lessor are essentially those of a
     secured seller, the substance of the arrangement must govern
     and it will be deemed a sale for tax purposes. Swift Dodge
                               -5-

     v. Commissioner, 692 F.2d 651 (9th Cir. 1982), revg. 76 T.C.
     547 (1981); Smith v. Commissioner, 51 T.C. 429, 438-439
     (1968). [Fn. ref. omitted.]

Aderholt Specialty Co. v. Commissioner, T.C. Memo. 1985-491.

     The lessor’s benefits, obligations, and rights resemble

those of a secured seller where:   (1) The lease term extends

throughout the equipment’s entire useful life, Mt. Mansfield

Television, Inc. v. United States, 342 F.2d 994 (2d Cir. 1965);

(2) the lease is an open-end lease,3 Swift Dodge v. Commissioner,

692 F.2d 651 (9th Cir. 1982), revg. 76 T.C. 547 (1981); Leslie

Leasing Co. v. Commissioner, 80 T.C. 411 (1983); (3) title

automatically passes to the lessee upon conclusion of the lease

or when the sum of the rental payments equals the cost of the

equipment, Chicago Stoker Corp. v. Commissioner, 14 T.C. 441

(1950); (4) the lessee has an option to purchase the equipment at

a nominal or below-market price, Transamerica Corp. v. United

States, 7 Cl. Ct. 441 (1985); Van Valkenburgh v. Commissioner,

T.C. Memo. 1967-162; or (5) the lessor has an option to compel

the lessee to purchase the equipment, Aderholt Specialty Co. v.

Commissioner, supra.




     3
      “Whether a lease is open-end or closed-end depends on who
assumes the risk fluctuation in residual value of the leased
property when the lease terminates. When the lessee assumes the
risk, the lease is called open-end; otherwise, it is a closed-end
lease.” Leslie Leasing Co. v. Commissioner, 80 T.C. 411, 413 n.3
(1983).
                                  -6-

     Here, none of these elements is present.   The term of the

lease was less than the useful life of the truck.    The record

does not establish the truck’s precise useful life, but the fact

that the parties expected it to have a residual value of $17,262

(approximately 39.5 percent of the truck’s gross capitalized

cost) indicates that the truck would not reach its salvage value

at the conclusion of the lease.    The contract was not an open-end

lease requiring petitioners to compensate Dan Wiebold for any

unanticipated depreciation at the conclusion of the lease, and

petitioners were required to pay a nominal $395 termination fee

regardless of the truck’s actual residual value.    The contract

did not confer title to the truck on petitioners.    Petitioners

could acquire title only if they exercised their option to

purchase the truck.   The option price of $17,612 was not a

nominal amount because it exceeded the truck’s estimated residual

value and represented approximately 40.3 percent of the truck’s

gross capitalized cost.   Thus, at the time the contract was

signed, there was no certainty that petitioners would exercise

the option.

     In similar cases involving closed-end leases where the

lessees had not assumed the risk of depreciation, courts have

held the disputed transactions to be leases.    See Nw. Acceptance

Corp. v. Commissioner, 500 F.2d 1222 (9th Cir. 1974), affg. 58

T.C. 836 (1972); Lockhart Leasing Co. v. United States, 446 F.2d
                                -7-

269 (10th Cir. 1971); Estate of Thomas v. Commissioner, 84 T.C.

412 (1985).

     In addition, the contractual limitation on the annual use of

the truck bears heavily against characterizing the contract as a

conditional sale agreement.   Petitioners were required to pay 18

cents per mile for any mileage in excess of 11,294 miles per

year, and there is no reason a purchaser would be subject to such

a restriction.   The excess mileage fee does not shift the risk of

depreciation to petitioners because it is substantially less than

the rate of depreciation factored into petitioners’ monthly

payments (approximately 49.3 cents per mile).4   Dan Wiebold thus

remained responsible for approximately 63.5 percent of the

depreciation caused by any excess mileage.   In addition, Dan

Wiebold was completely responsible for any unexpected decrease in

the truck’s residual value which was not caused by excess use of

the truck (e.g., a general decline in the resale value of Ford

trucks, poor economic conditions, etc.).   A secured seller would

not bear such risks.

     An argument can be made that petitioners could conceivably

have driven the truck so that the total excess mileage fee would

have exactly equaled the truck’s estimated residual value.    In




     4
      The depreciation rate of 49.3 cents per mile was computed
by dividing $22,256.53 of depreciation by the maximum allowed
mileage of 45,176 miles during the life of the contract.
                                 -8-

that case, petitioners would, in effect, have completely borne

the additional $17,262 of depreciation.

     However, the terms of the contract indicate that petitioners

and Dan Wiebold did not consider this a reasonable possibility.

Petitioners would have had to drive the truck for 95,900 excess

miles in order for the total excess mileage fee to equal $17,262.

In petitioners’ best-case scenario, this would amount to a total

of 107,194 miles.5   But at the 49.3-cents-per-mile rate of

depreciation provided for in the contract, petitioners and Dan

Wiebold expected the truck to be completely worn out at 80,214

miles.

     Even if petitioners were able to drive the truck for 95,900

excess miles, the mere existence of such a possibility does not

establish petitioners’ ownership of the truck because it does not

directly address the risk of depreciation.   Dan Wiebold, under

the agreement, substantially bore the economic benefits and

burdens of the excess mileage.   For example, in any of the

situations where petitioners’ excess mileage amounted to less

than 95,900 excess miles, Dan Wiebold would have been left with a

truck worth less than $17,262 and would have shouldered 63.5

percent of the difference between the truck’s estimated and

actual residual values.   In any of the situations where



     5
      All 107,194 miles were driven in a single year and zero
miles driven in the other 3 years.
                                 -9-

petitioners’ excess mileage exceeded 95,900 excess miles, Dan

Wiebold would have enjoyed the resulting windfall profit.     In

either case, Dan Wiebold was responsible for the consequences of

any excess mileage and therefore held the risk of depreciation.

     Accordingly, we hold that the contract is a lease agreement

and that petitioners are not entitled to the claimed section 179

expense deduction.

     To reflect the foregoing,


                                            Decision will be entered

                                       for respondent.
