                         T.C. Memo. 2001-52



                      UNITED STATES TAX COURT



            REGINALD AND RONDA CHARLSON, Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent

            GREAT AMERICAN STAGELINE, INC., Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket Nos. 12840-99, 12905-99.     Filed February 28, 2001.



      Reginald and Ronda Charlson, pro sese in docket No. 12840-

99.

      Reginald Charlson (an officer), for petitioner in docket No.

12905-99.

      Linette B. Angelastro, for respondent.
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              MEMORANDUM FINDINGS OF FACT AND OPINION


     FOLEY, Judge:     By notice dated April 21, 1999, respondent

determined the following deficiencies relating to petitioners’

Federal income taxes:

        Reginald and Ronda Charlson, docket No. 12840-99

                Year                       Deficiency
                1994                        $125,027
                1995                          26,775
                1996                          30,058

       Great American Stageline, Inc., docket No. 12905-99

                Year                       Deficiency
                1995                         $25,749
                1996                          38,652
                1997                             841

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.   After concessions, the issue for decision is whether

any petitioner is entitled to an investment tax credit (ITC) that

was carried forward from 1985.

                           FINDINGS OF FACT

     When their respective petitions were filed, Reginald and

Ronda Charlson resided in Westlake Village, California, and Great

American Stageline, Inc. (Great American), had its principal

place of business in Newbury Park, California.

     The Charlsons owned two corporations, Great American, a C

corporation, formed in 1974, and C & C Investments, Inc. (C & C),
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an S corporation, formed in 1977.    Mr. and Mrs. Charlson each

owned 50 percent of each corporation.     Great American operated

intercity buses that were purchased by, and leased from, C & C.

     In 1985, C & C purchased, and placed in service, seven

intercity buses.   C & C leased these buses to Great American from

January 1, 1986, through January 31, 1990, a term of 49 months.

At the conclusion of the first lease, C & C and Great American

entered into a second lease for an additional 19 months, from

February 1, 1990, through August 31, 1991.     The leases were

negotiated separately and did not contain options to renew, and

the payment amounts and lease terms were different.     C & C

purchased the buses for the sole purpose of leasing them to Great

American.

     The buses were qualified investment property which qualified

for an ITC pursuant to section 38.     The useful life of each of

the buses was 9 years.

     The Charlsons’ subsequent tax returns claimed the ITC

carried over from 1985 and passed through C & C.     In a prior

audit, respondent examined the Charlsons’, but not C & C’s, 1989

Federal income tax return, without challenging the ITC carryover.

                              OPINION

1.   Eligibility for Investment Tax Credit

     Section 38 allows an ITC, for qualified investments, the

amount of which is determined under section 46.     Section
                               - 4 -

46(e)(3), as in effect in 1985, limited the availability of the

ITC to noncorporate lessors, including S corporations.

Noncorporate lessors were entitled to the ITC only if either:

(A) The lessor manufactured or produced the leased property; or

(B) the property was leased for a term of less than 50 percent of

the useful life of the property, and the section 162 deductions

allowable to the lessor during the first 12 months after transfer

to the lessee exceeded 15 percent of the rental income.    See sec.

46(e)(3).   The parties agree that C & C did not manufacture or

produce the buses.   To determine whether the lease term exceeded

50 percent of the useful life of the property, two or more

successive leases entered into, relating to the same or

substantially similar items of section 38 property, are

aggregated.   See sec. 1.46-4(d)(4), Income Tax Regs.    Whether the

terms of two or more leases are aggregated depends on the facts

and circumstances, and our determination of the duration of the

lease is based on the “realistic contemplation” of the parties

when the property was placed in service.   Borchers v.

Commissioner, 95 T.C. 82, 88-89 (1990)(concluding that if “the

substance of the transaction is that the lessee will continue

leasing the property beyond the period stated in the lease, then

the specified lease term is disregarded and the lease is

considered to be of indefinite length”), affd. 943 F.2d 22 (8th
                                 - 5 -

Cir. 1991); see also Owen v. Commissioner, 881 F.2d 832, 834 (9th

Cir. 1989), affg. T.C. Memo. 1987-375.

     Although the leases were negotiated separately and the terms

changed, C & C purchased the buses for the sole purpose of

leasing them to Great American.    At the time the buses were

placed in service and the first lease was entered into, the

parties believed C & C would lease the buses to Great American

beyond the period stated in the lease.    Indeed, the term of the

two leases, when aggregated, was 68 months, more than half the 9-

year useful life of the buses.    In addition, petitioners failed

to introduce any evidence relating to whether their allowable

section 162 deductions exceeded 15 percent of the rental income

received by C & C during the first 12 months of the lease.      In

short, the lease did not meet the requirements of section

46(e)(3).    Accordingly, the Charlsons are not entitled to the ITC

relating to the years in issue.

     We also note that Great American was not entitled to claim

the ITC.    Section 48(d) allows a lessor to elect to treat the

lessee as the purchaser if the lessor files a statement of the

election.    See sec. 1.48-4(a), Income Tax Regs.   Petitioners did

not file such an election.    To the contrary, C & C claimed the

credit in 1985 and passed it through to the Charlsons.
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2.   Estoppel Relating to Prior Audit

     Petitioners contend respondent is estopped from challenging

the Charlsons’ carryover of the credit, because the Charlsons’

Federal income tax return for 1989 was audited and the ITC

carryover was not challenged.    Respondent is not bound, however,

to allow the same treatment in a subsequent year, even where

similar erroneously reported items were unchallenged in an audit

of a prior year.   See Union Equity Cooperative Exch. v.

Commissioner, 58 T.C. 397, 408 (1972), affd. 481 F.2d 812 (10th

Cir. 1973); Fidelity Commercial Co. v. Commissioner, 55 T.C. 483,

490 (1970), affd. per order (4th Cir., Sept. 1, 1971).

Accordingly, respondent was not estopped from disallowing the

carryover of the ITC claimed by the Charlsons in 1994, 1995, and

1996.

     Contentions we have not addressed are moot, irrelevant, or

meritless.

     To reflect the foregoing,


                                              Decisions will be entered

                                         under Rule 155.
