                        T.C. Memo. 1998-229



                      UNITED STATES TAX COURT



          EL CHARRO TV RENTAL, INC., DIANA L. PETERS,
                TAX MATTERS PERSON, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 25467-92.                     Filed June 29, 1998.



     John R. Gerdes and Timothy P. O'Sullivan, for petitioner.

     Edith F. Moates, for respondent.



                        MEMORANDUM OPINION

     GERBER, Judge:   Respondent, on August 12, 1996, filed a

motion for entry of decision, seeking to cause petitioner to

comply with respondent's understanding of the parties’

stipulation to be bound by the outcome of the same issues for

earlier years.   This case was calendared for trial at Oklahoma
                               - 2 -


City, Oklahoma, and was tried on June 1, 1994.    At the conclusion

of the trial, the parties agreed to defer the setting of post-

trial briefing dates in order to await the outcome of the earlier

case1 already under consideration by another division of this

Court.   The parties in this case stipulated to a substantial

portion of the facts and proffered only a limited amount of

testimony.   The parties believed that they could agree to be

bound by the outcome of El Charro I, but presented their evidence

in the event that factual distinctions were found in that case.

The earlier case involves three cases that had been consolidated

for trial.   El Charro TV Rental, Inc. (El Charro), is one of the

participating entities involved in the earlier consolidated

cases.   Petitioner’s 2 taxable years prior to those before the

Court in this case are the subject of El Charro I.    It was

thought that an opinion in El Charro I could obviate the need for

briefing and an opinion in this case.

     Following an opinion in El Charro I, the parties contacted

the Court and advised that an agreement had been reached to

settle all issues in this case subject to the outcome of

petitioner's appeal of El Charro I.    On June 15, 1995, the


     1
       For purposes of this opinion, the earlier case is referred
to as "El Charro I". ABC Rentals of San Antonio, Inc. v.
Commissioner, T.C. Memo. 1994-601, affd. without published
opinion sub nom. El Charro TV Rental, Inc. v. Commissioner, 79
F.3d 1145 (5th Cir. 1996), and revd. and remanded 97 F.3d 392
(10th Cir. 1996).
                                 - 3 -


parties’ stipulation of settlement was filed.   In the

stipulation, the parties agreed that the same issues were present

in El Charro I and that a “Notice of Appeal was filed with [the

Tax Court by the petitioner in this case] appealing * * * [El

Charro I] to the 5th Circuit.”

     The operative paragraphs of the parties’ stipulation are as

follows:

          5. If the Circuit Court determines the income
     forecast method of depreciation is not a proper method
     for depreciating the rental units inventory of the
     taxpayer in * * * [El Charro I] the parties agree that
     the above adjustments shall be resolved as if the
     petitioner in this case were the same as the taxpayer
     in * * * [El Charro I]. In that event, a decision
     shall be submitted in this case when the decision in
     * * * [El Charro I] becomes final under I.R.C. § 7481.

          6. If the Circuit Court does not determine the
     income forecast method of depreciation is an improper
     method for depreciating the rental inventory of the
     taxpayer in * * * [El Charro I], there remains in
     dispute in this case the application of the income
     forecast method to the petitioner’s rental units
     inventory. In that event, no new evidence will be
     introduced by the parties and the issue will require
     briefing by the parties.

     During the time the appellate case was pending before the

Court of Appeals for the Fifth Circuit, the parties in this case

submitted status reports.   Eventually, they advised that on

February 14, 1996, the Court of Appeals for the Fifth Circuit,

without published opinion, affirmed this Court's opinion in El

Charro I.   On May 1, 1996, the Court of Appeals for the Fifth
                               - 4 -


Circuit denied a request for a rehearing en banc in El Charro I.2

After the time for filing a petition for certiorari had expired,

respondent moved for entry of decision.   In response to that

motion, petitioner contended that the affirmed opinion in El

Charro I failed to address the legal issue presented in this case

and El Charro I.

     We were persuaded to delay ruling on respondent’s motion

because the same issues concerning the other participants in the

earlier consolidated cases had been appealed to the Court of

Appeals for the Tenth Circuit by the participants other than

petitioner.   The Court of Appeals, on April 14, 1998, issued its

opinion, reversing and remanding the opinion issued by this Court

as it affected the two controlling case participants other than

petitioner herein.   At this juncture, alternative possibilities

for resolution have been exhausted, and it is not appropriate to

delay further action on respondent's motion.

Discussion

     The operative language of the agreement between petitioner

and respondent limits the resolution of the adjustments in this

case to the same result obtained by petitioner as a litigant in

El Charro I if it was decided that the income forecast method was


     2
       El Charro TV Rental, Inc. v. Commissioner, 79 F.3d 1145
(5th Cir. 1996), rehearing denied 85 F.3d 627 (5th Cir. 1996),
affg. without published opinion ABC Rentals of San Antonio, Inc.
v. Commissioner, T.C. Memo. 1994-601.
                               - 5 -


not the proper method for depreciating a rental units inventory.

Further, the controlling result was limited to the final outcome

of the appeal to the Fifth Circuit.    If the income forecast

method had been found to be permissible, it would have then been

necessary to consider the underlying facts in this case to

determine whether petitioner qualifies.

     The Court of Appeals for the Fifth Circuit affirmed this

Court’s decision without published opinion.    Petitioner here

argues that the Court of Appeals' failure to issue a published

opinion does not comply with paragraph five of the parties’

stipulation or agreement, which comes into play “If the Circuit

Court determines the income forecast method of depreciation is

not a proper method for depreciating the rental units”.    It is

petitioner's position that the Court of Appeals’ affirmance

without published opinion is not a determination by the Court of

Appeals.   This argument is without merit.   By affirming this

Court's decision, the Court of Appeals has made the requisite

determination.

     Accordingly, this Court’s opinion in El Charro I is

dispositive.   Our review of ABC Rentals of San Antonio, Inc. v.

Commissioner, T.C. Memo. 1994-601, affd. without published

opinion sub nom. El Charro TV Rental, Inc. v. Commissioner, 79

F.3d 1145 (5th Cir. 1996), and revd. and remanded 97 F.3d 392

(10th Cir. 1996), reveals that this Court did consider and decide
                                 - 6 -


whether, as a matter of law, the income forecast method could be

used in connection with consumer durables leased under rent-to-

own contracts.

     In El Charro I, respondent had determined that the income

forecast method could not be used with the particular assets in

question.3     In ABC Rentals of San Antonio, Inc. v. Commissioner,

supra, the Court saw the question to be addressed as:     “whether

the consumer durables leased under rent-to-own contracts are

properties properly depreciable under the income forecast

method.”     Focusing its attention on section 168(f)(1),4 the Court

held:

     that petitioners have failed to demonstrate that the
     consumer durables leased in their rent-to-own business
     constitute property properly depreciated under the
     income forecast method of depreciation. It is clear
     that the consumer durables in this case are not
     property similar in character to the assets which have
     been allowed to use the income forecast method of
     depreciation.

The Court’s underlying rationale for its holding included the

following:




     3
       In this case, the parties presented three issues,
including the issue decided in El Charro I. The other two issues
involved whether El Charro made a valid election to use the
income forecast method under sec. 168(f)(1) and whether use of
the income forecast method clearly reflects its income. The
question decided in El Charro I, however, preempts and obviates
any need to consider the “other two issues.”
     4
       Section references are to the Internal Revenue Code in
effect for the period under consideration.
                               - 7 -


          The underlying theory of the income forecast
     method is that the useful life of certain assets of an
     artistic or creative character does not depend on
     physical wear or tear or the mere passage of time, but
     rather the vagaries of public taste. Consequently, an
     estimate is made of the total income expected to be
     derived from such an asset throughout its projected
     lifetime in the business. The depreciation for a given
     year is then allocated based on the net income actually
     earned in that year. In this case, however, the
     consumer durables were leased for fixed terms, and the
     income stream produced by these assets was relatively
     steady, unlike that of the television films * * *.

     Petitioner, in support of her position, offered the

following quote from this Court’s El Charro I opinion:

          Where a taxpayer makes an election pursuant to
     section 168(f)(1), the Commissioner determines that the
     elected method is improper, the taxpayer bears the
     burden of proof with respect to the issue that the
     useful life of the property is properly measured under
     the unit-of-production method or any other method not
     expressed in terms of years (including the income
     forecast method). In view of the even flow of income
     earned by these assets, and because the useful life of
     these assets is accurately measured by the passage of
     time and ordinary wear and tear, we hold the income
     forecast method of depreciation is not appropriate or
     applicable in this case as it produces a distortion of
     income and does not further the integrity of periodic
     income statements by making a meaningful allocation of
     the cost entailed in the use of the asset to the
     periods to which it contributes. We, therefore, hold
     that petitioners have not met their burden of proof
     with respect to the depreciation deductions claimed
     during the taxable years in issue. * * *

     Focusing on the above-quoted portion of this Court’s

Memorandum Opinion, petitioner argues that factual distinctions

exist between the methodology used in El Charro I and in this

case.   In that regard, petitioner points out that a different

calculation method was used for rental units in the years
                                - 8 -


currently before the Court than was used for the years involved

in the factual pattern for El Charro I.   Petitioner further

contends that the El Charro I opinion is binding for rental units

placed in service during 1987 and 1988, but that it is not

binding for the 1989 and 1990 years now before the Court.

Petitioner also contends that she met her burden of proof

referred to in the El Charro I opinion as to the accurate use of

the floating method to measure useful life of rental units.

     We disagree with petitioner’s interpretation of this Court’s

above-quoted opinion.   The holding in that case is that the

income forecast method may not be used for the type of asset used

in El Charro's business.   In the paragraph relied upon by

petitioner, the Court is explaining that, in addition to the

rental property’s not being legally appropriate for use of the

income forecast method, as a factual matter, the calculation

method used for those years to compute the amount of depreciation

did not comport with the principles underlying the income

forecast methodology.   In addition, the parties’ stipulation

agreement would permit consideration of whether petitioner

factually qualified for use of the income forecast method only if

it were decided that such method was available for use with

respect to the rental assets.

      The Court of Appeals for the Tenth Circuit describes the

issue in the earlier consolidated cases as “a legal issue
                                 - 9 -


regarding application and interpretation of § 168(f)(1).”         ABC

Rentals of San Antonio, Inc. v. Commissioner, __ F.3d __ (10th

Cir., Apr. 14, 1998) (slip op. at 6).      In addition, that Court of

Appeals also noted that, even if the underlying facts had not

been stipulated, “this case still would present a mixed question

of law and fact in which the legal issues predominate.”      Id.     In

ABC Rentals of San Antonio, Inc. v. Commissioner, supra, the

Court of Appeals for the Tenth Circuit decided that section

168(f)(1) did not preclude use of the income forecast method, and

the case was remanded to this Court for a decision as to whether

a proper election was made under section 168(f)(1) and whether

the income forecast method was properly applied to produce

reasonable depreciation allowances.      Id. (slip op. at 23).5

         On occasion, this Court relies on a test case process for

resolving issues that affect more than one taxpayer.      See Rybak

v. Commissioner, 91 T.C. 524 (1988); Clayden v. Commissioner, 90


     5
       The earlier consolidated cases were appealed to different
appellate venues (the Courts of Appeals for the Fifth and Tenth
Circuits). Petitioner, as Tax Matters Person of El Charro,
appealed to the Fifth Circuit, and the other two cases were
appealed to the Tenth Circuit. Although the El Charro I opinion
was affirmed without published opinion by the Fifth Circuit, on
Sept. 27, 1996, the Court of Appeals for the Tenth Circuit
reversed and remanded the ABC Rentals of San Antonio case. See
ABC Rentals of San Antonio, Inc. v. Commissioner, 97 F.3d 392
(10th Cir. 1996). A rehearing was sought, and, on Apr. 14, 1998,
the Court of Appeals for the Tenth Circuit granted the rehearing
petition and vacated and revised its original opinion. The
revised opinion reversed the decision in the case of ABC Rentals
of San Antonio and remanded for further proceedings.
                                - 10 -


T.C. 656 (1988); Anderson v. Commissioner, 83 T.C. 898 (1984),

affd. without published opinion 846 F.2d 76 (10th Cir. 1988);

Sennett v. Commissioner, 69 T.C. 694 (1978).       To some extent, the

test case process depends upon the parties’ agreement to be bound

by the outcome in the test case.

     A settlement stipulation, including a stipulation to be

bound, is “in all essential characteristics a mutual contract"

that is "entitled to all of the sanctity of any other contract.”

Saigh v. Commissioner, 26 T.C. 171, 177 (1956); see Fisher v.

Commissioner, T.C. Memo. 1994-434; Estate of Satin v.

Commissioner, T.C. Memo. 1994-435.       In this regard, general

principles of contract law are applied in construing such

agreements.   Robbins Tire & Rubber Co. v. Commissioner, 52 T.C.

420, 435-436 (1969); Fisher v. Commissioner, supra; Estate of

Satin v. Commissioner, supra.    Generally, we look within the

“four corners” of the agreement to ascertain the intent of the

parties.   Rink v. Commissioner, 100 T.C. 319, 325 (1993), affd.

47 F.3d 168 (6th Cir. 1995).    Where an agreement is ambiguous,

the Court may look to extrinsic evidence to determine the

parties’ intentions.   Woods v. Commissioner, 92 T.C. 776 (1989).

      As discussed above, the El Charro I opinion of the Tax

Court holds that, under section 168(f)(1), El Charro was not

entitled to use the income forecast method for the type of

property in service.   The parties agreed to be bound in this case
                               - 11 -


by the holding in El Charro I as determined by the Court of

Appeals for the Fifth Circuit.    By affirming the Tax Court’s

decision, the Court of Appeals has confirmed (determined) that

the income forecast method for depreciation is not a proper

method for depreciating the rental units inventory.    There is no

ambiguity in the parties’ agreement or the El Charro I opinion.

     El Charro is in a paradoxical situation because it may

experience a result different from the taxpayers whose cases were

appealed to the Court of Appeals for the Tenth Circuit and

because it may have had the right to appeal to the Court of

Appeals for the Tenth Circuit.    El Charro was incorporated in

Texas and alleged that its principal place of business is in

Kansas.    El Charro’s lot was chosen by reaching an agreement with

respondent to be bound by the outcome of the appeal to the Fifth

Circuit.   That choice cannot now be retracted because a more

favorable result might occur for El Charro.    In order to maintain

the finality of parties’ agreements to resolve cases, it is

necessary to enforce the parties’ agreement here.

     To reflect the foregoing,

                                      Respondent's motion for entry

                                 of decision will be granted, and

                                 decision will be entered in accord

                                 with the parties’ agreement.
