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and that ABC failed to make a proper election for its taxable
year ending May 31, 1987. We hold further that ABC made a proper
election for its short taxable period ending December 31, 1987,
since it substantially complied with the election requirements
for this short taxable period. Consequently, we must determine
whether the income forecast method was properly applied to rental
units placed in service in 1988 and to ABC's rental units placed
in service during its short taxable period ending December 31,
1987.
II. Proper Application
The U.S. Court of Appeals for the Tenth Circuit has directed
us to determine whether petitioners improperly applied the income
forecast method because (1) they did not accurately forecast the
income expected over the life of the assets and (2) they did not
make an adjustment for salvage value. ABC Rentals of San
Antonio, Inc. v. Commissioner, 142 F.3d at 1211.
The income forecast method of depreciation requires the
application of a fraction, the numerator of which is the income
from the rent-to-own equipment for the taxable year, and the
denominator of which is the forecasted or estimated total income
to be derived from the rent-to-own equipment during its useful
life. Rev. Rul. 60-358, 1960-2 C.B. 68. This fraction is
multiplied by the cost of the rent-to-own equipment which
produced income during the taxable year, after appropriate
adjustment for estimated salvage value. Id.
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