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period ending December 31, 1987. Guaranteed and ABC timely filed
their Federal corporate income tax returns for S corporations for
the calendar year 1988.
Guaranteed and ABC operated commercial enterprises which
rented consumer durables (appliances, furniture, televisions,
stereos, and video cassette recorders) under rent-to-own leases
to individuals. Both Entities have been in the rent-to-own
business for a number of years. During the tax periods in
controversy, Guaranteed and ABC estimated that the total gross
rental anticipated to be received on each rental unit (except for
initial rental contracts on rental unit purchases as transfers
between companies as discussed below) would be 300 percent of its
initial cost. This method of determining the total gross rental
anticipated to be received was consistent with the practice in
the rent-to-own industry. In determining the weekly or monthly
rental rate, as the case may be, for each rental unit, the
Entities divided such expected total gross rental by the total
number of weeks or months, as the case may be, under the initial
rental contract for such rental units.
Whenever a rental unit either was picked up by an Entity or
returned to that Entity prior to all payments being made under
the initial rental contract, due either to a failure of the
customer to timely pay periodic rent or the exercise by the
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