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customer of the customer's rights to return the rental unit at
any time, normally a subsequent rental contract, having the same
provisions and weekly or monthly rental payment as the initial
rental contract, would be executed with another customer.4
During the tax years in issue, each Entity periodically sold or
purchased rental units to or from the other Entity at the selling
Entity's book value.5
Rental units ceased to be in an Entity's depreciable rental
inventory upon the occurrence of the following events: (1)
Customers' retaining rental units for the full term of the rental
contract; (2) customers' electing the early purchase option
thereunder; (3) selling or junking substantially damaged rental
units which were returned to an Entity by customers; (4) theft of
4The term of the subsequent rental contract would be
adjusted, when so required, according to the Entity's internal
schedule. This internal schedule might require a reduction in
the term of the lease depending upon the number of days the
rental unit had been previously rented. In a small minority of
circumstances, the weekly or monthly rental payments also would
be reduced under the subsequent rental contract on returned
rental units which had sustained a diminished value beyond normal
wear and tear. Normally this procedure would continue to be
followed until a customer retained the rental unit for the full
term of the rental contract.
5The Entities used the straight line method of depreciation
for book purposes with an 18-month useful life to depreciate all
of the rental units. Such transfers between Entities were not
made for tax reasons, but for the purpose of transferring rental
units to maximize their income potential. The term of the rental
contract of the rental units so purchased, which had been
previously rented by the selling Entity, was adjusted
accordingly.
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Last modified: May 25, 2011