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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
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