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Tax Court holds income forecast method not proper for rent-to-own company.

Companies using the income forecast depreciation method should be aware of a recent Tax Court case that holds that this method was improper for consumer durables. In ABC Rentals of San Antonio, Inc., TC Memo 1994-601, the court held that the companies failed to demonstrate that the consumer durables leased in their rent-to-own business were properly depreciated under the income forecast method.

The consumer durables in the case were appliances, furniture, televisions, stereos and video cassette recorders, which were leased to individuals under rent-to-own leases. The court noted that 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, the total income expected to be derived from such an asset (such as a film), and its projected lifetime, can vary widely.

The court pointed out that the consumer durables were dissimilar to assets for which the income forecast method is permissible, because the consumer durables were leased for fixed terms, and the income stream produced was relatively steady.

Another case on this issue currently pending in the Tax Court is Grauel Enterprises, Inc., which also addresses the use of the income forecast method of depreciation in the rent-to-own business. Grauel Enterprises contains the additional issue of whether rent-to-own transactions were installment sales, rather than leases, for Federal income tax purposes.
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Title Annotation:ABC Rentals of San Antonio, Inc.
Author:Howe, Vicki
Publication:The Tax Adviser
Article Type:Brief Article
Date:Apr 1, 1995
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