# Transamerica Corp. v. United States

> United States Court of Claims · August 31, 1988 · 15 Cl. Ct. 420

URL: https://www.frixlaw.com/law-library/cases/6826238

## Case

- **Full name:** TRANSAMERICA CORPORATION for itself and for all members of the Affiliated Group v. United States
- **Court:** United States Court of Claims
- **Decided:** August 31, 1988
- **Citations:** 15 Cl. Ct. 420; 62 A.F.T.R.2d (RIA) 5489; 1988 U.S. Claims LEXIS 144
- **Precedential status:** Published
- **Opinion:** Opinion of the court by Harkins
- **Judges:** Harkins
- **Cited by:** 11 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/6826238

## How later opinions describe it (automated extraction)

- holding that payments yielding an equity interest do not qualify for deduction under section 162(a)

## Opinion text

CONTENTS
Issues Page
(1) I.R.C. § 51 Tax Surcharge 425
(2) I.R.C. § 421(b) Deduction 425
(3) Air Craft Leases 425
(4) I.R.C. §§ 921, 922 (WHTC) 425
(5) Bad Debt Deduction (SCORE) 425
(6) Investment Tax Credits for Films 425
(7) Computational Adjustments 426
(8) Title Plant Leases 426
Facts 427
Disposition 436
Conclusion 443
(9) Charitable Contributions 443
Facts 444
Property Involved 444
UA Business 448
American Film Institute 449
Library of Congress 450
University of Wisconsin 451
Negotiations for Conveyances 451
Gift Instruments 455
Valuations 458
Depreciation Recapture 463
Disposition 464
Final Positions 464
Library Property 467
Date of Conveyance 474
Conclusion 474
University Property 475
Ziv-TV Original 35mm Negatives 480
Date of Completion 480
Valuation of Witnesses 481
Valuation of Categories 484
Markets 486
Conclusions 489
Summary 491
(10) Order on All Claims 491
OPINION
HARKINS, Senior Judge:
Transamerica Corporation, plaintiff, a Delaware corporation with principal offices in San Francisco, California, in tax years 1968 and 1969 filed consolidated federal income tax returns as the common parent of an affiliated group of corporations. In 1968, the affiliated group consisted of plaintiff and 228 includable subsidiaries; in 1969, the affiliated group consisted of plaintiff and 258 includable subsidiaries.
On March 9,1979, plaintiff filed two complaints in the United States Court of Claims, relative to the taxable years ending December 31,1968, and December 31,1969, respectively. On September 28, 1979, the two cases were consolidated for all purposes, except computation and entry of *425 judgment. Both complaints were amended in June 1980. As amended, each complaint challenged IRS determinations on eight substantive issues.
The cases initially were assigned to Judge Miller. During pretrial preparation, the issues were bifurcated, with the question of liability on each issue to be resolved first, and computation of damages on all issues to be deferred until entry of final judgment. Appeals of the various decisions on all liability and damages issues would follow final judgment on the entire case. On September 18, 1986, prior to determination of liability on two of the contested issues, the cases were reassigned to this court.
In a joint stipulation dated December 18, 1986, the parties agreed to waive their rights to retrial of the liability issues that had been resolved by Judge Miller. The stipulation applies to the following matters:
1. IRC § 51 Tax Surcharge Issue: On July 5, 1984, on cross-motions for summary judgment, defendant’s motion for partial summary judgment was allowed. See opinion in 5 Cl.Ct. 477 (1984). *
2. IRC § 421(b) Deduction (Stock Option Issue): Trial of this issue was held in January 1984 in San Francisco, California. On December 18, 1984, an opinion was filed that concluded plaintiff was not entitled to the deductions involved and that this claim would be dismissed. See opinion in 7 Cl.Ct. 119 (1984).
3. Aircraft Leases Issue: This issue concerns recapture of depreciation and investment credit on leases of certain aircraft. Trial of this issue was held in January 1984 in San Francisco, California. On February 22, 1985, an opinion was filed that concluded the leases in fact were conditional sale contracts and that plaintiff’s claims with respect to the aircraft leasing issue would be dismissed. See opinion in 7 Cl.Ct. 441 (1985).
4. IRC §§ 921, 922 — Western Hemisphere Trade Corporation (WHTC) Deduction: For years 1968 and 1969, plaintiff took certain deductions for members of the affiliated group that qualified as Western Hemisphere trade corporations. After plaintiff and the IRS agreed upon adjustments for each year, certain deductions claimed by plaintiff remained in dispute. On March 31, 1982, plaintiff filed a motion for partial summary judgment, and on April 7, 1983, defendant filed a response in which it did not contest the motion as to either year. By order dated June 14, 1983, plaintiff’s motion for partial summary judgment was allowed.
5. Bad Debt Deduction: In 1969, a subsidiary of plaintiff entered an agreement with stockholders of Scientific Commercial Research Services Limited (SCORE) to purchase shares of and lend money to SCORE. After a default settlement, debt remained outstanding and plaintiff deducted the outstanding notes as bad debt, which the IRS disallowed. This same issue, with respect to later years, was pending in Federal District Court for the Northern District of California. In a memorandum and order dated November 14, 1984, Judge Miller accepted the parties’ stipulation that the SCORE issue in this court would be bound by the decision of the District Court on the same issue. On January 24,1986, the parties to the District Court proceeding agreed to a settlement of the SCORE issue. In accordance with the November 14,1984, order, the stipulation of the parties in the District Court proceedings is binding in this court, and no further proceedings remain in this court on this issue, other than calculations pursuant to the terms of the settlement agreement.
6. Investment Tax Credits for Films: In its determination of allowable investment tax credits for films for tax years 1968 and 1969, the IRS did not account for certain carryover credits for the years 1962 through 1966, certain credits earned in 1968 and 1969, and certain carryover credits for 1967. Plaintiff's *426 claims on these issues were settled by the parties’ agreement that the Government would withdraw its objections to the allowance of a claim for refund based on the restricted interest calculation attributable to investment tax credits for films, and that such investment tax credits plus interest could carry forward and associated net operating loss claimed in 1970 could carryback. This agreement was reported to Judge Miller at a pretrial conference on July 8, 1982. In the December 18, 1986, stipulation, which is accepted by the Court, the parties agree that the previous agreement is binding and that this issue is settled.
7. Certain computational issues, such as the propriety of and calculations for interest in assessed deficiency for tax year 1969, and carryback adjustments, remain. These remaining issues will be calculated and resolved by mutual agreement after final decisions on the underlying substantive issues.
The two remaining liablity questions that were transferred to this court on September 18, 1986, involved the IRS recharacteri-zation of certain title plant leases, and the IRS disallowance of deductions for claimed charitable contributions of film property to the Library of Congress and the University of Wisconsin. Liability as to the title plant leases was determined in an opinion filed on March 8, 1988. Trial of the charitable contributions issue was completed on June 22, 1987, and posttrial briefing was completed on December 18, 1987.
The March 8, 1988,. opinion on the title plant leases, which was not reported when filed, is included in this opinion. Resolution of the charitable contributions issue follows.
TITLE PLANT LEASES
Transamerica’s involvement in the title plant leases issue is a result of the acquisition of Title Guaranty Company (Title Guaranty), a Colorado corporation doing business in the Denver metropolitan area. The acquisition occurred during the period October 10, 1962, through December 20, 1962, by means of an exchange of common stock. By December 20, 1962, Trans-america had acquired 100 percent of the issued outstanding stock of Title Guaranty.
When it was acquired, Title Guaranty had lease arrangements that involved two title plants, one in Boulder County, and one in Mesa County, Colorado. The Boulder County lease, effective on January 1, 1961, had as parties the Boulder County Abstract of Title Company and members of the Hickman families. Title Guaranty, effective February 3, 1961, merged with the Boulder County Abstract of Title Company, with Title Guaranty as the surviving corporation. The lease transaction involving Mesa County was made December 28, 1961, effective January 1, 1962. The parties were Title Guaranty and a partnership composed of Richard B. Williams and G. Dale Williams doing business as the Mesa County Abstract Company.
In 1966, Transamerica transferred all of the stock of Title Guaranty to Trans-america Title Insurance Company, a California corporation that was a wholly owned subsidiary of Transamerica. In 1966, Title Guaranty changed its name to Trans-america Title Insurance Company of Colorado. On November 30, 1967, Trans-america Title Insurance Company of Colorado was liquidated into Transamerica Title Insurance Company. Transamerica Title Insurance Company succeeded to all of the rights and obligations of Transamerica Title Insurance Company of Colorado, including its rights and obligations under the Boulder and Mesa leases.
At all times material, Title Guaranty and its successors, for financial reporting purposes, treated the Boulder lease and the Mesa lease as leases. The title plants were not included as assets on its balance sheets, and rents paid were expensed on its income statements. For federal income tax purposes, the rents paid were deducted.
On its consolidated federal income tax returns, under IRC § 162(a)(3), plaintiff deducted $22,000 in payments in 1968 and 1969 on the Boulder lease. On the Mesa lease, the deduction was $6,600 for 1968 and $6,745 for 1969. On audit, the rental deductions were disallowed because the *427 IRS recharacterized the leases as installment purchase contracts.
Trial of the title plant leases issue was held in Washington, D.C. on February 27-29, 1984. The parties have filed extensive stipulations of fact, proposed findings of fact, and posttrial briefs during the period December 2, 1983, and April 8, 1987.
The issue to be determined is whether defendant properly recharacterized, as conditional sales contracts rather than leases, the agreements under which Title Guaranty gained access to the Boulder County and Mesa County title plants.
FACTS
Most of the essential facts have been stipulated by the parties. The parties’ differences arise from the conclusions to be drawn from the undisputed facts, and the precedent applicable to those facts and conclusions.
The title plant leases issue involves (1) the business of preparing and selling abstracts of title, and (2) the title insurance business.
An abstract of title consists of a chronological list and description of all recorded documents affecting the title to a particular parcel of real property. In general, the title abstracting business consists of preparing abstracts of title for a fee. In the usual situation, such abstracts are requested by an attorney who has been engaged by a prospective vendee or mortgagee of property to render an opinion on the state of the vendor’s or mortgagor’s title. The attorney’s opinion is based largely on the facts disclosed in the abstract of title.
One of the principal assets of a title abstracting business is its “title plant.” A title plant consists of a specialized set of books, records, maps, charts, plats, indices, film and related materials (also referred to as “abstracting materials”) covering all transactions involving real property located within a particular county. Such transactions are indexed according to parcels of property. This is in contrast with the governmental indexing system maintained by the County Recorders in the various counties in Colorado (and most other states), which index real property transactions by the names of the grantor and the grantee, mortgagor and mortgagee, etc.
A title plant is established and maintained by employees of the title company making a record (or “abstract”) of every document filed with a county recorder on a daily basis, briefly noting the vital information involved (such as the particular parcel, the nature of the document, the persons involved, and other relevant information), which information is then transcribed onto the books maintained by the title company. Information is also gathered from other official sources, including but not limited to judgments and bankruptcy records that may affect title to real property and that are recorded by the clerks of various courts.
The “books” of a title plant consist of two types, tract books and abstract books. The tract books consist of the daily tract indices of recorded documents affecting real property. The abstract books consist of the transcribed abstracts of recorded title documents. The “maps” of a title plant are also of two types, subdivision maps and arbitrary maps. Subdivision maps are copies of recorded maps subdividing larger parcels of real property. Arbitrary maps are unofficial subdivision maps prepared by the title company for its own internal use in searching titles. “Plats” is an alternate term for official subdivision maps; “charts” is an'alternate term for arbitrary maps. The term “indices” is an alternate term for tract books. The term “records” refers to all of the records described above, plus miscellaneous records such as judgment and bankruptcy records and microfilm records.
A title plant may have an indefinite useful life because its records will always be useful to some extent unless, of course, they are somehow rendered obsolete by a change in the law or some advance in technology. It is good business practice in the title insurance industry and, especially, in the title abstracting business to maintain a complete title plant back to the date that patent was issued. Nevertheless, the actu *428 al use and resulting value of older title plant records becomes less frequent because, each time an abstract or insurance policy is issued for a piece of property, the general practice is to review the title plant records only for transactions that have occurred since the issuance of the last abstract or insurance policy. The proportion of times requiring recourse to the older records would still be less overall even if the volume of real estate transactions increase as a given county prospers.
The title insurance business consists of selling policies of insurance guarantying a particular state of title with respect to a parcel of property. A title insurance policy is also based upon an abstract of title, usually prepared from the insurance company’s title plant records. From the title abstracting-insurance company’s viewpoint, the principal differences between title abstracting and title insurance are (i) the basis of the fee charged (the premium for a title insurance policy is based upon the insured value of the property whereas the fee charged for an abstract of title is based upon the number of documents in the chain of title since the last abstract was certified), (ii) the nature of the risk assumed by the company (errors and omissions in an abstract of title give rise to a cause of action, if any, based upon negligence, whereas an insurance company is absolutely liable for loss, up to the face amount of the policy, resulting from defects of title not excepted in the policy), and (iii) the elimination of the attorney’s opinion of title (although attorneys employed by the company examine the abstracts when necessary).
Title Guaranty
Title Guaranty’s primary business from 1911 until at least 1962 was preparing and selling abstracts of title with respect to real property. Until 1961, Title Guaranty’s title abstracting business was limited to the Denver, Colorado metropolitan area, consisting of Denver County, Adams County, Arapahoe County, and Jefferson County. From its inception, Title Guaranty had engaged in the title insurance business.
Before 1948, the title plant records were maintained in handwritten or typewritten form. Beginning in 1948, Title Guaranty and other title companies in Colorado began to make photographic copies on microfilm of the full text of recorded title documents and to make microfilm duplicates of their records. In some cases, Title Guaranty and its successors also made microfilm copies of all of their pre-1948 handwritten or typewritten records to an arbitrarily selected prior date. These duplicate records were created and have been maintained both for more efficient operation of abstracting titles and to provide security to the title company in the event that its primary abstracting materials are destroyed. These microfilm records are the “film” referred to as part of the abstracting materials of a title plant.
Colorado has for many years maintained a system of licensing title abstractors. Colorado Rev.Stat. § 12-1-101, et seq. Among the statutory requirements for obtaining a license are that the applicant own or have access to a reasonably complete title plant and, in a county already having a licensed abstractor, that another licensed abstractor is needed, based upon current or anticipated business.
Beginning in the mid-1950’s Title Guaranty was anxious to expand its title insurance business as rapidly and as extensively as circumstances permitted. Among the obstacles faced by Title Guaranty in the mid-1950’s to expanding its title insurance business throughout Colorado were a lack of staff and facilities in counties outside the four-county Denver area, a reluctance on the part of the community at large to accept title insurance as true insurance and in lieu of the traditional attorney’s opinion of title, and the fact that Title Guaranty would have to compete with local businessmen (including abstractors and attorneys) who were securely established in the title business in the various counties of Colorado.
As a first step to solving its lack of staff and facilities outside the four-county Denver area, Title Guaranty established agency relationships with the owners of indepen *429 dent title abstracting businesses in other counties (although some agency relationships had been established as early as 1942). Through such independent agents, Title Guaranty was able to sell title insurance in counties where it had no staff or facilities.
Title Guaranty’s independent insurance agents were generally selected on the basis of their reputations as title abstractors. Most such agents were the only licensed abstractors and the owners of the only complete abstracting plants within their respective counties. In general, these persons were very prominent in the business communities of their respective counties and were regarded as the most important persons in such counties for purposes of securing title insurance business.
For many years prior to 1961, Title Guaranty’s major Colorado-based competitor in the title abstracting business in the four-county Denver area and for title insurance business throughout Colorado was Record Abstract and Title Insurance Company (Record Abstract). In the mid-1950’s, Title Guaranty’s competition for title insurance business from Record Abstract and larger non-Colorado-based national companies intensified. In the mid-1950’s four national title insurance companies formed a cooperative type company to establish a title plant in the four-county Denver area so that each could compete more effectively with Title Guaranty and Record Abstract for title insurance business in that area. Such competition also included attempts by Record Abstract and other companies to establish insurance agency relationships with the same persons with whom Title Guaranty had established agency relationships. In the late 1950’s and early 1960’s, Title Guaranty determined that it would be desirable to establish more permanent relationships with its independent agents in order that such agents would not be lost to Title Guaranty’s competitors.
In approximately 1959, the management of Record Abstract changed, and Lloyd Hughes (hereinafter referred to as Hughes) became President of and gained effective control over that company. Prior to 1959, Hughes and Donald Graham (an officer of Title Guaranty, hereinafter referred to as Graham) had informal discussions regarding a merger of Title Guaranty and Record Abstract. It was thought that a merger would be advantageous to both parties, and that they could compete more effectively with the larger non-Colorado based national title insurance companies.
Hughes was apprehensive of a simple merger of Record Abstract into Title Guaranty because Title Guaranty was a larger company and a consolidated board of directors would be dominated by former Title Guaranty directors. For this reason, and because Boulder County was a natural area of expansion for both companies (the City of Boulder being regarded in some respects as a suburb of the Denver metropolitan area), Hughes negotiated with Aksel Nielsen (hereinafter referred to as Nielsen), President of Title Guaranty, to make the Boulder Corporation a party to the proposed merger. Nielsen accepted Hughes’ demand that, as a condition to Record Abstract’s merger into Title Guaranty, the Boulder Corporation be made a party to the merger.
Boulder County
The Boulder County Abstract Company (hereinafter referred to as the Boulder Company) was formed in 1871. H.C. Hickman purchased an interest in the Boulder Company in 1922, increased his interest to a controlling interest in the Boulder Company in 1933, and soon thereafter became the sole owner of the Boulder Company. At all times material hereto, H.C. Hickman’s ownership interest in the Boulder Company was shared equally with his wife, Laurena 0. Hickman.
In approximately 1945, H.C. Hickman’s son, James 0. Hickman (hereinafter referred to as Hickman), began to work for the Boulder Company. In the early 1950’s, H.C. Hickman gave to Hickman a 50 percent ownership interest in the Boulder Company. At all times material hereto, Hickman’s ownership interest in the Boulder Company was shared equally with his wife, Patricia J. Hickman.
*430 At or about the time of its formation in 1871, the Boulder Company established and began to maintain and update a complete title plant with respect to real property titles in Boulder County, Colorado. The Boulder Company’s title plant records date from 1865. Records predating 1876, at which time Colorado became a state, include geographically posted Territorial Commission records. The Boulder Company’s title plant contains approximately 660,-000 documents from the period 1876 through 1961. At all times material hereto, the Boulder Company’s title plant, as maintained and updated by its successors, has been the only complete title plant in Boulder County, Colorado.
From the time of its formation in 1871 until some time in the mid-1950’s, the principal business of the Boulder Company was preparing and selling abstracts of title with respect to real property located in Boulder County, Colorado. In the early 1940’s, the Boulder Company began to sell policies of title insurance with respect to property located in Boulder County, Colorado, in addition to conducting its title abstracting business. For this purpose, it entered into agreements with both Title Guaranty and with Record Abstract to act as an agent for selling policies of title insurance on behalf of such companies.
During the 1940’s, the Boulder Company’s title abstracting business constituted approximately 90 percent of its total business, and its title insurance business constituted approximately 10 percent. By 1962, title insurance business accounted for approximately 85 percent of the total business of the Boulder Company and its successor, and title abstracting business was only 15 percent of the total business.
For the period 1945 through approximately 1959, the Boulder Company was organized as a general partnership. The partners, after the early 1950’s, were H.C. Hickman, Laurena O. Hickman, Hickman, and Patricia J. Hickman. In approximately 1958, the members of the Hickman family decided to incorporate the Boulder Company. The Boulder County Abstract of Title Company (hereinafter referred to as the Boulder Corporation) was organized as a Colorado corporation in approximately 1959.
To implement its desire to limit exposure to liability, the only assets transferred by the Boulder Company to the Boulder Corporation consisted of accounts receivable, furniture and equipment, and goodwill (including its title abstracting and title insurance agency businesses), the book value of which, in the aggregate, was $20,000. The Boulder Company also arranged to have its errors and omission liability insurance coverage reissued in the name of the Boulder Corporation. Neither the Boulder Company’s title plant nor the building in which it conducted its business were transferred to the Boulder Corporation. At the time of the transfer of the business of the Boulder Company to the Boulder Corporation, there was no specific expectation or anticipation of a subsequent acquisition of the Corporation by Title Guaranty or by any other company.
The Boulder Company retained ownership of its title plant. The title plant was leased to the Boulder Corporation for rents determined by reference to the gross receipts of the Boulder Corporation.
The building in which the Boulder Company and subsequently the Boulder Corporation conducted its business was owned by The Hickman Company, a corporation all of the stock of which was owned by Hickman and Patricia J. Hickman. This building was also leased to the Boulder Corporation.
In July or August 1960, representatives of Title Guaranty approached Hickman with a proposal that the Boulder Corporation be merged into Title Guaranty at the same time as Record Abstract was to be merged, and the parties commenced negotiating the terms of the proposed merger at that time. The Hickmans did not consider selling the Boulder Company’s title plant to the Boulder Corporation. Rather, the Hickmans felt it was to their benefit to consider the package arrangement: (i) the lease; (ii) employment contract for Hickman, Sr. that ran for his life as well as his wife’s life; (iii) employment contract for *431 Hickman, Jr.; and (iv) stock from Title Guaranty.
Title Guaranty did not have the funds to make an outright, lump-sum purchase of the abstracting materials owned by the Boulder Company. Even if it could have borrowed the money, it would then have been required to schedule the debt on its books and records and this, in turn, would have seriously impaired its ability to sell title insurance. Title Guaranty regarded this balance sheet distinction as important at a time when title insurance was not generally regarded as true insurance in Colorado and it, Title Guaranty, was attempting to enhance its image and expand its penetration into the business of title insurance.
In the course of the negotiations between representatives of Title Guaranty and the Boulder Corporation, it was understood that Title Guaranty would need to use the title plant then under lease to the Boulder Corporation. Graham, and subsequently Nielsen insisted that the title plant lease had to be renegotiated and a new agreement executed prior to approval of the merger because the rights and obligations of the Boulder Corporation with respect to the title plant lease (which was negotiated by the Hickmans in approximately 1959 between the Boulder Company and the Boulder Corporation) were to be assumed by Title Guaranty in the proposed merger. While technically the renegotiation was between the Boulder Corporation and the Boulder Company, in practical effect the negotiations for a new agreement covering the title plant were between the Hickman family interest, represented by Hickman, and Title Guaranty, represented by Nielsen.
On January 1, 1961, H.C. Hickman, Laurena 0. Hickman, Hickman, and Patricia J. Hickman, as partners, and the Boulder Corporation executed a Lease Agreement and Option (the Boulder Lease) to become effective on that date. In negotiating the amount to be paid under the new title plant agreement, Hickman insisted on setting forth minimum payments and Nielsen insisted upon setting forth maximum payments.
The Boulder Lease recited that, inter alia:
(a) The lessors were to lease to the Boulder Corporation all of their abstracting materials, including books, records, maps, charts, plats, indices, and film theretofore used by them in the conduct of their business of abstracting titles to real property in Boulder County for a period of 30 years beginning January 1, 1961, through January 1, 1991. The Boulder Corporation was to pay amounts designated as annual rent for the use of the abstracting materials as follows: $20,000 for the first 5-year period; $22,000 for the second 5-year period; $24,-000 for the third 5-year period; 5 percent of gross income but not less than $24,000 nor more than $40,000 for the fourth 5-year period; and 5 percent of gross income but not less than $24,000 nor more than $35,000 for the final 10-year period. No portion of the payments designated as rentals were designated as interest. One-half of each monthly payment was to be paid to H.C. Hickman and Laurena O. Hickman, and one-half of each monthly payment was to be paid to Hickman and Patricia J. Hickman.
(b) The Boulder Corporation was granted the right at the end of the Lease term to exercise an option to purchase the abstracting materials for $25,000. No payments designated as rentals were to be credited toward the option price.
(c) The abstracting materials were to remain the sole and exclusive property of the Lessors for the duration of the Lease, subject to the Boulder Corporation’s right to use such materials. All additions subsequent to January 1, 1961, to the abstracting materials were the sole and exclusive property of the Boulder Corporation.
(d) The Boulder Corporation was required to maintain fire and hazard insurance with respect to the abstracting materials of at least $100,000 and to maintain errors and omissions liability insurance in an amount not less than $100,000. If, during the period of the Lease, the abstracting materials were destroyed or substantially *432 damaged, the Boulder Corporation was to replace all materials within a reasonable time at its own expense.
Negotiations between Hickman, Graham and Nielsen regarding the proposed merger of the Boulder Corporation into Title Guaranty also covered a new employment contract regarding H.C. Hickman. The employment agreement dated January 1,1961, between H.C. Hickman and the Boulder Corporation recited, inter alia, that H.C. Hickman would perform consulting services on an irregular basis for the Boulder Corporation. The Boulder Corporation was required to pay H.C. Hickman $10,000 per year from 1961 through August 15, 1967, and $5,000 per year thereafter for the remainder of H.C. Hickman’s life. In the event of H.C. Hickman’s death, the Boulder Corporation was required to pay $5,000 per year to Laurena O. Hickman for the remainder of her life.
The negotiations between Hickman and Nielsen regarding the proposed merger of the Boulder Corporation into Title Guaranty included a renegotiation of the building lease between The Hickman Company and the Boulder Corporation. On or about January 1, 1961, The Hickman Company as lessor and the Boulder Corporation as lessee entered into a lease agreement whereby, inter alia, The Hickman Company agreed to lease to the Boulder Corporation the building in which the Boulder Corporation conducted its abstract and guaranty title insurance business for a 5-year period commencing January 1, 1961, through January 1, 1966. The Boulder Corporation was required to pay rents in the amount of $800 per month. This building lease agreement was renewed on substantially identical terms for the period January 1, 1966, through January 1, 1971.
A final Plan of Merger for the merger of Record Abstract and the Boulder Corporation into Title Guaranty was approved by the Board of Directors of Title Guaranty on January 20, 1961, and by the shareholders of Title Guaranty on January 30, 1961. The Plan of Merger for the merger of Record Abstract and the Boulder Corporation into Title Guaranty recited, inter alia: Title Guaranty was designated as the surviving corporation. Upon the effective date of the merger, all rights, privileges, property, debts due, and all and every other interest of or belonging to Record Abstract and the Boulder Corporation became vested in Title Guaranty, and all rights of creditors, liens, debts, liabilities, and duties of Record Abstract and the Boulder Corporation became enforceable against Title Guaranty. Pursuant to this paragraph of the Plan of Merger, Title Guaranty succeeded to the rights and obligations of the Boulder Corporation regarding the Boulder lease, the building lease with The Hickman Company and the H.C. Hickman employment agreement. The Plan of Merger explicitly stated that the assets of the Boulder Corporation did not include the abstracting materials owned by the Boulder Company, nor the building owned by The Hickman Company, but that Title Guaranty would succeed to the Boulder Corporation’s Lease agreements with respect thereto. The merger of Record Abstract and the Boulder Corporation into Title Guaranty was effective on February 3, 1961.
Shortly after the effective date of the merger, and as negotiated among Nielsen, Hickman, Hughes, and two others, Title Guaranty entered into employment contracts with Nielsen, Hughes, Hickman, and two former Title Guaranty directors and employees, Fred Klein and Andrew Dyatt. Pursuant to these employment agreements, each of the aforementioned individuals was to be employed by Title Guaranty for 5 years at specified salaries, plus an annual bonus, each such person was to be a member of the Title Guaranty Board of Directors, and each such person was to be a member of the executive committee of such board. Hickman was actively employed by Title Guaranty and its successors from February 3,1961, until he left the company in 1971.
All amounts received from Title Guaranty and its successors under the Boulder Lease were reported as ordinary income by H.C. Hickman and Laurena O. Hickman on their joint federal income tax returns and by Hickman and Patricia J. Hickman on their joint federal income tax returns.
*433
Mesa County
The Williams family had established the Independent Abstract Company, a title abstracting business, in 1905. Richard B. Williams (Williams) entered into the title abstracting business in Grand Junction, Mesa County, Colorado, in June 1936. Williams purchased the Independent Abstract Company from his father before 1940, purchased in 1951 the only remaining title abstracting business in Mesa County, and operated his business under the name The Mesa County Abstract Company. In the mid-1950’s, Williams’ son, G. Dale Williams, began to work for him in the title abstracting business. Thereafter, Williams gave to G. Dale Williams a 30 percent share of the business. Williams and G. Dale Williams continued to operate the title abstracting business as a partnership, under the name The Mesa County Abstract Company (hereinafter referred to as the Mesa Company). In approximately 1956, Nielsen persuaded Williams to become a title insurance sales agent for Title Guaranty.
By 1940, Williams had acquired or established, and thereafter maintained and updated, a complete title plant with respect to real property titles in Mesa County, Colorado. The Mesa Company’s title plant records date from 1883, at which time Mesa County was partitioned out of Gunnison County. The Mesa Company’s title plant contains approximately 500,000 documents from the period 1883 through 1961. At all times material hereto, Williams was the only licensed title abstractor in Mesa County and the abstracting materials that were the subject of the Mesa Lease constituted the only complete title abstracting plant in Mesa County.
In 1961, Nielsen and Hickman approached Williams for the purpose of employing Williams and securing Mesa Company’s title plant by Title Guaranty. After approximately two months of discussions, Williams was persuaded to enter into an agreement. Williams was not in favor of what he termed an “outright” sale. Williams was interested in staying in the business, and in providing an employment opportunity for his son. He preferred that his payments be “spread over a period of time” rather than “getting any sizable amount of money at one time.” •
Title Guaranty did not have the funds to make an outright, lump-sum purchase of the abstracting materials owned by Williams and G. Dale Williams. Even if it could have borrowed the money, it would have then been required to schedule the debt on its books and records and this, in turn, would have seriously impaired its ability to sell title insurance. Title Guaranty regarded this balance sheet distinction as important at the time when title insurance was not generally regarded as true insurance in Colorado and it, Title Guaranty, was attempting to enhance its image and expand its penetration into the business of title insurance.
In the meetings on the negotiations underway with the Mesa Company for Title Guaranty to lease the abstracting materials of Mesa, there was no discussion regarding a lump-sum purchase of the Mesa Company’s abstracting materials. Nor were Title Guaranty’s officers authorized to negotiate or enter into such an agreement.
On December 28, 1961, Williams and G. Dale Williams and Title Guaranty executed a Lease Agreement and Option (the Mesa Lease), to become effective January 1, 1962. The Mesa Lease recited that, inter alia:
(a) The lessors were to lease to Title Guaranty all of their abstracting materials including charts, plants, indices, and film previously used by the lessors in the conduct of their title abstracting business for a 30-year period beginning January 1, 1962, through January 1,1992. Title Guaranty was required to pay amounts designated as annual rent for the use of the abstracting materials of the greater of $6,600 or 5 percent of Title Guaranty’s gross receipts with respect to title business in Mesa County. No portion of these payments was designated as interest. Seventy percent of each monthly payment was to be paid to Williams, and 30 percent of each monthly payment was to be paid to G. Dale Williams.
*434 (b) Title Guaranty was granted the right at the end of 17-1/2 years or at any time thereafter during the lease term to exercise an option -to purchase the abstracting materials for $25,000. No payments designated as rentals were to be credited toward the option price.
(c) The abstracting materials were to remain the sole and exclusive property of the lessors for the duration of the Lease, subject to Title Guaranty’s right to use such materials. All subsequent additions to the abstracting materials were the sole and exclusive property of Title Guaranty.
(d) Title Guaranty would employ both Williams and G. Dale Williams and each agreed not to compete with Title Guaranty.
(e) Title Guaranty was required to maintain fire and hazard insurance with respect to the abstracting materials of at least $80,000 and to maintain errors and omissions liability insurance in an amount not less than $100,000. If, during the period of the Lease, the abstracting materials were destroyed or substantially damaged, Title Guaranty was to replace all materials within a reasonable time at its own expense without regard to the amount already paid.
By letter dated January 1, 1962, from Title Guaranty to Williams and signed and approved by Williams, Williams was employed by Title Guaranty at a salary of $500 per month. By letter dated January 1, 1962, from Title Guaranty to G. Dale Williams, approved and signed by G. Dale Williams, G. Dale Williams became an employee of Title Guaranty and manager of the Title Guaranty Mesa County Branch. G. Dale Williams’ salary was $7,500 per year plus 10 percent of yearly gross receipts in excess of $100,000.
On or shortly after January 22, 1962, Williams purchased 65 shares of previously unissued capital stock of Title Guaranty. On February 1, 1962, Title Guaranty entered into an agreement with G. Dale Williams whereby G. Dale Williams was granted an option to purchase 65 shares of unissued capital stock of Title Guaranty from Title Guaranty at an option price of $194 per share. The agreement recited that the stock option was to provide an incentive to G. Dale Williams to devote his best efforts in managing the Mesa County Branch and that the stock option was intended to qualify under Section 421 of the Internal Revenue Code of 1954. G. Dale Williams exercised such option at some time during 1962 or early 1963.
A lease agreement dated as of January 1, 1962, was executed by Williams and Title Guaranty which provided, inter alia, that Williams would lease to Title Guaranty the building he was using to conduct his abstract and guaranty title insurance business.
G. Dale Williams was employed by Title Guaranty as the manager of its Mesa County Branch under the direction of Williams. In May 1963 he terminated his employment for personal reasons. Williams was actively employed at the Mesa County Branch from January 1,1962, and became manager of that Branch upon the termination of G. Dale Williams. Williams continued as manager of the Mesa County Branch as an employee of Title Guaranty and its successors until September 1, 1976, at which time he retired. Before Williams’ retirement, Title Guaranty’s successor’s share of the market for title insurance business in Mesa County was approximately 85 percent; shortly after his retirement, its market share dropped to approximately 40 percent.
The Mesa Lease transaction provided for a minimum payment of $6,600 per annum for a 30-year period. The Mesa Lease transaction also provided Title Guaranty an option to purchase when any time after 17-1/2 years Title Guaranty could pay the $25,000 option price. In 1979, Trans-america, as Title Guaranty’s successor, did exercise its option to purchase the Mesa Company. Transamerica Title Insurance Company exercised its option to acquire legal title to the abstracting materials that were the subject of the Mesa Lease transaction on June 14, 1979, and has paid the $25,000 option price with respect thereto. Williams reported the rental payments received from Title Guaranty on the Lease Agreement as rental income on its income tax returns.
*435 In the mid-1960's, G. Dale Williams sold his interest in the Lease Agreement between The Mesa County Abstract Company and Transamerica Title Insurance Company, successor to Title Guaranty, to his father. After graduating from law school in 1966, G. Dale Williams was employed as a trust officer with First National Bank in Grand Junction, Mesa County, Colorado. Two years later, G. Dale Williams left that position to practice law full-time in Grand Junction. G. Dale Williams tooks no part in the transaction between The Mesa County Abstract Company and Transamerica Title Insurance Company when the latter in 1979 exercised its option to purchase the title plant for Mesa County.
In November 1984, James L. Roffe (Roffe) representing Transamerica Title Insurance Company, approached G. Dale Williams about selling Transamerica’s interest in the title business in Mesa County. G. Dale Williams resolved to proceed and actively pursued negotiations to purchase the Mesa County title business. All of the negotiations were between G. Dale Williams and Roffe. G. Dale Williams entered into an Agreement of Sale with Roffe on December 31, 1984, to take effect on January 1, 1985. The sale price was $160,-000. Included were: (1) the complete title plant dating from 1883 to the present; (2) the physical assets of the business including furniture and fixtures; (3) “Work in Process”, comprised of Transamerica’s outstanding contracts; (4) two building leases, both to run through December 31, 1987; and (5) the goodwill of the existing business. Also as a part of the transaction, G. Dale Williams entered into an Agency Agreement with Transamerica Title Insurance Company on December 31, 1984, in which he agreed to act exclusively as its agent in Mesa County.
In making his purchase, G. Dale Williams was advised by James Grisier (Grisier), a certified public accountant in Grand Junction since 1972 who has represented a number of clients in buying and selling businesses and who has made many appraisals in conjunction with various transactions in Mesa County. Grisier has been G. Dale Williams’ and his father’s personal accountant since 1981.
On or about February 26, 1985, G. Dale Williams sent a letter to Transamerica Title Insurance Company’s Los Angeles office setting forth his final allocation of the purchase price for the Mesa County title business. The letter indicated that G. Dale Williams would conclude that the allocation was acceptable if he did not hear to the contrary. G. Dale Williams did not hear to the contrary, concluded that Transamerica Title Insurance Company accepted his allocation and so proceeded to use that allocation in both his financial records and tax returns.
The purchase price allocation as set forth in the February 26,1985, letter and G. Dale Williams’ and Grisier’s bases therefor are as follows:
Furniture and Fixtures $ 63,780.00
Title Records 46,485.00
Goodwill 15,494.00
Work in Process 19,503.00
Building Leases 14,738.00
TOTAL $160,000.00
The basis for the allocation as to title records and goodwill, was: After deducting the values allocated to the furniture and fixtures, the work in process, and the building leases from the total price paid for the business ($160,000), 75 percent of the remaining balance was allocated to the title records and 25 percent to goodwill. The value of the title plant itself, which included both the original 1883-1961 plant and the subsequent additions, was based on G. Dale Williams’ experience and knowledge and Grisier’s estimations of its future value. Accordingly, G. Dale Williams believed that the original, pre-1962 records had a value of less than 50 percent of the $46,485 for all title records.
G. Dale Williams is now President and General Manager of Abstract & Title Company of Mesa County, Inc., the privately held corporation he formed to purchase the title business. He personally oversees the company’s entire operations, spending approximately 80 percent of his time with the business. Both of G. Dale Williams’ sons *436 are full-time employees and officers of the company.
DISPOSITION
Plaintiffs challenge to the IRS recharac-terization of the Boulder and Mesa leases rests on compliance with the requirements of section 162(a)(3) of the Internal Revenue Code of 1954. 26 U.S.C. § 162 (a)(3) (1982). That section provides the ordinary and necessary expenses in carrying on a business are deductible if the payments are for the “continued use or possession” of property to which the “taxpayer has not taken or is not taking title or in which he has no equity.”
The parties disagree as to the analysis to be applied in the determination of whether the agreements properly may be characterized as leases or as conditional sales. Plaintiffs argument concentrates on the intent of the parties in entering the transactions. Business realities at the time, the terms and form of the agreements, and the conduct of the parties are emphasized as evidence of the intent to make and satisfy the traditional concepts of a leasehold transaction. Defendant emphasizes elements in the transactions that indicate an intent to acquire title to and to use “uniquely irreplaceable” assets for an indefinite future period. Defendant’s argument concentrates on the significance of the options, the expectation of the parties that the options would be exercised, and the characteristics of the option prices that bear upon the likelihood or guarantee they would be exercised.
Numerous cases have considered whether an agreement, which was in form a lease, was in substance a sale for purposes of determining whether income should be reported by a taxpayer as rental receipts or income from the sale of property. The burden is on the taxpayer to prove that the IRS characterization of the transaction as a conditional sale was erroneous. Lewis v. Reynolds, 284 U.S. 281 , 52 S.Ct. 145 , 76 L.Ed.2d 293 (1932); Dysart v. United States, 169 Ct.Cl. 276 , 340 F.2d 624 (1965). The labels employed by the parties to a transaction are not controlling; the substance of the transaction, rather than its form, is determinative. Helvering v. Lazarus & Co., 308 U.S. 252 , 60 S.Ct. 209 , 84 L.Ed. 226 (1939). The focus is on the practical effect of the transaction, not its technical effect. Northwest Acceptance Corp. v. Commissioner, 58 T.C. 836 (1972), aff'd, 500 F.2d 1222 (9th Cir.1974). In determining whether a transaction is a lease or a purchase, its effect on both parties to the transaction must be analyzed and the business involved must be examined. Lockhart Leasing Co. v. Commissioner, 446 F.2d 269, 272 (10th Cir.1971). In Oesterreich v. Commissioner, 226 F.2d 798, 801-02 (9th Cir.1955), the court stated:
If the parties enter into a transaction which they honestly believe to be a lease but which in actuality has all the elements of a contract of sale, it is a contract of sale and not a lease no matter what they call it nor how they treat it on their books.
There is no single criterion that shows the essence of a commercial deal negotiated between businessmen with differing interests. All of the aspects of the arrangement must be examined to form a judgment as to whether the parties intent was to negotiate for the use of property or for the transfer of ownership.
In fact, since most transactions exhibit a variety of circumstances which point in opposite directions, the cases have been decided on the basis of all of the facts and circumstances there presented.
Kansas City So. Ry. Co. v. Commissioner, 76 T.C. 1067, 1094 (1981).
It is necessary to examine the economic nature of the payments. Rental is a payment merely for the use of property, and it contemplates return of the rented property at the termination of the lease. On the other hand, if payments, though denominated rental, are required to be made in amounts that actually cover the full economic value of the property, and ownership ultimately will be transferred, they are a payment for ownership. If the user of the property in fact acquires an economic equity in the property by virtue of the payments, and the property will be *437 worth substantially more than the price to be paid upon exercise of the so-called option to purchase, then the user will have been building up a true economic interest in the property. Universal Drilling Co. v. United States, 412 F.Supp. 1231 (E.D.La.1976).
Plaintiff relies heavily on Frank Lyon Co. v. United States, 435 U.S. 561 , 98 S.Ct. 1291 , 55 L.Ed.2d 550 (1978) as a change in the law and a significant reordering of the factors to be considered. Plaintiff argues that the United States Supreme Court’s decision in Frank Lyon holds that where the transaction is the result of bonafide negotiations conducted at arms-length, and where the transaction form is encouraged or compelled by legitimate business or regulatory realities, the taxpayer will only have to' demonstrate that it has retained some of the traditional attributes of a lessor. Plaintiff articulates the change in the scope of examination that is to be made when a recharacterization of a lease has been challenged. As to intent, plaintiff argues: The determination of objective intent, however, is inextricably linked to the parties’ subjective intent. Where the facts and circumstances present at the time the transaction was consummated indicate that the lease was the product of economic realities and arms-length negotiations, the courts will more readily accept the parties’ agreement and will find a lease for tax purposes if only some of the attributes of the traditional lessor status are present.
Plaintiff relies upon the Supreme Court’s concluding paragraph in Frank Lyon:
In short, we hold that where, as here, there is a genuine multiple-party transaction with economic substance which is compelled or encouraged by business or regulatory realities, is imbued with tax-independent considerations, and is not shaped solely by tax-avoidance features that have meaningless labels attached, the Government should honor the allocation of rights and duties effectuated by the parties. Expressed another way, so long as the lessor retains significant and genuine attributes of the traditional lessor status, the form of the transaction adopted by the parties governs for tax purposes. What those attributes are in any particular case will necessarily depend upon its facts. It suffices to say that, as here, a sale-and-leaseback, in and of itself, does not necessarily operate to deny a taxpayer’s claim for deductions.
435 U.S. at 583-84 , 98 S.Ct. at 1303-04 .
Plaintiff's focus on the summation paragraph in Frank Lyon is misdirected, and plaintiff’s analysis is too broad as to the meaning and scope of that decision. In Frank Lyon, the Court was concerned with a sale-and-leaseback transaction, which is different in nature from the question of the proper characterization of a transaction as a lease or as a conditional sale. Frank Lyon, essentially, embraces the “traditional” substance over form analysis. The Court’s reasoning in Frank Lyon is a combing of all of the facts. Indeed, the Court states: “[tjhere is no simple device available to peel away the form of this transaction and to reveal its substance,” and then proceeds to examine the transaction fact by fact. 435 U.S. at 576 , 98 S.Ct.. at 1299-1300.
The post-Frank Lyon precedent establishes that Frank Lyon is another gloss on the traditional analysis which long has been applied to the conditional sale versus lease issue. In Illinois Valley Paving Co. v. Commissioner, 42 T.C.M. (CCH) 909 (1981) (a conditional sale/lease situation where the lessee rented concrete paving equipment for a trial period), the court cited Frank Lyon and numerous other cases decided before Frank Lyon. The court held that the parties had entered into a bonafide lease with an option to purchase after a consideration of: (1) substance and form; (2) intent of the parties at the time the agreement was made as shown by the facts and circumstances and economic realities existing at that time; (3) the terms of the agreement; (4) the likelihood that the option would be exercised; and (5) the parties’ treatment of the transactions on their books.
In Swift Dodge v. Commissioner, 692 F.2d 651 (9th Cir.1982), the court found that the two party “leasing” arrangement *438 was in fact a conditional sale. The court cited Frank Lyon and noted that the characterization of the transaction is controlled by the substantive provisions of the agreement and the parties’ conduct. Id. at 652 . The court in Swift Dodge makes frequent reference to Frank Lyon. It is clear, however, that the court does not consider itself confronted by the narrow interpretation plaintiff asserts. Rather, the court, as did the court in Illinois Paving, incorporates Frank Lyon into an existing analytic framework. See also Kansas City So. Ry. Co. v. Commissioner, 76 T.C. 1067 (a transaction’s effect on both parties must be analyzed as well as the general business of the lessor and the manner in which it is conducted).
In sum, the post-Frank Lyon cases point out that Frank Lyon has left open the door to objective inquiry into substance over form, which necessitates a review of all the facts. Such a review requires examination of the facts and circumstances present at the time the transaction was entered, and a consideration of how those facts conform with a variety of relevant factors.
Defendant’s analysis rests on the decision made on February 22, 1985, in this case on the aircraft dispositions issue. Transamerica Corp. v. United States, 7 Cl.Ct. 441 (1985). The aircraft dispositions issue also involved a two-party lease versus a conditional sale recharacterization. Defendant contends the aircraft dispositions decision is dispositive on the title plant leases issue. Defendant, however, does not recognize that in the aircraft leases the facts in significant respects have a clarity that is not present in the title plant leases. The facts of the aircraft leases included: monthly payments by the lessor successively reduced pro rata the option price; when the agreements were made, any failure to exercise the option was remote; during the lease terms, the lessee was charged interest on the unpaid balance of the option prices; necessary spare parts for the aircraft were sold concurrently with execution of the leases; and, on their financial records, the parties treated the transactions differently.
Resolution of the title plant leases issue requires application of the analyses in both Frank Lyon and the aircraft dispositions decision. Frank Lyon offers two specific guidelines: (1) look at substance over form, and (2) look to see if the lessor has retained significant and genuine attributes of the traditional lessor status, and the lessee has not acquired an equity. These guidelines are supplemented by the methodology followed in the aircraft dispositions decision to examine the facts.
Isolation of the business purpose in the Boulder and the Mesa transactions that the IRS recharacterized is complicated by differences in the two transactions and by the chronology of events. The Boulder agreement was a product of Title Guaranty’s and Record Abstract’s expansion program. The Mesa agreement subsequently was consummated separately. The record is not clear whether the Mesa transaction was part of a program to expand Title Guaranty’s title abstract and insurance business, or whether it was part of a package put together to attract the subsequent acquisition of Title Guaranty by plaintiff.
In the negotiations of both the Boulder and Mesa agreements, the parties did not discuss during the negotiations the possible tax consequences of the transactions. The record is barren of documentation relative to any internal discussions or analysis either party may have undertaken independently. As prudent businessmen, however, the parties presumably were mindful of tax and other practical consequences. The record also is barren as to analysis or consideration, if any, plaintiff gave to tax consequences of the lease agreements when it acquired Title Guaranty.
The property that was the subject of the leases was the title plant materials that covered the period 1865-1961 for the Boulder Company, and the period 1883 through 1961 for the Mesa Company. At all times during the lease terms, the lessors retained legal title to the leased property. All additions to the title plant materials during the period of the leases were the sole and exclusive property of the lessees.
*439 In form, the challenged transactions had the traditional attributes of leases: the instruments identified the parties as lessee and lessor, designated a fixed term, designated the money payments as rents, provided title to the pre-1961 abstracting materials remained exclusively in the lessor, gave lessor a right of inspection, obligated the lessee to preserve the property and return it in good condition, obligated lessee to replace damaged property with no abatement of rent for destruction or damage to the property, and obligated the lessee to pay for fire and hazard insurance, and for errors and omissions liability insurance. The option to purchase in the Boulder lease was provided separately from the rental obligations, and was subject to exercise after the term without adjustment for previous rental payments. The option to purchase in the Mesa lease was a part of the section on rents, and it could be exercised after 17-1/2 years into the 30-year term, without adjustment for previous rental payments.
Defendant contends that the economic substance of the transactions requires the form to be disregarded and the transactions to be deemed immediate sales on an installment basis. In a conditional sale, the seller retains legal title for security purposes. The buyer has possession with the right to use during the installment term, during which he accumulates equitable title through payments based upon full economic value of the property, plus an interest component to compensate for deferred payments during the installment term.
When Title Guaranty sought to enter into the Boulder and Mesa County markets, it recognized it would have to secure for extended periods the use of the only complete title plants in each county. The title plants were indispensable to Title Guaranty’s ability to conduct its title insurance business. This requirement could be satisfied by a long term lease, with or without an option to purchase, or by a conditional sale. Either type of transaction would secure for Title Guaranty the right to use the title plants.
In 1961 and 1962 there were no appraisal services available through which the parties could obtain a valuation of the Boulder and Mesa title plants. In 1962, it would have cost approximately $250,000 to recreate the Mesa title plant. Plaintiff estimates, since the Boulder plant was earning more than twice as much as the Mesa title plant, that the Boulder title plant in 1961 would have been worth approximately $500,000. Plaintiff presented no evidence that anyone involved in the transactions attempted to make estimates of the current or prospective values of the title plants separate from other features of the transactions.
The business objectives of the parties could be achieved through a lease with an option to purchase more readily than through the use of an installment sale. Title Guaranty wanted to maintain its balance sheet in a manner sufficiently conservative to assure potential title insurance customers of its ability to pay in the event of a loss. Title Guaranty did not have the funds to make an outright lump sum purchase of abstracting materials owned either by the Boulder Company or by Williams and G. Dale Williams. If Title Guaranty borrowed the money, it would have been required to schedule the debt on its books, and this in turn, would have impaired seriously its ability to sell title insurance. In 1961, long term lease obligations did not have to be capitalized. See Frank Lyon v. United States, 435 U.S. at 577, n. 14 , 98 S.Ct. at 1300, n. 14 (until 1968 a long term lease did not impact a lessee’s balance sheet).
Title Guaranty’s expansion throughout Colorado depended upon its ability to identify itself with local leaders in the title insurance business. For a continuation of local contacts, Title Guaranty needed to establish a relationship that would encourage the Hickmans and the Williams to maintain an active interest in the title plants.
The Hickman family interests agreed to renegotiate the 1959 Boulder title plant lease in order to satisfy the merger conditions imposed by Title Guaranty and *440 Record Abstract. During the negotiations, the Hickmans did not consider selling the Boulder Company’s title plant. The Hick-mans felt it was to their benefit to consider a package arrangement that included: (1) a lease; (2) a lifetime employment contract for Hickman, Sr., and payments for life to his wife; (3) an employment contract for Hickman, Jr.; and (4) stock from Title Guaranty.
In the Mesa transaction, Williams was not interested in a sale of the title plant. Williams wanted to stay in the business and to provide an employment opportunity for his son. Further he preferred that payments be spread over a period of time rather than getting any sizable amount of money at one time.
Other features of the transactions support the conclusion that the parties entered a lease relationship. The parties consistently treated the transactions as leases for both financial and tax reporting purposes. Where the parties execute a lease and treat the transaction as a lease on their books and records, this method of reporting is a factor that supports the conclusion that a lease actually was intended. See Benton v. Commissioner, 197 F.2d 745 (5th Cir.1952); Illinois Valley Paving Co. v. Commissioner, 42 T.C.M. (CCH) 909, 914 (1981); T Wayne Davis v. Commissioner, 37 T.C.M. (CCH) 1441, 1446 (1978).
In both transactions, the rental payments were based upon a percentage of gross receipts, and the rental payments had no direct connection with the amounts to be paid if the purchase options were exercised. In the Mesa transaction, Title Guaranty was obligated to pay rent in an amount equal to the greater of $6,600 per annum or 5 percent of its gross receipts. Between 1962 and 1972, under the Mesa lease the average rent per year was $7;264, the average gross income was $123,255, and the approximate average net profit before taxes was $43,957. Under the Mesa lease, Title Guaranty paid rentals that totaled $220,006 before it exercised its purchase option after 17-1/2 years.
The Boulder lease required annual rentals of from $20,000 to $24,000 during the period January 1, 1961 — December 31, 1975, and thereafter at 5 percent of the lessee’s gross income, but not less than $24,000 nor more than $40,000 during the period January 1, 1976 — December 31, 1980, and not less than $24,000 nor more than $35,000 during the period January 1, 1981 — January 1, 1991. Between 1961 and 1972, under the Boulder lease the average rent per year was $21,500. The average gross income for the years 1962 through 1972 was $370,144, and the approximate average net profit before taxes from 1962 through 1972 was $99,354. By 1979, payments made under the Boulder lease totaled $448,509.
A lease that has payments based upon a percentage of gross receipts makes the lessee’s liability open-ended. Such a provision is consistent with the concept that the lessee is paying for the use of the property involved. The provision also is inconsistent with a concept that a firm selling price had been established and agreed upon.
In both transactions, no portion of the amounts designated as rental payments or option prices was specifically designated by the parties to represent interest. The payment of interest normally is a factor in a sale to compensate the seller for deferred payment during the installment period.
In both transactions, the option price was $25,000. This sum is not nominal. See Oesterreich v. Commissioner, 226 F.2d 798 (9th Cir.1955) (purchase option $10— building worth $350,000); Watson v. Commissioner, 62 F.2d 35, 36 (9th Cir.1932) (additional sum of $1, a mere formality in a transaction involving $109,900). The payment of rentals did not build up an equity that was reflected in reductions in the option prices, nor did such payments amount to an equity in the pre-1961 title plant materials.
Defendant interprets the facts as showing arrangements where the Boulder and Mesa owners each effectively agreed to permanently dispose of their title plants. According to defendant, this was an instance where it was to everyone’s advantage to formulate an agreement under which Title Guaranty would buy out two *441 family businesses, title plants included, through an installment plan. The annual installment payments, although they were denominated as rentals and the final installment was termed an option price, defendant argues that, in fact, the yearly payments were not meant to (and did not) represent fair rental values, and the last optional payment was not meant to (and did not) represent the properties’ anticipated fair market values.
Defendant emphasizes that the title plants were indispensable elements to Title Guaranty’s proposed expansion. Further, Title Guaranty expected to continue to operate indefinitely in Boulder and Mesa Counties and would have a continuous need to use the title plants.
Defendant’s view of the facts has support in the record. With respect to plaintiff’s contention that it was uncertain at the time the transactions were entered whether the options would be exercised, the testimony shows that at the time the leases were executed, Title Guaranty’s officials did not foresee any circumstances or conditions that might arise which would cause it not to exercise the purchase options. Mr. Fred Klein, a former Transamerica/Title Guaranty executive, testified that he believed the Mesa option was included in the transaction because he felt that Title Guaranty would exercise the option “everything remaining equal.” Mr. Klein also testified that he felt Title Guaranty had a moral obligation to exercise the options even though he recognized that there was no legal obligation to do so. Williams testified that he believed, at the time he entered the transaction, that Title Guaranty would exercise the option. Although he felt that Title Guaranty had a moral obligation to exercise the option, he did not feel that the moral obligation would be violated if the option were not exercised. Williams acknowledged that he did understand that, at the end of either 17-1/2 or 80 years, he could get his company back. Hickman, Jr. stated that at the time he entered the transaction he anticipated that Title Guaranty would exercise the option.
Defendant points to anomalies in the $25,000 option prices and contends that the option price could not have been intended to represent a true sales price based upon fair market values at the time the options were eligible to be exercised. Defendant emphasizes that no testimony or other evidence indicates that any attempt was made to estimate the future value of the title plants when the option prices were negotiated and established. Identical option prices for the two properties are said to be unreasonable in view of the difference in values at the beginning of the lease periods. Further, it seems strange to value the Mesa property at $25,000 in 17-1/2 years, while the Boulder property would take 30 years to decrease to the same value.
Defendant notes that under the Boulder lease agreement, the minimum annual payments increased to $24,000 per annum for the last 10 years of the contact, plus additional amounts payable based upon gross receipts. If the value of the property had fallen to the option price, defendant claims it would be unreasonable to pay $24,000 per year to rent a $25,000 asset. In the Mesa transaction, the option could be exercised after 17-1/2 years by making a single $25,000 payment. Defendant asks how could the value of the Mesa title plant drop to $25,000 in 17-1/2 years and have the same value at the end of the 30th year? Further, in the event the option was not exercised at the end of 17-1/2 years, the lessee would have to make annual payments for the next 12-1/2 years that would total at least $82,500. Defendant argues that this provision made it absolutely certain that Title Guaranty would exercise the option rather than remain liable for $82,-500. In fact, Title Guaranty in June 1979 exercised its option at the earliest possible date, and paid the $25,000.
Defendant’s analysis of the facts as establishing an installment sale has superficial appeal. In a balance of all factors, however, defendant’s analysis does not give effect to the substance and economic realities of the transactions.
*442 In their arguments, both parties lost sight of the limitation on the title plant materials that actually were the subject of the leases. At the beginning of the leases in 1961, the materials that were leased comprised complete title plants. This condition of completeness would not exist at the end of the lease terms, and would not be the situation at any time during the lease period. All additions to the title plants became the property of the lessee; and the property to be returned in each lease would be only the pre-1961 materials. These materials covered roughly equivalent periods of time, and the allocation of equivalent values for these volumes of materials is not unreasonable. The trial testimony shows that the parties actually believed that $25,000 was a fair estimation of what the leased materials would be worth at the time the options could be subject to exercise.
The pre-1961 title plant materials have a useful life that may extend for indeterminate periods, unless supplanted by legislation that render such materials irrelevant. The value of the pre-1961 title plant materials would decline during the terms of the leases as new title plant materials were added by the lessees. As time went on, there would be fewer occasions when reference to the pre-1961 records would be necessary. At the end of the lease term, the lessors would have partial title plants, and would be faced with the substantial expense of updating the records. Both of these factors would contribute to a decline in value of the leased materials.
It was not a certainty in 1961 that the options ever would be exercised. Prudence required Title Guaranty to have an extended term to support its expansion into the new territories. This it accomplished in the leases. Whether the expansion would prosper, however, depended on events that were unforeseeable. The nature of business and human experience dictates a future that includes possibilities for technological advances that requires changes in old patterns. The fact that the parties expected the options to be exercised is not inconsistent with an intent to enter a lease transaction. Whether the options would be exercised, in the light of future vagaries, was a speculative matter in 1961.
Mesa Repurchase
On March 21, 1986, the parties filed a Joint Stipulation of Facts Based on Newly Discovered Evidence with Respect to the Title Plant Leases Issue. The new evidence establishes that on December 31, 1984, G. Dale Williams purchased Title Guaranty’s Mesa County business for $160,000. Afterwards, Williams allocated $46,485 of the lump-sum purchase to all the title plant records, and indicated that less than one-half of that amount was attributable to the pre-1962 records. Plaintiff argues that this allocation is evidence that the $25,000 option price reflects fair market value of the property in the Mesa lease, and that a similar deduction can be made about Boulder pre-1961 title plant materials. Plaintiff argues that the repurchase transaction provides “factual justification” for the option prices in the Mesa and Boulder transactions.
Defendant asserts that plaintiffs deduction from the repurchase transaction is based, on a false premise. Defendant points out that the ultimate question is not the fairness of the option price, but rather whether the $25,000 was meant to be a bonafide option price, and that there is no way to determine from plaintiffs “new evidence” what the 1984 fair market value of the Mesa title plant was, much less that of the Boulder title plant. Defendant summarizes its argument as follows: (1) G. Dale Williams did not actually value or appraise the title records; he only determined an amount allocable to them on the basis of what remained after valuing the other assets; (2) the aggregate value of the assets which G. Dale Williams received may well have been worth more than $160,000 since that amount represented book value, not fair market value; (3) it was in G. Dale Williams’ interest to allocate as much of the $160,000 to the assets he valued, and as little as possible to the title records and goodwill, because the cost of the former could be written off for tax purposes much faster than that for the latter.
*443 Defendant’s argument is persuasive. The repurchase transaction is without probative value.
Jefferson County Transaction
On December 18,1986, the parties filed a Joint Stipulation to supplement the record with respect to the title plant leases issue. The stipulation, as to which defendant expressly reserved the right to object to admissibility of the facts stated, was concerned with a lease with the Jefferson County Abstract Company, Jefferson County, Colorado.
The Jefferson transaction involves an agreement between Title Guaranty and Jefferson County Abstract Company. The parties entered a 15-year lease, commencing March 15, 1951. The rental payments were $45,000 per year, plus 2 percent of the gross income. The option price was set at $20,000 which was exercised in 1966.
The IRS initially proposed to treat the agreement as a sale rather than a lease. Plaintiff protested and the Appellate Division of the IRS sustained the protest and allowed the rental deductions.
Plaintiff claims that the Jefferson County lease was identical to the Mesa and Boulder transactions in all pertinent aspects. However, plaintiff does not provide any of the facts or circumstances surrounding the Jefferson transaction. The Supreme Court, in Frank Lyon stated that a plaintiff must show that a lessor has retained significant and genuine attributes of the traditional lessor status. The Court went on to state that “what those attributes are in any particular case will necessarily depend upon its facts.” 435 U.S. at 584 . Whether a transaction is a sale or a lease is essentially a factual issue. Northwest Acceptance Corp. v. Commissioner, 58 T.C. 836 (1972), aff'd, 500 F.2d 1222 (9th Cir.1974).
The Jefferson transaction was not tried in this case. This court therefore is without any knowledge as to the substance of the transaction. Judge Miller ruled testimony regarding the Jefferson transaction inadmissible. The parties’ arguments as to the correctness of the ruling, in the light of the lack of a complete record on the Jefferson transaction, are not relevant.
CONCLUSION
On the basis of the foregoing, it is concluded that the Boulder and Mesa transactions were in substance and in form leases with options to purchase. The transactions were not installment sales. Transamerica is therefore entitled to the rental deductions it has taken for tax years 1968 and 1969 pursuant to Section 162 since it has at no time acquired an equity interest in the Boulder or Mesa title plants as a result of its rental payments.
CHARITABLE CONTRIBUTIONS
Plaintiff’s involvement in the charitable contributions issue stems from its ownership in 1969 of United Artists Corporation (UA). In that year, UA conveyed certain film and motion picture property, described below, to the University of Wisconsin and to the Library of Congress.
UA was a distributor of independently produced motion pictures which had been organized in 1919 by Charlie Chaplin, Mary Pickford, D.W. Griffith and Douglas Fairbanks, Sr. In 1951 UA was in financial difficulties, and management was transferred to Arthur Krim, Robert Benjamin and Arnold Picker. In 1956, Arthur Krim and Robert Benjamin became owners of UA. In 1957, UA’s stock was publicly offered and listed on the New York Stock Exchange. In 1967, Transamerica acquired 87.5 percent of UA’s stock, and by 1970 it had become its sole stockholder. In 1981, Transamerica sold UA to Metro-Goldwyn-Mayer Film Company.
In its 1969 consolidated federal income tax return, plaintiff claimed charitable contributions in the aggregate amount of $27,-744,328 as the fair market value of certain motion picture property UA conveyed to the United States of America for inclusion in the collection of the Library of Congress (Library Property) and of different motion picture property conveyed to the University of Wisconsin (University Property) under IRC § 170(a). The entire deduction and carryforward relating to these conveyances *444 were disallowed by the IRS. A statutory notice of deficiency reflecting an asserted underpayment of tax for the year 1969, based in part on the disallowance of deductions for plaintiffs claimed charitable contributions, was issued on January 31, 1978. The deficiency has been paid and a timely claim for a refund has been disallowed. In its March 9, 1979, complaints, plaintiff claimed charitable contributions in aggregate amount of $27,744,328. During these proceedings, plaintiff has modified its claim and now asserts the fair market value of the property conveyed amounts to $15,873,-431.
Trial of the charitable contributions issue was protracted, and required 36 trial days from commencement on June 25, 1984, to final session on May 19, 1987. Trial sessions were held in Madison, Wisconsin (4 days in 1984), New York, New York (3 days in 1984), Pasadena, California (5 days in 1986), and Washington, D.C. (13 days in 1984 and 11 days in 1987). Posttrial briefing was completed December 18, 1987.
FACTS
The parties are in agreement as to a majority of the facts essential to the charitable contributions issue. A stipulation filed on June 20, 1984, lists 128 separately numbered facts in 11 categories. An additional 15 facts were listed in a stipulation filed October 1,1984, and a stipulation filed April 14, 1987, added 11 more. The facts stipulated by the parties, although not duplicated in this opinion, are adopted as findings of the court. For purposes of continuity, some of the materials the parties have stipulated is repeated in the narrative that follows. Findings of fact in the narrative that supplement or add to the parties’ stipulations are based upon testimony and documentary evidence in the trial record.
Property Involved
The property conveyed to the Library of Congress and to the University of Wisconsin consisted of various items of tangible personal property that together constitute the basic physical structure for the commercial interests in the motion picture industry. Items of tangible personal property that were conveyed included preprint materials (original 35mm negatives or other 35mm preprint material, 35mm and 16mm printing intermediates), 16mm exhibition prints, photographs (still negatives and prints), scripts, press books and production files.
The production of a motion picture involves the manufacture of several categories of film materials in the course of several stages of film production, from the filming of the subject (and, in the case of sound productions, the recording of the sound), through the manufacture of viewable exhibition prints. At each stage subsequent to the initial filming and recording, the image embodied on the film material that had been produced in the previous stage is replicated on another piece of film material. Usually, if the image is in negative form on the film material that had been manufactured in the previous stage of production, it is transposed into a positive image, and vice versa. This sequence is altered somewhat in the Technicolor wet dye printing process and in the color reversal intermediate (CRI) process.
The categories of film material that are manufactured in the stages leading up to the striking of viewable exhibition prints are generally called “preprint material”. All preprint material, with the exception of protection prints, is on film stock having sharper resolution and different emulsion sensitivity characteristics than exhibition prints. Protection prints have the same physical characteristics as exhibition prints but can be considered preprint material because they are used in the manufacture of exhibition prints when other preprint material is unavailable. The type of preprint material that is produced at each stage of production depends on the manufacturing process used.
Film materials conveyed to the Library and the University consist of a clear strip of plastic, which is either nitrate-base film or acetate-base film. To this plastic base, a photo-sensitive emulsion is bonded chemically. This emulsion embodies either a positive or a negative image of the matter that was filmed or if sound, recorded.
*445 With minor exceptions all original negatives and nearly all other film material manufactured before 1951 for professionally produced motion pictures was on nitrate-base film stock. Film material manufactured after 1951 is on acetate-base film stock.
Nitrate-base film stock is highly flammable, potentially explosive and subject to shrinkage, decomposition and ultimately to disintegration. Nitrate-base film decomposes with the passage of time and eventually will be unuseable and must be discarded. Unless the image is transferred to safety film or preserved in some other manner it will eventually be lost when the nitrate-base decomposes. Acetate-base film stock (safety film) is less flammable, not potentially explosive and more stable, but unless properly cared for is subject to shrinkage, fading and brittleness.
Among experts, it is generally believed that more than half of the motion pictures produced in the United States during the 20th Century have disappeared. The American Film Institute estimates that only about 50 percent of the 25,000 feature films produced in the United States between 1900 and 1950 survive in any form. Most films have disappeared due to deterioration of the nitrate. Even in the case of those that survive in some form, they are often of a poor quality print on which the images or sound may have been, altered, cut, or rearranged.
Motion picture companies, because they thought the films had no further commercial value, frequently made little or no effort to save nitrate-base films. Even among companies that continued to exploit their old motion pictures, it was often felt that the cost and dangers involved in keeping the nitrate film was too great to justify retention, and that commercial exploitation of the motion picture could continue using other safety stock preprint materials. Some companies were anxious to get rid of their nitrate film; some simply discarded their nitrate films. MGM informed an archive that it would destroy its nitrate films unless the archive took them off its hands. In the 1960’s, interested segments of the public, the film industry, and the United States Government became increasingly aware of the need to preserve as a historical and scholarly heritage those motion pictures recorded on nitrate film that still existed.
The film materials conveyed to the Library and the University were manufactured under one of four processes: (1) black and white motion picture films; (2) technicolor process for nonanimated color films; (3) technicolor process for animated color cartoons; and (4) Eastman color process, which in 1951 began to replace the Technicolor process.
The steps in the production of film materials for black-and-white motion pictures is illustrative of the complexities and the interdependent nature of film industry commercial practice. The first category of film material created is the “original negative”. For silent films in black-and-white, this consists of the “original picture negative” that was in the motion picture camera at the time of filming, as subsequently developed through a chemical process, cut and edited for release, and added to for titles, subtitles, credits and optical effects. With respect to sound films in black-and-white there is an original picture negative that is the same as the original negative for a silent film, as well as a separate “optical sound track negative” that was manufactured by mixing music, effects and dialogue. The original picture negative and, in the case of sound films, the corresponding optical sound track negative, are on 35mm film. Pre-1951 productions are on film with a nitrate base, post-1951 productions are on film with an acetate base.
The image on the original negative is copied onto 35mm duplicating fine-grain film stock (containing either a nitrate or an acetate base), thereby creating a “fine-grain master positive” of the motion picture film. In the case of sound films, this positive print combines onto one strip of film the images contained on the original picture negative and on the original sound track negative. It is therefore referred to as a “composite fine-grain master positive.”
*446 The fine-grain master positive and the composite fine-grain master positive are used to manufacture one or more “duplicate negatives”. A duplicate negative is a 16mm or 35mm film on a nitrate or acetate base, in which the picture and sound are either combined or separated on separate strips of film. In either case the sound component consists of a re-recorded sound track negative.
“Exhibition prints” (also known as release prints), on either 16mm or 35mm film stock, are commonly manufactured from a duplicate negative, and are distributed for viewing by audiences and for broadcasting on television. “Protection prints”, which essentially are physically indistinguishable from exhibition prints, are also manufactured from a duplicate negative. They may be used to manufacture additional duplicate negatives if the original negative or a fine-grain master positive is unavailable, although the resulting duplicating negative is of inferior quality. It is also possible to manufacture exhibition and protection prints directly from the original negative, but this is rarely done because of the risk of damage to the original negative.
Except for original negatives and re-recorded sound track negatives and except for the original Technicolor imbibition process, the film materials are manufactured by putting the strip of film whose images are being copied through laboratory printing machines and then chemically developing the raw film stock that was printed. A contact printer is used to manufacture 35mm film material from 35mm film material and from 16mm film material from 16mm film material, and a laboratory reduction printer is used to manufacture 16mm film material from 35mm film material. If the film material that was manufactured is a picture negative (other than an original negative), it is standard practice to manufacture immediately from that picture negative a single positive print, called an “answer print”, to ascertain whether the negative was printed properly. A rerecorded sound track negative is manufactured in a sound studio by playing the positive through electronic means and rerecording the sound onto negative raw stock, which is then chemically developed.
A reel of 35mm motion picture film is generally approximately 1,000 feet in length and a reel of 16mm motion picture film is generally approximately 400 feet in length. Generally, at least 10 percent of each reel is not utilized. The running time of a 35mm film is 90 feet per minute, and of a 16mm film, 36 feet per minute. An exhibition print can be damaged in the course of its use. Even if properly handled and cared for, it will eventually wear out as it is used. A film negative can be damaged in the printing process, and it will eventually wear out if repeatedly used. Consequently, archives generally try to avoid using original negatives to make prints. While prints can be struck directly from the original picture negative or earliest available preprint material, this is not the usual practice in the industry and is rarely, if ever, done by UA.
Duplicate negatives are regularly and commonly used to manufacture exhibition prints. At the time UA conveyed the original negatives or earliest available preprint materials to the Library and the University, it possessed or believed it possessed one or more duplicate negatives for each of the motion pictures involved. UA generally owned at least one 16mm duplicate negative for each of its motion pictures that it expected to exploit commercially. Normally, it also possessed additional preprint material {e.g., fine-grain master positives) for such movies from which replacement duplicate negatives could be made. Because of the availability of these articles, recourse to any of its original 35mm nitrate negatives was rare, occurring in the aggregate approximately 10 to 12 times per year.
Nonfilm materials conveyed to the University were integral to the commercial structure of the motion picture industry. These nonfilm materials included:
—still photographs (stills): individual positive print photographs that are taken by a unit photographer, during the filming of a motion picture, of the key scenes, settings, background, cast and filming activity. Such photographs com *447 monly provide materials for publicizing and promoting the motion picture following its completion.
—still negatives: a negative of a still photograph from which positive prints are prepared.
—still books: a bound book containing linen-backed copies of the still photographs with respect to a motion picture (also called a “linen book”).
—key books: a bound book, containing copies of the representative still photographs with respect to a motion picture, that is used for promotional purposes.
—starheads: still photographs of an individual actor or actress, taken in a studio or other photographic setting unrelated to any given motion picture film, that is ordinarily used for promotional purposes. Generally, the actor or actress photographed in the starhead was under a long term or multiple picture contract with the studio or the motion picture producer.
—pressbooks: books that are distributed to a prospective exhibitor of a motion picture film containing suggestions as to ways to promote the film, including forms of newspaper advertising, layouts, forms of press releases, synopses, and other promotional suggestions.
—production legal files: files customarily maintained with respect to each motion picture containing contracts for performers, contracts for rights to the story and to the screenplay, and any copyrights or permissions (as, for example, to a song used in the picture).
—production files: files that may include some or all of the following:
—story outline or synopsis: an outline of the basic plot element, usually fewer than 25 pages in length and not using cinematic terms.
—treatment: an early rendition of the motion picture that includes a longer outline of the plot, begins to break down the story into scenes, and may include dialogue and shot descriptions.
—screenplay: is a complete breakdown of the film into scenes and shots.
—shooting script (temporary, revised temporary, final, revised final): a script containing dialogue as well as a description of the scene and instructions for the actors and the cameramen. It is the script used in the filming of the film and may contain thereon notations of changes made during filming.
—dialogue (also “dialogue transcript” or “continuity”): a script containing the complete dialogue in the finished film, shot by shot, with the shots numbered consecutively and the separation from reel to reel being indicated, that is prepared after the film has been edited into its final version. It is used for foreign language dubbing purposes and to accommodate censorship cuts.
—title list (also “title sheet for superimposed version”): (a) complete cast and crew credits for each title, (b) a 1-2 page synopsis of each title, (c) shot numbers for each of the shots in the picture, sequentially and consecutively numbered, with beginning and ending footage and frame counts for each shot, and an inclusive total footage and frame count for each shot. The lines of dialogue provided here are not complete — they are intended merely as a sampling of dialogue appearing in the film.
—spotting sheet: (a) a complete breakdown of the finished film, (b) a brief description of each shot as it appears on the screen (but not the accompanying dialogue), (c) the footage of each shot, rounded off to feet (but no frame counts), and (d) a complete description of each title which appears in the film, including a description of the point in the film at which each of these titles appear and disappear. Additional information indicates whether each of the shots is an interior or exterior shot.
—trailer title list: a title list for a short preview film that is used to advertise the motion picture.
—music cue sheet: an index of music used in a film, indicating title, composer, copyright owner, type of use and duration of each musical composition.
*448 Still photographs and starheads were created for promotion and advertising purposes with respect to films distributed by UA and its predecessors in title, and to that end, were provided without specific charge to persons to whom publication rights had been granted and were either provided without specific charge or sold to exhibitors (including television stations) to utilize for publicity purposes when related to a film being exhibited. Starheads were also sent to members of the public, usually without charge, upon request. Pressbooks were provided without specific charge to prospective exhibitors when related to a film being exhibited. Television stations were provided without specific charge music cue sheets for royalty purposes when related to a film being exhibited.
In the production of a film there are generally several generations of scripts. Early generations, such as synopses and treatments, are used in planning the film. Shooting scripts are used for the actual filming and later generations, such as continuities, are used in the post-filming production processes. It is customary in making a film to produce several copies of a script for the use of the actors and others in producing the film. Accordingly, before 1951, scripts were typically produced by the mimeograph or ditto processes. Some number of the early generation scripts conveyed by UA to the University are either typewritten or carbon copies. Most of the later generation scripts were either mimeographed or dittoed. Some number of the early and later generation scripts contain original handwritten notations reflecting changes made in the course of producing the film.
There are numerous businesses that deal in motion picture prints, still prints, scripts, and other film memorabilia. Those businesses dealing in still prints, scripts and other film memorabilia are sometimes referred to as “dealers”. Some such dealers operate retail stores.
Pressbooks of the type conveyed by UA to the University are bought and sold by private collectors and dealers. Some press-books are copyrighted and others are not. The market value of pressbooks is not affected, however, by whether they are or are not copyrighted. Scripts are generally copyrighted. Legally acquired scripts are uncommon, although dealers sometimes sell scripts.
UA Business
During the period 1919-50, UA directly engaged in distributing films produced by others. Generally the producers were independent of UA. Except for some TV production between 1960 and 1966 by ZIV-United Artists, Inc., UA has never engaged in the production of motion pictures in the United States. In the period-1936-41, it owned a 50 percent interest in Walter Wan-ger Productions, Inc., which produced 17 films, and owned a corporation that produced one film in 1941-42. Subsequent to 1951, UA has had subsidiaries that produced a limited number of motion pictures abroad.
In 1951, UA purchased the stock of Eagle Lion Classics, Inc., the company that was then distributing Eagle Lion and Film Classics feature motion picture films. In 1957 and 1960, UA acquired all of the assets of Associated Artists Production Corporation. These assets included Warner Bros.’ entire film library going back to 1913 when that studio first commenced the production of films. That library consisted of the following principal elements: 806 Warner Bros, sound features, 54 Warner Bros, silent features, 1,507 Warner Bros, short subjects, and 337 Warner Bros, cartoons. Associated Artists Production Corporation also owned a complete collection of 229 Popeye cartoons and 187 Monogram sound features.
In 1960, UA acquired the ZIV Television Library, consisting of over 2,200 television episodes comprising virtually the entire production of the ZIV Television Studio during the period of 1948 to 1960. At the same time, UA acquired domestic television rights to 707 feature motion picture films produced by RKO.
UA purchased the Warner Brothers, ZIV Television and RKO film libraries solely for the purpose of exploiting them commercially. At the time they were purchased, UA *449 did not consider these libraries or the tangible materials contained therein to have any present or future non-commercial purpose or value. UA considered that when it acquired these libraries (and paid their respective purchase prices), it was acquiring the right to exploit the films in these libraries commercially and the tangible materials necessary for such exploitation. However, most of the tangible materials acquired by UA when it purchased these libraries (such as the original nitrate negatives and most of the non-film material) were not essential (notwithstanding their possible usefulness) for UA’s continuing commercial exploitation of the libraries, and the purchase price paid by UA for the libraries would not have been reduced had such non-essential tangible materials not been included in the sale. At the time of their acquisition, UA had no plans, nor did it expect, to market or otherwise convey any of the tangible materials contained in these libraries to archives, collectors or scholars.
UA acquired the Warner Brothers Library at what it considered to be an extremely favorable purchase price, which was well below what it considered to be the fair market value of the commercial rights to such film library. The amounts payable to UA under licensing contracts entered into by UA’s predecessor in title and to which UA succeeded when it acquired the Warner Brothers Library covered UA’s purchase price for such library, and UA expected to enter into many more additional contracts licensing the films in such library. For the purposes for which UA acquired and used the Warner Brothers and ZIY Television film libraries, copies of the original tangible materials included in such libraries would have been at least as useful to UA as the originals.
At the time of purchase, UA did not perceive any present or future artifactual, archival or scholarly use or value for any of the items of tangible material separate and apart from their utility in exploiting the libraries commercially so as to warrant the allocation of a portion of the purchase price to such items, either as nondeprecia-ble basis or as nondepreciable salvage value. In those years, neither UA nor the film industry in general evidenced any recognition of archival value or any intention or practice of marketing or otherwise disposing of any of the foregoing items of material to archives, collectors or scholars. For this reason, UA allocated substantially the entire cost of purchasing each film library to the right and ability to exploit the library commercially and none of the purchase price to archival, historical or scholarly values.
American Film Institute
In 1965, Congress enacted the National Foundation on the Arts and the Humanities Act of 1965 ( Pub.L. No. 89-209, 79 Stat. 845). Pursuant to the Act, the National Council on the Arts was established. In 1967, the National Council on the Arts established the American Film Institute (AFI) as a non-profit private organization to preserve the heritage and advance the art of film and television in America. It received initially $1.3 million in funding from the National Council on the Arts, and an equal amount each from the Ford Foundation and the Motion Picture Association. Its subsequent support has been from the National Endowment for the Arts and from the private sector. Arnold Picker was a founding trustee of the AFI.
AFI’s basic purpose is the preservation and cataloguing of films. To this end, it attempts to bring attention to the necessity of preserving the nation’s film heritage, to serve as a focal point for coordination and leadership with organizations and archivists in the field, and to coordinate and stimulate the archival activities of regional and private institutions.
One of AFI’s earliest activities was an attempt to preserve American motion pictures that were on nitrate-base film. On June 13, 1968, the AFI entered into an agreement with the Library of Congress, under which the AFI undertook to arrange and provide funding for the acquisition of the best available copies of nitrate-base films that were in danger of decomposition. The films were to be acquired in the name of the Library and housed in the Library, *450 which would assume the responsibility for their storage and maintenance as well as the provision of reference services.
In 1968, AFI began to solicit donations of nitrate film from both the film industry and private collectors for either donations of film prints and film negatives or the loan thereof so that a copy could be made and the original returned to the owner. The AFI solicitation stated in part:
Individuals and corporations donating nitrate film materials receive tax benefits, based on the physical value of the print or negative, while retaining all rights of reproduction and exhibition. The Library assumes transport and storage costs for films selected for the National Collection. An acetate preservation copy of the original nitrate material is made at the Library’s expense. The owner is thus relieved of the cost of transferral and nitrate storage and is assured that his film will be preserved by the best methods available.
Owners may also lend nitrate films to the Library. Acetate prints are made with AFI funds and the original material is returned to the owner. In this case, however, no tax benefits are available.
A copy of AFI’s solicitation was sent to UA. There is no documentary evidence that UA responded to this solicitation. On May 20,1968, at the suggestion of AFI, the Library wrote UA and requested a donation of a safety-stock preservation master for a single movie, The Third Degree (Warner Bros. 1927), that was on its special “Rescue List”. UA declined to make the gift. Instead, it would only agree to loan the original negative to the AFI so that the latter could make the requested safety master at its own expense for the Library and then return the negative to UA. Prior to its conveyances of property to the University and the Library, UA had never donated film to any public, charitable and/or educational institution.
By 1982, the AFI had solicited the acquisition of and had arranged for donations to the Library of some 17,000 films (sometimes referred to as “titles”). Material received by the Library through the efforts of AFI is referred to as the “AFI Collection”. More than 95 percent of the titles were made prior to 1951 and were on nitrate stock. Copyright owners who conveyed film material pursuant to the AFI-Library acquisition program retained all commercial rights to the films.
Library of Congress
Prior to 1965, the Library of Congress did not have an extensive collection of pre-1913 film materials. This was a result of the copyright deposit system that was in place prior to 1913. Under this system, the maker of a film deposited a paper strip negative, which constituted the entire movie at the time it copyrighted the moving picture. This method of copyright deposits stopped in 1913, and the Library had almost no film material between the period 1913 to 1942.
The Library began to collect nitrate film for preservation purposes in the early 1940’s. By 1965, the collection consisted of over 25,000 titles. The program was designed to preserve in perpetuity the motion picture that is initially recorded on nitrate film. The Library’s policy and practice is to gain access to the original nitrate negatives, or the best available later generation film, so that the motion picture can be copied and thereby converted to, and preserved on, safety (acetate) film. For safety and storage reasons, it has been the policy of the Library to destroy nitrate film once safety copies have been made. The Library considers its nitrate film to be a liability. To reduce the amount of nitrate film in storage and to thereby minimize the costs and hazards associated with its retention, the Library has consistently maintained the policy that such film is to be destroyed as soon after it is copied as is possible. Adequate space and staff to maintain its nitrate film has been a chronic problem for the Library. The Library staff’s practice is not to destroy nitrate negatives until necessary; where feasible, preservation of original nitrate negatives remains a priority to the Library staff.
It was the Library’s policy and practice to accept either gifts or deposits of nitrate film. The Library treats nitrate film the *451 same way whether it is deposited or gifted. The number of film deposits accepted by the Library increased substantially beginning in the mid-1960’s. In late 1968 or early 1969, the Library received a large deposit of nitrate film of RKO movies. The receipt of this film absorbed all of the Library’s available storage space and caused it to search for additional vault facilities.
The Library’s permanent record of a motion picture is called its “preservation master”. It is made on acetate-base safety stock film and is typically a fine-grain composite master positive. The picture and sound quality of a fine-grain is almost as good as that recorded on the original negative. Movie companies generally regard a fine-grain as their “master” also. The Library treats its fine-grains as preservation masters and, therefore, they generally are not physically used but are instead held as archival objects. It eventually will cost the Library well over $1 million to make preservation masters for UA’s motion pictures. UA will pay nothing towards this cost, although it will have the right in perpetuity to use these articles.
University of Wisconsin
In 1960, the University established the Wisconsin Center of Film and Theater Research in conjunction with the State Historical Society of Wisconsin. The purpose of the Wisconsin Center was to acquire and preserve materials that document the performing arts in 20th century America, and make them available for research. Professor Agatino Balio became the Director of the Wisconsin Center in 1966 and expanded its focus to include motion picture materials.
In the late 1960’s, the University was one of just a few educational institutions that had a motion picture archive. Since it had no regular source of funds with which to make purchases, it relied almost exclusively on donations for additions to its archives. This situation generally applied to the other universities that also maintain film archives.
The University does not have an established fund from which to make purchases of films or related materials. However, in two instances, one in the late 1960's and the other in the late 1970’s, the University had purchased such items. In the first instance, the University paid $10,000 for various items of memorabilia from an estate; the articles acquired in the Daniel Blum Collection on stage and screen personalities included several hundred scrapbooks, and between 50,000 and 100,000 photographs, many of which were autographed. The second transaction involved payment by the University of $25,000 to a private film collector, David Shepard, for 16mm exhibition prints of various feature-length, documentary and cartoon motion pictures. Most of these films were in the public domain. Professor Balio testified that he “literally had to beg” for money to acquire motion pictures for the University and that “obtaining an appreciably larger sum in 1969 would have been impossible.”
Negotiations for Conveyances
In February 1968, Professor Balio wrote to UA’s president, Arthur Krim, soliciting a donation of his noncurrent personal papers to establish the Arthur Krim collection of manuscripts as a part of the Center’s archives. Mr. Krim referred the request to UA’s then Chief Operating Officer, Arnold Picker.
In April 1968, Mr. Picker and Professor Balio met to discuss the scope of the latter’s request. At this time the Professor proposed that the gift include UA’s corporate records for the period 1919 to 1951. During this period, UA had been under the control of its original owner-management team of Mary Pickford, Charlie Chaplin, Douglas Fairbanks, Sr., and D.W. Griffith. Professor Balio advised UA that if it would contribute its old corporate records, the University would catalog them and make them available to UA upon request.
Mr. Picker enlisted the aid of Robert Schwartz, U.A.’s Director of Administrative Services, and Herbert Sehottenfeld, Vice President of UA’s legal department, to deal with Professor Balio. Mr. Picker asked Mr. Sehottenfeld to determine whether the gift could create any legal problems, and he asked Mr. Schwartz to ascertain *452 whether the proposed conveyance would impede UA’s continuing operations.
All of the pre-1951 corporate records which Professor Balio sought from UA were stored at the Long Island City warehouse. These records were no longer used for commercial operations, occupied too much space and UA was inclined to destroy them. Professor Balio first visited the warehouse in or about the summer of 1968. During the course of visits to the warehouse, Professor Balio noticed movie memorabilia and asked if still photographs, scripts, pressbooks, and other promotional materials could be included.
Professor Balio’s expression of interest in the acquisition of additional materials from UA stimulated consideration of including more than only the corporate records. For several months in 1969, Mr. Schottenfeld and Professor Balio discussed other materials to enhance the gift to the Center’s collection. The gift thus grew to include still photographs, still negatives, pressbooks, scripts and other materials.
For various reasons, including the huge volume of documents in the warehouse, consisting of literally millions of papers taking up 4,000 cubic feet of space, it was not feasible for Professor Balio to review the documents in the warehouse for purposes of selecting those which he wanted for the University’s collection. Accordingly, it was agreed that Professor Balio would designate all of the files that he thought possibly could be of any interest to the University, that these files would be shipped, at UA’s expense, to Madison, Wisconsin, where they would be examined, and that whatever was not wanted would either be returned to UA or destroyed.
In 1968, Professor Balio advised UA that an appraisal of its corporate records would be needed, and he suggested that UA contact Milton Luboviski for this purpose. UA contacted Mr. Luboviski in the summer 1968. At this time, UA did not believe its corporate records had any significant value and, therefore, expected that Mr. Lubovi-ski’s fee would be small. Before he examined the corporate records, Mr. Luboviski informed UA that he was prepared to value the materials at between $200,000 to $250,-000. After Mr. Luboviski had disclosed his preliminary valuation of the corporate records, UA began to consider the potential tax consequences of its donation. Mr. Picker consulted with UA’s in-house tax specialist.
After UA decided to include additional materials, it initiated a search of its warehouse and other facilities to determine what items might be suitable. In this effort, UA ascertained that much of the non-film materials for its old movies was seldom used or needed and that their inclusion would not interfere with its commercial operations.
Mr. Picker was the individual within the UA organization who made the final decisions on the conveyances both to the Library and the University. He believed that he did not have the authority to give away the company’s property where it could be used for commercial purposes. In deciding what articles to include, Mr. Picker made it clear from the outset that he would not authorize any conveyance which would in any way hamper UA’s ongoing operations. He was assured that, whatever property was involved, it would be well maintained.
In conveying the film to the Library and the University, UA’s personnel were confident that UA would have reasonable access at its own expense to the property conveyed (and/or their replacements) whenever the need arose, so long as such property existed, and that their physical relocation would pose no serious problems.
Mr. Picker believed that it made no difference, from a practical standpoint, where the negatives were stored as long as the company had access to them. Mr. Picker advised his subordinates that UA’s right to access was an important feature of any agreement. He testified that he approved the conveyances because he was convinced that the company’s commercial interests would not be impaired and that the transfers would not cause UA to lose any money or reduce the value of the company’s assets.
During the summer of 1969, Mr. Schot-tenfeld also conceived the idea of giving all *453 of UA’s movie and television productions to the University. After consulting with other personnel at UA, Mr. Schottenfeld offered Professor Balio its 16mm positives and original 35mm negatives for both the movie and television titles. When Professor Balio learned that the negatives for the movies were all on nitrate film, he had to decline the offer because the University lacked the facilities and resources to store them. He eagerly accepted the negatives for the ZIV television productions, which were on acetate (safety) stock.
Warner sound features:
On August 22, 1969, Professor Balio forwarded to Mr. Schwartz at UA copies of the University’s model deed of gift and a copy of the section of the House Report on the Tax Reform Act of 1969, dealing with charitable contributions. The letter requested comments on the model deed of gift.
UA’s officials did not learn of the proposed changes to the tax laws regarding charitable contributions until the late summer or early fall of 1969. By this time, one change, the amendment to IRC § 1221(3), had become operative, and other restrictive provisions were scheduled to take effect as of January 1, 1970. UA had already determined to make the conveyances and Mr. Picker directed Mr. Schwartz and Mr. Schottenfeld to make every effort possible to complete the conveyances to the Library and the University before the end of the year. Many people in the organization devoted long hours to the project, giving it the highest priority.
On September 5, 1969, Mr. Schwartz wrote to Mr. Luboviski to recapitulate the material which to date had been turned over to the University and inventoried, and to identify additional material UA wanted to add to the depository. The new material was described as representative of United Artists Product prior to 1950 and as “one of a kind”. Mr. Schwartz noted the inventory of items enclosed was voluminous, and requested Mr. Luboviski to maintain the inventory in a permanent safe place until a determination is made “when and if we shall turn it over to the University.” The letter indicated there was a great urgency on UA’s knowing some approximate appraisal figures, and that UA “would appreciate your contacting me no later than Tuesday, September 9th”.
A memorandum to Mr. Picker, dated September 9, 1969, prepared by Mr. Schotten-feld for the “Archives Committee” summarized the present status of the corporate donation to the University. The memorandum included a preliminary appraisal received by telephone from Mr. Luboviski. The preliminary appraisal was said to represent the minimum values based upon a limited examination of the lists of the materials which UA had supplied. The memorandum included the following chart:
RANGE OF APPRAISED VALUATIONS (in thousands)
TYPE OF MATERIAL
Minimum Probable Value Value
United Artists Corp. (pre-1950 material) UA corporate business records (per formal written appraisal) CO ^ oo oo t-H
777 UA key stillbooks (including 560 pressbooks) to ^ o as
35,000 UA still negatives t>0 cn o o oo
130,000 Eagle Lion still negatives 05 cn o o lo
1,197 1,467 Total UAC pre-1950 material
United Artists Television, Inc. (UAA pre-1950 materials)
800 original picture negatives 2,500 o O O
400 shooting scripts 30 o CO
Production legal files 80 o o <N
*454 (in thousands) TYPE OF MATERIAL RANGE OF APPRAISED VALUATIONS
Minimum Probable Value Value
$ 40 $ 50 10,500 still negatives
375 625 50 Warner silent features-negative material
750 1,125 1,500 Warner short subje

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/6826238. Public record. Not legal advice.