Rev. Rul. 76-469

Advice has been requested whether, under the circumstances described below, amounts received by a small business corporation in connection with the long-term leasing of motor vehicles are rents within the meaning of section 1372(e)(5) of the Internal Revenue Code of 1954.

M is a small business corporation as defined in section 1371 of the Code. Its primary source of income is from the leasing of automobiles and trucks for a fixed weekly or monthly rental that is not related to the normal purchase price. The lease period ordinarily exceeds one year but is substantially less than the useful life of the vehicle. The lease does not transfer equitable ownership of the vehicle to the lessee. With respect to such leases, M performs services for the convenience of the lessee without additional charge to the lessee. M assists the lessee in selecting the proper vehicle and will install or coordinate the installation of any special equipment. M will deliver the vehicle to the lessee up to 300 miles from M's home office. Prior to delivery of the vehicle M furnishes each lessee a credit card that permits the lessee, during the term of the lease, to purchase tires, batteries, glass, and to obtain maintenance services such as oil and filter changes, lubrications, tune-ups and other vehicle repairs at a discount and to bill M for such purchases and services. M pays for such purchases and then bills the lessee in the exact amount. If a lessee wishes, M will arrange to have repairs performed. In such a case, M inspects the vehicle after the repairs have been made and returns the vehicle to the lessee at no extra charge. In many instances during the life of a lease, M performs repairs not covered by the manufacturer's warranty in its own shop, or pays to have them done. In such case supplemental transportation is supplied at no charge to the lessee.

Section 1372(e)(5) of the Code provides, in part, that a small business corporation's election not to be subject to the taxes imposed by chapter I of subtitle A of the Code, but to have all of its income taxed directly to its shareholders, shall be terminated if for any taxable year more than 20 percent of the gross receipts of the corporation is derived from rents and certain other types of income.

In the instant case, the services furnished by M as part of its business of leasing motor vehicles under long-term leases are significant services within the meaning of section 1.1372-4(b)(5)(vi) of the regulations.

Accordingly, the amounts received by M under the circumstances described above are not "rents" within the meaning of section 1372(e)(5) of the Code.

See Rev. Rul. 65-40, 1965-1 C.B. 429, which holds similarly with respect to amounts received by a corporation in connection with the short-term leasing of motor vehicles.