SEC. 2. BACKGROUND

.01 Sections 61(a)(3) and (5) of the Internal Revenue Code provide that, except as otherwise provided by law, gross income means all income from whatever source derived, including gains derived from dealings in property and rents.

.02 Section 1.61–6 of the Income Tax Regulations provides that gross income includes gain realized on the sale or exchange of tangible property.

.03 Section 1.61–8 provides that gross income includes rentals received or accrued for the use of personal property.

.04 Section 1231 provides for the treatment of § 1231 gain as capital gain and § 1231 loss as ordinary loss.

.05 Gain or loss on the disposition of property held both for sale and lease is not treated as section 1231 gain or loss. See Rev. Rul. 80–37, 1980–1 C.B. 51. .06 The characterization of a transaction as a sale or a lease for federal income tax purposes is based on the facts and circumstances of each transaction, including factors such as the intent of the parties as evidenced by the contract entered into by them and whether the burdens and benefits of ownership of the property have passed to the purported purchaser. See, e.g., Larsen v. Commissioner, 89 T.C. 1229, 1267 (1987); Haggard v. Commis- sioner, 24 T.C. 1124, 1129 (1955); see also Rev. Rul. 55–540, 1955–2 C.B. 39. This characterization is determined by an examination of each individual transaction.

.07 In a typical rent-to-own transaction, a rent-to-own dealer enters into a contract with an individual for the use of consumer durable property for a period of not more than three years. The individual is under no legal obligation to make all the scheduled payments under the contract, but may acquire the property if all the payments are made. Typically, a substantial portion (and in many cases, a majority) of a rent-to-own dealer’s contracts terminate with the return of the property to the rent-to-own dealer.