For many decades, companies in the business of leasing “over-the-road” vehicles such as trucks, tractors, and trailers, have used terminal rental adjustment clause (TRAC) leases to maximize the value they can provide to their customers. Traditionally speaking, TRAC leases combine the tax advantages of leasing with an option to purchase the equipment at the end of the lease term for a residual amount determined at the inception of the lease. Since 1981, it has been well-settled that TRAC leases constitute “true” leases, and not disguised financing transactions, for federal tax purposes. See, e.g., Swift Dodge v. Commissioner, 76 T.C. 547 (1981); affirmed Swift Dodge v. Commissioner of Internal Rev. 692 F.2d 651 (9th Cir. 1982). By contrast, however, whether TRAC leases are treated as true leases or disguised financing transactions in the context of a bankruptcy case is anything but settled.
