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October 4, 1974


Werker, District Judge.

The opinion of the court was delivered by: WERKER

WERKER, District Judge.

On April 23, 1974, the Honorable Asa S. Herzog, Bankruptcy Judge, entered an Order expunging a priority claim *fn1" filed by the New York State Tax Commission ("Tax Commission") in the amount of $1,350,870.56 *fn2" for sales and/or compensating use tax allegedly owed by Sherwood Diversified Services, Inc. ("Sherwood"), the debtor in possession. The Bankruptcy Judge concluded that Sherwood was in the business of financing the purchase of machinery and equipment by third parties from manufacturer-vendors, and that Sherwood, as a financing agency, had no responsibility to collect sales tax. The Tax Commission appeals from the Order expunging its priority claim.

 For the purpose of this appeal, this Court adopts the description of Sherwood's business activities as set forth on pages 2 and 3 of the Bankruptcy Judge's Opinion:

The debtor commenced operations in 1961 as Sherwood Leasing Corporation, engaged in the business of financing the purchase by third parties of machinery and equipment from manufacturer-vendors. Although its business became diversified over the succeeding years, the debtor continued its financing operations and it is those operations which are the basis of the present controversy. The financing transactions arose in this manner:
Persons desirous of purchasing equipment or machinery, who were unable to finance the transactions themselves, or unable to obtain bank financing, applied to the debtor for a loan in order to effect the purchase. If debtor was satisfied with the nature of the transaction, the responsibility of the purchaser and the character of the collateral, it made a commitment to advance the money necessary for payment to the manufacturer-vendor of the purchase price plus applicable sales tax. The equipment was shipped by the vendor directly to the purchaser and the invoice sent to the debtor. The debtor thereupon entered into a security agreement with the purchaser which took the form of a document characterized as an "equipment lease,"* and upon advice from the purchaser that the equipment had been received in good condition, debtor remitted the full purchase bill plus any applicable sales tax to the manufacturer-vendor. Concurrently with the execution and delivery of the aforesaid "equipment lease," U.C.C. financing statements were executed and delivered to the purchaser and filed by the debtor.
The monthly payments called for by the "equipment lease" were calculated to return to the debtor over the term of the agreement: (1) the purchase price, (2) sales tax or other charges paid at the time of the purchase from the manufacturer-vendor, (3) interest on the moneys advanced, and (4) filing fees.
The purchaser, who was characterized in the agreement as a "lessee" was given an option to purchase the equipment at the end of the term of the agreement for a nominal consideration of $1.00 to $10.00.
In some instances there were sale and lease-back arrangements in which the debtor entered into the financing transaction after the borrower had already purchased the equipment from the manufacturer-vendor and had obtained delivery thereof. In these situations, where the State of New York was involved, the purchaser of the equipment paid all applicable sales tax to the manufacturer-vendor at the time of the purchase of the equipment.

 The initial question to be answered on this appeal is whether the "equipment leases" were in fact true leases or simply financing agreements. Under ยง 1105(a) of the New York Tax Law (McKinney's Consol.Laws, c. 60, 1966) [hereinafter cited as "Tax Law"], a tax is imposed on retail sales of tangible personal property in New York State. For the purposes of the Tax Law, a true lease constitutes a sale, *fn3" and the seller has the responsibility of collecting the tax and remitting it to the state. *fn4"

 Section 1-201(37) of the New York Uniform Commercial Code (McKinney 1964) draws a distinction between a true lease and a lease intended as security:

"Whether a lease is intended as security is to be determined by the facts of each case; however, (a) the inclusion of an option to purchase does not of itself make the lease one intended for security, and (b) an agreement that upon compliance with the terms of the lease the lessee shall become or has the option to become the owner of the property for no additional consideration or for a nominal consideration does make the lease one intended for security."

 The evidence adduced during the proceedings below shows that in substantially all of the transactions between Sherwood and its customers, nominal purchase options of from $1.00 to $10.00 were given to the purchaser-lessees. See Transcript of Adjourned Hearing on Objections to Claim of State of New York (No. 1608), February 15, 1974, at 7 [hereinafter cited as "Transcript"]. The importance of the options is emphasized by Professor Hawkland:

UCC section 1-201(37) makes it clear that an intention of the parties test is the appropriate one to distinguish true leases from leases intended as security, and that the presence or absence of an option to purchase is a strong factor in determining that intention. *fn5"

 Both the Bankruptcy Judge in his Opinion and Sherwood in its brief cite numerous authorities in support of the test outlined in section 1-201(37). *fn6" The Tax Commission seeks to avoid the thrust of Sherwood's argument by pointing to the boilerplate provisions of the equipment leases. Mr. Max Mulberg, who conducted an audit of Sherwood's financial records, ...

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