Legal Document

55 United States Supreme Court Reports Lawyer’s Edition 2d Series KF101.8 U54 550 98 Reporter 1291 435 U.S. 561 FRANK LYON COMPANY, Petitioner,v.UNITED STATES. Number 76-624. Argued Nov. 2, 1977. Decided April 18, 1978. Syllabus A state bank, which was a member of the Federal Reserve System, upon realizing that it not feasible, because various and federal regulations, for to finance by conventional mortgage other financing building under construction its headquarters principal banking facility, entered into sale-and- easeback agreements petitioner took title leased back bank long-term use, obtaining both loan permanent financing. The is obligated pay rent equal interest payments on petitioner's has an option repurchase at times prices then unpaid balance initial $500,000 investment. On income tax return year in completed possession, accrued from claimed as deductions depreciation building, mortgage, expenses related sale-and-leaseback transaction. Commissioner Internal Revenue disallowed ground owner purposes but arrangement transaction loaned acted conduit transmission mortgagee. This resulted deficiency tax, paid. After claim refund denied, brought suit District recover amount so court held were allowable, Appeals reversed, agreeing with Commissioner. Held: Petitioner entitled deductions. Pp. 572-584. (a) Although agreed be paid he equaled amounts due mortgagee, simple sham used forward made guise petitioner, note obligations are alone, and, accordingly, therefor § 163(a) Code 1954. Helvering versus Lazarus & Co., 308 252, 60 209, 84 L.Ed. 226, distinguished. 572-581. (b) While clear none parties any sense, equally one whose capital invested therefore party consumption 167 Code. Pacific KF135 P2 581. (c) Where, here, there genuine multiple-party economic substance compelled or encouraged business regulatory realities, imbued tax-independent considerations, shaped solely tax-avoidance features meaningless labels attached, Government should honor allocation rights duties effectuated parties; long lessor retains significant attributes traditional status, form adopted governs purposes. 581-584. 536 Reporter, 2nd 746, reversed. Erwin N. Griswold, Washington, D. C., petitioner. Stuart Atlantic Smith, respondent. Mr. Justice BLACKMUN delivered opinion Court. 1 case concerns consequences Frank Lyon Company (Lyon) Worthen Bank Trust (Worthen) Little Rock, Ark., simultaneously use facility. 2 * underlying pertinent facts undisputed. They established stipulations, App. 9, 14, trial testimony, documentary evidence, reflected Court's findings. 3 closely Arkansas corporation engaged distribution home furnishings, primarily hirlpool RCA electrical products. 1965 Arkansas-chartered System. Lyon's majority shareholder board chairman; also served Worthen's board. time began plan multistory office replace existing facility Rock. About same competitor, Union National new building. Adjacent sites Capitol Avenue, separated only Spring Street, acquired two banks. It became matter competition, tenants, prestige would start complete first. 4 initially hoped finance, build, own proposed total cost $9 million site, adjoining parking deck. accomplished selling $4 debentures using proceeds acquisition stock wholly owned real estate subsidiary. subsidiary have formal raise remaining $5 premises. plan, however, had abandoned reasons: 5 1. As chartered law, legally could more might issue than specified law. But marketable rate. 6 2. Applicable statutes regulations State Department System required Worthen, subject their supervision, obtain prior permission investment premises (including placed subsidiary) excess bank's 40% surplus.1 See Ark.Stat.Ann. 67-547.1 (Supp.1977); 12 KF62 371d (1976 ed.); Regulations 265.2(f)(7) (1977). advised staff employees they recommend approval System's Board Governors. 7 forced seek alternative solution provide satisfy regulators, attract necessary capital. In September 1967 arrangement. approved this approach, possess purchase property end 15th lease set price, regulator independent third party. 8 Detailed negotiations ensued investors indicated interest, namely, Goldman, Sachs Company; White, Weld Co.; Eastman Dillon, Securities Stephens, Incorporated Certain these firms specific proposals. 9 obtained commitment New York Life Insurance $7,140,000 conditioned titleholder. At point it, too, proposal. 10 submitted counterproposal incorporated best features, view, several offers. accepted counterproposal, suggesting, way further inducement, $21,000 reduction annual first five years lease. selected investor. negotiations, resulting elimination (offset, higher subsequent unrel ted loan), November acceptable borrower First City financing, Life, lender. 1968 approvals regulators received. 11 meantime, 15, before selected, itself construction. B May Lyon, Bank, executed complementary interlocking sold constructed, Lyon: 13 Agreements between Lyon. lease, sales agreement, 14 Under dated 1, 1968, 366, site 76 months through 2044. 19 estimated period. rents payable $50 26 thereafter quarterly payments: 15 12/1/94 11/30/99 (5 years) —$100,000 annually 16 12/1/99 11/30/04 —$150,000 17 12/1/04 11/30/09 —$200,000 18 12/1/09 11/30/34 (25 —$250,000 12/1/34 11/30/44 (10 —$10,000 annually. 20 agreement 19, id., 508, sell buy piece price exceed $7,640,000, reimbursements expenditures building.2 21 376, primary term 25 December 1969, options extend eight additional 5-year terms, 65 years. During period expiration (at latest, 30, 2034, if fully extended) 2044, full ownership, control Lyon's, unless, course, been repurchased Worthen. Id., 369. until completion For is, 1980, stated $145,581.03 ($582,324.12 year). next years, $153,289.32 ($613,157.28 year), periods $300,000 year, quarterly. 378-379. over 25-year thus $14,989,767.24. That amortize When off term, rent, extended came down $300,000. net rentals reduced increase receive during extension.3 22 "net lease," responsible all usually associated maintenance including repairs, taxes, utility charges, insurance, keep good condition, excluding, reasonable wear tear. 23 Finally, following prices: 11/30/80 (after —$6,325,169.85 11/30/84 —$5,432,607.32 11/30/89 —$4,187,328.04 11/30/94 —$2,145,935.00 24 These sum investment, 6% compounded Construction agreement. By 462, lend $7,000,000 secured deck, well assignment interests 3. Permanent Note Purchase Agreement 443, 63/4% issued warranted noncancelable least note. make corresponding 523. security deed trust 527, 571. joined fee 27 1969 possession. received discharged interim Bank. actual constructing complex (excluding land) exceeded $10,000,000. Contract 28 filed returns accrual calendar basis. return, December. asserted month's Life; building; Bank; sums legal incurred connection 29 audit determined "not portion Building," ruled "the allowable . purposes." 304-305, 299. He added $2,298.15 "accrued income." computed gain, considered equivalent income, realization based assumption exercise after determination "loaned" words, Worthe Life. 30 All $497,219.18 reported $236,596.36. assessed amount, together $43,790.84, $280,387.20.4 31 assessment timely refund. suit, paid, instituted Eastern within allowed 6532(a)(1). 32 without jury, Court, memorandum letter-opinion setting forth findings conclusions, favor allowable. 75-2 Tax Cases (CCH) ¶ 9545 (1975); 36 AFTR 75-5059 296-311. concluded intent create bona fide accordance language documents evidencing transactions. rejected argument acquiring equity rental payments. found unchallenged throughout prices, negotiated arm's length parties, represented fair estimates market value applicable dates. negative inference fact rentals, combined options, sufficient acquire exercised purchase, highly unlikely, practical matter, ever exercised. drawn lease." mixed motivations entering transaction, need diversify desire benefits "tax shelter." 296, 33 Eighth Circuit 746 (1976). correctly true likened ownership "bundle sticks" undertook evaluation facts. concluded, Government's contention, "totes empty bundle" sticks. 751. stressed following: circumscribed right profit giving plus compound mortgage.5 did take account possible appreciation inflation.6 Any award realized result destruction condemnation Lyon.7 (d) exactly payments.8 (e) retained ultimate disposition renew site.9 (f) enjoyed bore burdens incident operation that, Appeals' advantages accruing event property, savings approximately $1.5 yea arrangement.10 752-753.11 753, "closely akin" 226 (1939). "In sum, benefits, risks, [Lyon] respect simply too insubstantial establish status vice present [its] employed cumulative effect depriving interest." F.2d, 754. 34 We granted certiorari, 429 1089, 97 1097, 51 534 (1977), conflict American Realty States, 498 1194 (CA 1974). II 35 almost 50 ago, observed "taxation much concerned refinements command taxed—the benefit paid." Corliss Bowers, 281 378, 336, 74 916 (1930). number cases, refused permit transfer shift incidence taxation attributable where transferor continues retain transferred. E. g., Sunnen, 333 591, 68 715, 92 898 (1948); Clifford, 309 331, 554, 788 (1940). applying doctrine form, looked objective realities rather particular employed. never regarded expedient drawing up papers," Tower, 327 280, 291, 66 532, 538, 90 670 (1946), controlling when contrary. field taxation, administrators laws courts written rigidly binding." U.S., 255, S.Ct., 210. G. Lake, Inc., 356 260, 266-267, 78 691, 743 (1958); Holding 324 334, 707, 89 981 (1945). Nor parties' achieve necessarily relevant. Duberstein, 363 278, 286, 80 1190, 1218 (1960). light general principles, takes position Worthen-Lyon entirety sham. whole, said, elaborate scheme designed guaranteed latter payments, This, claims, viewed microscope laws. cast terms renewals indicate. said reacquire satisfying debt paying advance regardless time; similarly, off, drastically bargain likewise no relation calculated term. (although conceded less, Tr. Oral Arg. 32). Furthermore, favorable renewal unlikely abandon "paid off' mortgage. implies convenience which, face, enable deduct allow deduction depreciation, ultimately borne offset against roughly inclusion income. If, argues, deductible extent depreciation; either mo tgage include "rent" function those 37 places great reliance supra, claims precedent controls case. taxpayer department store. three buildings trustee land-trust certificate holders. made, 99 purchase. Commissioner, stark contrast his posture case, statutory followed title. Appeals, reality buildings. conclusion affirmed. stipulated leaseback promise loan, "depreciation fund" amortization fund Thus, justifiably although leaseback, actually involved. 38 we feel, distinguished here. Its involving (and multiple) taxpayer-department store trustee-bank. rightly despite nomenclature instrument conveyance leaseback. Sun Oil company Revenue, 562 258 1977) (a two-party feature second tax-exempt pension trust). 39 contrast, involves agency. usual unavailable Independent interested participating available (also Worthen) won privilege. Despite presence directors, developed, familial arranged restrictions imposed bank. Had appeared, another investor selected. essentially same. party, our significantly distinguishes removes authority. III 40 true, shape according needs. points out, respective proposals funds. 355. prospective compared anticipated investor's equity. natural contemplating kind. needed operations know what be. employ funds most remunerative possible. And, past, must given accord occurred occurred. Alfalfa Dehydrating Milling 417 134, 148-149, 94 2129, 717 (1974); Central Tablet Mfg. 673, 690, 2516, 41 398 (1974). There device peel away reveal substance. effects obviously different able Then apply. Here, significantly, who liable notes, anything go awry later liable.12 No how devised otherwise, remains final obligation notes fell squarely Lyon.13 ongoing enterprise, exposed very well-being substantial risk. 42 liability just abstract possibility something will wrong disclosed sheet world see. financial affected substantially debt, offsetting asset. To less 43 concluding distinct element liability, mindful characterization accounting purposes, hand, other, Lincoln Savings Loan Assn., 403 345, 355, 91 1893, 519 (1971); Old Colony R. 284 552, 562, 52 211, 484 (1932). Accounting methods descriptions, more, do methods, understood applied others, gave meaningful character consonant given.14 enter type now urges cannot intending involved allocated sale-and-leaseback. 44 Other factors representing "loan" theory. And assumed putative loan—required recognized taxable question—will exercises options. 45 acknowledged urges, guaranteed, 752. chooses gambling last minimal, recoup negotiate again regarding many contingencies, variations estate, money, structure intended st uctured taxed. 46 inappropriate likely lose little revenue, any, parties. created matched item differently. induce concedes. 22-23. taken reason disallowing consequences.15 ignore affect nearly every Brown, 380 563, 579-580, 85 1162, 75 (1965) (Harlan, J., concurring). purpose hold even financed degree 47 ignored does not, automatically compel items Nevertheless, facts, readily follows. noted, 1954 Code, 163(a). 48 sense. focus committed therefore, contention treated property. order growing equity, speculate bargain. indulge such speculation view finding contrary.16 conclude deductions, 167. Cf. Chicago baron Q. 412 401, 93 2169, (1973). IV 49 recognize position, superficial appeal. One, indeed, may theorize directors; departure corporate activity unusual venture; parallel mortgage; provisions relating property; nature Worthen; double declining accrue arrangement, basis recipient nothing loan. find theorizing incompatible transaction: competitive situation existed immediately following; undercapitalization; consequent inability, restraint, carry plans borrowing; barriers regulators; suggestion, forthcoming regulator, purchase; requirement, party; organizations seriously resolution problem; submission organizations; bargaining process ensued; competitiveness bidding; negotiations; three-party aspect transaction; substantiality17 independence diversification motivation; being alone successive reasonableness, found, prices; substantiality generally financing; risks Lyon; risk default fail, banks failed; "walk away" relationship probably then-current worth inescapable extended, free chose; decides extend; absence understanding options; nonfamily nonprivate entire differential rates special circumstances parties—all convince us far better case.18 concluding, emphasize condoning manipulation arbitrary dealings significance. Such, happened short, where, Expressed way, What depend suffices say sale-and-leaseback, itself, operate deny taxpayer's deductions.19 53 judgment 54 ordered. WHITE dissents affirm reasons Circuit. 56 STEVENS, dissenting. 57 my matters structuring result, largely irrelevant. question whether leasehold answered examining purported lessor's reversionary estate. 58 power repaying amounts, advanced period, among parallels normal lenders, mortgage.1 If repays loans, unencumbered suggests confirmed themselves interest. 59 original credited unamortized limited free. Conversely, nominal surrender supposed ownership.2 option.3 "It fundamental 'depreciation predicated property.' exists design yield purchaser." Estate Franklin 544 1045, 1049 1976) (citations omitted; emphasis original). has, effect, all. incurs neither depreciation,4 nor appreciation. sale-leaseback, stand worse 11th lease—when can repurchase—whether appreciated depreciated.5 rest 61 risks. First, like lender, insolvency. Second, term.6 repay, perhaps appropriate characterize lessee. happen justify Until option,7 N Dec. Immigration Nationality Decisions think correct present, since unrestricted residual hold, owner. 62 respectfully dissent. June 1967, surplus million. national supervision Comptroller Currency. appeared advisable purchases materials (which become bank) tax. 84-1904(l ) (1960); Agricultural Nat. Comm'n, 392 339, 88 2173, 1138 (1968). Sales elements 84-1902(c) (Supp.1977). prescribed brings sharp W rthen extend, expires chooses. lease's claimed, approximate repay Brief 14. figures uncontested adjustments litigation. here challenges assertion grounds opportunities greater attractive estate; minimum realize unlikely; observation pointing out estimate dates reasonable. 303, asserts statement taking 1980. above partial damage time. 408-410, 411. concedes accuracy statement, merely transmitted sole obligor remain requirement loans exercised; uncertainty years; anyone lease; continuing response this, occupancy enjoy common leases, motives cash after-tax $312,220, relied 752, credit ability "carefully circumscribed" agreements. statute freely allocable 48(d) 48(d), pressed submit statements periodically. Agreement, 453-454, 458-459. remedies remedy lessee, lessor. aware standards changed propriety disclosing debate standards. Compare Principles Bd. Opinion 5, Reporting Leases Financial Statements Lessee (1964), 7, Lessors (1966), Standards Board, Statement 13, Currency, Banking Circular 95 (Nov. 11, 1977), instructing revise n FASB Standard 13. states, 78, instances treatments diverge. Further, nonapplicable January 1977 (as Lyon-Worthen lease), 1981. Obviously, executed. Then-existing pronouncements Service measure leases sales, Rev.Rul. 55-540, 1955-2 Cum.Bull. 39, dealt equipment leases. ruling look determine proper Generally, conditional portions specifically lessee certain disproportionately large sale, value, some identifiable 60-122, 1960-1 56; 72-543, 1972-2 87. announced guidelines, indicating answer requests rulings leverage leasing transactions, Rev.Proc. 75-21, 1975-1 715. "[u]nless indicate contrary intent," rule leveraged unless maintains minimal 20% except part furnished lent indebtedness lessor, demonstrate expects treatment. guidelines definitive, guidance assessing Rosenberg Weinstein, Sale-leasebacks: An analysis transactions decision, J.Tax. 146, 147 n. Indeed, inevitable revenues less. sheltered sufficiently dollars preserved thereby taxes sheltering deduction. law review. subject. 1194, 1198 consolidated 31, showed assets $12,225,612, stockholders' $3,818,671. Of assets, $2,674,290 587-588. others another, form. See, e. (sale-and-leaseback land enabled amortize, otherwise depreciable). arrangements hardly labeled techniques rrangements promoted Zeitlin, Planning Equipment-Leasing Shelters, So.Cal. Inst. 621; Marcus, Real Purchase-Leasebacks Secured Loans, L.J. 664 Danielson, 378 771 3), cert. 389 858, 94, 123 (1967), remand, KF6280 A2 U55 782 (1968); Levinson (1966); World Publishing 299 614 1962); Northwest Acceptance Corporation 836 (1972), aff'd, 500 1222 1974); Cubic 541 829 1976). "[W]here fixed Company, predetermined substantive akin debtor creditor lessee." 149 noting potential see ante, 564, contemplate costs instance, cost, whichever greater. 7. acknowledges consistent lessor-lessee relationship. Breece Veneer Panel 232 319 1956); LTV 63 Comment, Sale Leaseback Transactions, N.Y.U.L.Rev. 672, 688-689, 117 analogous 916, grantor cost-free revocation similar; restraints normally repayment limitations timing intervals. argues bears decreases 29-30. clearly incorrect. soon bear opportunity hinges ways terminated. condemned, destroyed act God, event, increased Reply 8-9, amortized ensuing totaling Yet choose owning $10,000 2034 2044 ownership. Ante, 579. "economically compelled" option. advantageous let lapse somewhat repurchase. 26. option, so, 258, 267 (repurchase enabling indicative lessee's premises). "put" drops below Even appears

Classification Label: 11