And do I have a special treat and surprise in store for those of you in the reading audience who have been checking in while I tended to mundane matters with a certain taxing agency. That said this is also continuing education season and the tax update I attended yesterday had some very interesting case law presented. My personal favorites were ABC Beverage Corp. v. U.S., 113 AFTR 2d 2014-2536 (6th Cir. 2014), which also made the Forbes list of the top ten tax cases of 2014 along with another of the Forbes 2014 top ten tax cases in Shea v. Commissioner, 142 T.C. 3 (2/12/2014).
In ABC Beverage, the company was paying exorbitant rent to its landlord, paying over $1.1 million in annual rent when the fair market value of that rent was in the neighborhood of $356,000 per year (“excess rent”). To get out of the bad lease, ABC exercised an option to purchase the building, with the purchase price to be determined by the fair market value of the building including the value of the remaining lease. ABC ultimately paid $11 million after conducting several different appraisals of the property that valued the property without a lease at $2.75 million. Upon purchasing the building, the corporation capitalized as the cost of the building only the $2.75 million value of the building without the lease, and currently deducted the remaining portion of the purchase price as the cost of terminating its lease with the landlord. The Service denied the deduction for the lease termination expense, contending that the entire amount paid for the building must be capitalized. ABC begged to differ.
Litigation ensued and ABC found a case from 1948, Cleveland Allerton Hotel, Inc. v. Commissioner, 166 F.2d 805 (6th Cir. 1948) which allowed the deduction of the cost of terminating the lease under almost identical circumstances. The IRS countered with three cases decided since 1948, that had a slightly differing fact set from Cleveland Allerton which required the costs associated with a real property purchase, such as professional fees and litigation expenses in connection with the purchase to be capitalized and written off over a period of years. In allowing the deduction the Sixth Circuit reconciled the 4 different prior rulings, three of which went in favor of the IRS and concluded that those previous decisions cited by the IRS and the three principles that emerged from them did not require modification of the Cleveland Allerton decision, explaining its view in the following manner: Continue reading “Good Morning Vietnam!!!!”