Frank Lyon Company v. United States, 435 U.S. 561 (1978), was a United States Supreme Court case in which the Court held that the title owner that acquired depreciable real estate as if the owner were a mere conduit or agent was indeed the owner and, for Federal income tax purposes, had the legal right to take tax deductions associated with depreciation on the building.

Background

According to the text of the syllabus preceding the Court's opinion: The bank was Worthen Bank in Little Rock and the Frank Lyon Corporation engaged in the distribution of home furnishings, primarily Whirlpool and RCA electrical products. The bank bought the land and started construction of the subject building before it found a buyer. The Frank Lyon Company won the bidding to buy the building from the bank by providing $500,000 of the $7.6 million purchase price. The rest of the money came from New York Life. The mortgage loan's payments to the lender and the rent payments were engineered to be exactly equal. The title owner, Frank Lyon, never actually received the rent payments from the Worthen Bank because the three party deal specifically required that Worthen pay New York Life directly. The lease was triple net (i.e. any increase in expenses are paid not by the owner, but by the tenant). Another fact which leads a reasonable man to conclude that Worthen Bank was the real party in a two party deal and that the Frank Lyon company was a mere agent, is that the tenant, Worthen Bank, had a 25-year lease with options to either buy the building or extend the lease for 65 years when it could still buy the building. The option's strike price was set so that Frank Lyon would be repaid exactly its $500,000 plus 6% interest. Economic owners of an asset would be expected to bear the benefits and burdens of any change in market value of the thing owned. In this case, Worthen Bank, the tenant, bore the benefits and the burdens, rather than the title owner. The transaction was a classic sale leaseback.

Holding

The court held that the Government should honor the allocation of rights and duties effectuated by the parties where there is a genuine multiple-party transaction with economic substance which is compelled or encouraged by business or regulatory realities, imbued with tax-independent considerations, and not simply shaped by tax-avoidance features with meaningless labels attached. As long as the lessor retains significant and genuine attributes of the traditional lessor status, the form of the transaction adopted by the parties governs for tax purposes. As such, a sale-and-leaseback does not necessarily operate to deny a taxpayer's claim for deductions.

Subsequent developments

The result of this case was modified by the Tax Reform Act of 1986, which disallowed this tax feature. The Rose Law Firm represented the taxpayer.