U.S. Supreme Court Frank Lyon Co. v. United States, 435
U.S. 561 (1978) Frank Lyon Co. v. United
States No. 76-624 Argued November 2,
1977 Decided April 18,
1978 435
U.S. 561 CERTIORARI TO THE UNITED STATES
COURT OF APPEALS FOR THE EIGHTH
CIRCUIT Syllabus A state bank, which was a member of the Federal Reserve System,
upon realizing that it was not feasible, because of various state
and federal regulations, for it to finance by conventional mortgage
and other financing a building under construction for its
headquarters and principal banking facility, entered into sale and
lease-back agreements by which petitioner took title to the
building and leased it back to the hank for long-term use,
petitioner obtaining both a construction loan and permanent
mortgage financing. The bank is obligated to pay rent equal to the
principal and interest payments on petitioner's mortgage, and has
an option to repurchase the building at various times at prices
equal to the then unpaid balance of petitioner's mortgage and
initial $500,000 investment. On its federal income tax return for
the year in which the building was completed and the bank took
possession, petitioner accrued rent from the bank and claimed as
deductions depreciation on the building, interest on its
construction loan and mortgage, and other expenses related to the
sale and lease-back transaction. The Commissioner of Internal
Revenue disallowed the deductions on the ground that petitioner was
not the owner of the building for tax purposes, but that the sale
and lease-back arrangement was a financing transaction in which
petitioner loaned the bank $500,000 and acted as a conduit for the
transmission of principal and interest to petitioner's mortgagee.
This resulted in a deficiency in petitioner's income tax, which it
paid. After its claim for a refund was denied, it brought suit in
the District Court to recover the amount so paid. That court held
that the claimed deductions were allowable, but the Court of
Appeals reversed, agreeing with the Commissioner. Held: Petitioner is entitled to the claimed deductions.
Pp. 435 U. S.
572 -584.

															(a) Although the rent agreed to be paid by the bank equaled the
amounts due from the petitioner to its mortgagee, the sale and
lease-back transaction is not a simple sham by which petitioner was
but a conduit used to forward the mortgage payments made under the
guise of rent paid by the bank to petitioner, on to the mortgagee,
but the construction loan and mortgage note obligations on which
petitioner paid interest are its obligations alone, and,
accordingly, it is entitled to claim deductions Page 435 U. S. 562 therefor under § 163(a) of the Internal Revenue Code of 1954. Helvering v. Lazarus & Co., 308 U.
S. 252 , distinguished. Pp. 435 U. S.
572 -581.

															(b) While it is clear that none of the parties to the sale and
lease-back agreements is the owner of the building in any simple
sense, it is equally clear that petitioner is the one whose capital
was invested in the building, and is therefore the party entitled
to claim depreciation for the consumption of that capital under §
167 of the Code. P. 435 U. S.
581 .

															(c) Where, as here, there is a genuine multiple-party
transaction with economic substance that is compelled or encouraged
by business or regulatory realities, that is imbued with
tax-independent considerations, and that is not shaped solely by
tax-avoidance features to which meaningless labels are attached,
the Government should honor the allocation of rights and duties
effectuated by the parties; so 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. Pp. 435 U. S.
581 -584.

															536 F. d 746, reversed.

															BLACKMUN, J., delivered the opinion of the Court, in which
BURGER, C.J., and BRENNAN, STEWART, MARSHALL, POWELL, and
REHNQUIST, JJ., joined. WHITE, J., filed a dissenting statement, post, p. 435 U. S. 584 .
STEVENS, J., filed a dissenting opinion, post, p. 435 U. S.
584 .

															MR. JUSTICE BLACKMUN delivered the opinion of the Court.

															This case concerns the federal income tax consequences of a sale
and lease-back in which petitioner Frank Lyon Company (Lyon) took
title to a building under construction by Worthen Bank & Trust
Company (Worthen) of Little Rock, Ark., and simultaneously leased
the building back to Worthen for long-term use as its headquarters
and principal banking facility. Page 435 U. S. 563 I The underlying pertinent facts are undisputed. They are
established by stipulations, App. 9, 14, the trial testimony, and
the documentary evidence, and are reflected in the District Court's
findings. A Lyon is a closely held Arkansas corporation engaged in the
distribution of home furnishings, primarily Whirlpool and RCA
electrical products. Worthen, in 1965, was an Arkansas-chartered
bank and a member of the Federal Reserve System. Frank Lyon was
Lyon's majority shareholder and board chairman; he also served on
Worthen's board. Worthen at that time began to plan the
construction of a multistory bank and office building to replace
its existing facility in Little Rock. About the same time,
Worthen's competitor, Union National Bank of Little Rock, also
began to plan a new bank and office building. Adjacent sites on
Capitol Avenue, separated only by Spring Street, were acquired by
the two banks. It became a matter of competition, for both banking
business and tenants, and prestige as to which bank would start and
complete its building first.

															Worthen initially hoped to finance, to build, and to own the
proposed facility at a total cost of $9 million for the site,
building, and adjoining parking deck. This was to be accomplished
by selling $4 million in debentures and using the proceeds in the
acquisition of the capital stock of a wholly owned real estate
subsidiary. This subsidiary would have formal title, and would
raise the remaining $5 million by a conventional mortgage loan on
the new premises. Worthen's plan, however, had to be abandoned for
two significant reasons:

															1. As a bank chartered under Arkansas law, Worthen legally could
not pay more interest on any debentures it might issue than that
then specified by Arkansas law. But the proposed obligations would
not be marketable at that rate. Page 435 U. S. 564 2. Applicable statutes or regulations of the Arkansas State Bank
Department and the Federal Reserve System required Worthen, as a
state bank subject to their supervision, to obtain prior permission
for the investment in banking premises of any amount (including
that placed in a real estate subsidiary) in excess of the bank's
capital stock or of 40% of its capital stock and surplus. [ Footnote 1 ] See Ark.Stat.Ann.
§ 67-547.1 (Supp. 1977); 12 U.S.C. § 371d (1976 ed.); 12 CFR §
265.2(f)(7) (1977). Worthen, accordingly, was advised by staff
employees of the Federal Reserve System that they would not
recommend approval of the plan by the System's Board of
Governors.

															Worthen therefore was forced to seek an alternative solution
that would provide it with the use of the building, satisfy the
state and federal regulators, and attract the necessary capital. In
September, 1967, it proposed a sale and lease-back arrangement. The
State Bank Department and the Federal Reserve System approved this
approach, but the Department required that Worthen possess an
option to purchase the leased property at the end of the 15th year
of the lease at a set price, and the federal regulator required
that the building be owned by an independent third party.

															Detailed negotiations ensued with investors that had indicated
interest, namely, Goldman, Sachs & Company; White, Weld &
Co.; Eastman Dillon, Union Securities & Company; and Stephens,
Inc. Certain of these firms made specific proposals.

															Worthen then obtained a commitment from New York Life Insurance
Company to provide $7,140,000 in permanent mortgage financing on
the building, conditioned upon its approval of the titleholder. At
this point, Lyon entered the negotiations, and it, too, made a
proposal. Page 435 U. S. 565 Worthen submitted a counterproposal that incorporated the best
features, from its point of view, of the several offers. Lyon
accepted the counterproposal, suggesting, by way of further
inducement, a $21,000 reduction in the annual rent for the first
five years of the building lease. Worthen selected Lyon as the
investor. After further negotiations, resulting in the elimination
of that rent reduction (offset, however, by higher interest Lyon
was to pay Worthen on a subsequent unrelated loan), Lyon, in
November, 1967, was approved as an acceptable borrower by First
National City Bank for the construction financing, and by New York
Life, as the permanent lender. In April, 1968, the approvals of the
state and federal regulators were received.

															In the meantime, on September 15, before Lyon was selected,
Worthen itself began construction. B In May, 1968, Worthen, Lyon, City Bank, and New York Life
executed complementary and interlocking agreements under which the
building was sold by Worthen to Lyon as it was constructed, and
Worthen leased the completed building back from Lyon.

															1. Agreements between Worthen and Lyon. Worthen and Lyon
executed a ground lease, a sales agreement, and a building
lease.

															Under the ground lease dated May 1, 1968, App. 366, Worthen
leased the site to Lyon for 76 years and 7 months through November
30, 2044. The first 19 months were the estimated construction
period. The ground rents payable by Lyon to Worthen were $50 for
the first 26 years and 7 months, and thereafter in quarterly
payments:

															12/1/94 through 11/30/99 (5 years) -- $100,000 annually

															12/1/99 through 11/30/04 (5 years) -- $150,000 annually

															12/1/04 through 11/30/09 (5 years) -- $200,000 annually

															12/1/09 through 11/30/34 (25 years) -- $250,000 annually

															12/1/34 through 11/30/44 (10 years) -- $10,000 annually. Page 435 U. S. 566 Under the sales agreement dated May 19, 1968, id. at
508, Worthen agreed to sell the building to Lyon, and Lyon agreed
to buy it, piece by piece as it was constructed, for a total price
not to exceed $7,640,000, in reimbursements to Worthen for its
expenditures for the construction of the building. [ Footnote 2 ]

															Under the building lease dated May 1, 1968, id. at 376,
Lyon leased the building back to Worthen for a primary term of 25
years from December 1, 1969, with options in Worthen to extend the
lease for eight additional 5-year terms, a total of 65 years.
During the period between the expiration of the building lease (at
the latest, November 30, 2034, if fully extended) and the end of
the ground lease on November 30, 2044, full ownership, use, and
control of the building were Lyon's, unless, of course, the
building had been repurchased by Worthen. Id. at 369.
Worthen was not obligated to pay rent under the building lease
until completion of the building. For the first 11 years of the
lease, that is, until November 30, 1980, the stated quarterly rent
was $145,581.03 ($582,324.12 for the year). For the next 14 years,
the quarterly rent was $153,289.32 ($613,157.28 for the year), and
for the option periods the rent was $300,000 a year, payable
quarterly. Id. at 378-379. The total rent for the building
over the 25-year primary term of the lease thus was $14,989,767.24.
That rent equaled the principal and interest payments that would
amortize the $7,140,000 New York Life mortgage loan over the same
period. When the mortgage was paid off at the end of the primary
term, the annual building rent, if Worthen extended the lease, came
down to the stated $300,000. Lyon's Page 435 U. S. 567 net rentals from the building would be further reduced by the
increase in ground rent Worthen would receive from Lyon during the
extension. [ Footnote 3 ]

															The building lease was a "net lease," under which Worthen was
responsible for all expenses usually associated with the
maintenance of an office building, including repairs, taxes,
utility charges, and insurance, and was to keep the premises in
good condition, excluding, however, reasonable wear and tear.

															Finally, under the lease, Worthen had the option to repurchase
the building at the following times and prices:

															11/30/80 (after 11 years) -- $6,325,169.85

															11/30/84 (after 15 years) -- $5,432,607.32

															11/30/89 (after 20 years) -- $4,187,328.04

															11/30/94 (after 25 years) -- $2,145,935.00

															These repurchase option prices were the sum of the unpaid
balance of the New York Life mortgage, Lyon's $500,000 investment,
and 6% interest compounded on that investment.

															2. Construction financing agreement. By agreement dated May 14,
1968, id. at 462, City Bank agreed to lend Lyon $7,000,000
for the construction of the building. This loan was secured by a
mortgage on the building and the parking deck, executed by Worthen
as well as by Lyon, and an assignment by Lyon of its interests in
the building lease and in the ground lease.

															3. Permanent financing agreement. By Note Purchase Page 435 U. S. 568 Agreement dated May 1, 1968, id. at 443, New York Life
agreed to purchase Lyon's $7,140,000 6 3/4% 25-year secured note to
be issued upon completion of the building. Under this agreement,
Lyon warranted that it would lease the building to Worthen for a
noncancelable term of at least 25 years under a net lease at a rent
at least equal to the mortgage payments on the note. Lyon agreed to
make quarterly payments of principal and interest equal to the
rentals payable by Worthen during the corresponding primary term of
the lease. Id. at 623. The security for the note was a
first deed of trust and Lyon's assignment of its interests in the
building lease and in the ground lease. Id. at 527, 571.
Worthen joined in the deed of trust as the owner of the fee and the
parking deck.

															In December, 1969, the building was completed, and Worthen took
possession. At that time, Lyon received the permanent loan from New
York Life, and it discharged the interim loan from City Bank. The
actual cost of constructing the office building and parking complex
(excluding the cost of the land) exceeded $10,000,000. C Lyon filed its federal income tax returns on the accrual and
calendar year basis. On its 1969 return, Lyon accrued rent from
Worthen for December. It asserted as deductions one month's
interest to New York Life; one month's depreciation on the
building; interest on the construction loan from City Bank; and
sums for legal and other expenses incurred in connection with the
transaction.

															On audit of Lyon's 1969 return, the Commissioner of Internal
Revenue determined that Lyon was "not the owner for tax purposes of
any portion of the Worthen Building," and ruled that "the income
and expenses related to this building are not allowable . . . for
Federal income tax purposes." App. 304-305, 299. He also added
$2,298.15 to Lyon's 1969 income as "accrued interest income." This
was the computed 1969 portion of a gain, considered the equivalent
of interest income, Page 435 U. S. 569 the realization of which was based on the assumption that
Worthen would exercise its option to buy the building after 11
years, on November 30, 1980, at the price stated in the lease, and
on the additional determination that Lyon had "loaned" $500,000 to
Worthen. In other words, the Commissioner determined that the sale
and lease-back arrangement was a financing transaction in which
Lyon loaned Worthen $500,000 and acted as a conduit for the
transmission of principal and interest from Worthen to New York
Life.

															All this resulted in a total increase of $497,219.18 over Lyon's
reported income for 1969, and a deficiency in Lyon's federal income
tax for that year in the amount of $236,596.36. The Commissioner
assessed that amount, together with interest of $43,790.84, for a
total of $280,387.20. [ Footnote
4 ]

															Lyon paid the assessment and filed a timely claim for its
refund. The claim was denied, and this suit, to recover the amount
so paid, was instituted in the United States District Court for the
Eastern District of Arkansas within the time allowed by 26 U.S.C. §
6532(a)(1).

															After trial without a jury, the District Court, in a memorandum
letter opinion setting forth findings and conclusions, ruled in
Lyon's favor and held that its claimed deductions were allowable.
75-2 USTC � 9545 (1975), 36 AFTR2d � 75-5059 1975); App. 296-311.
It concluded that the legal intent of the parties had been to
create a bona fide sale and lease-back in accordance with the form
and language of the documents evidencing the transactions. It
rejected the argument that Worthen was acquiring an equity in the
building through its rental payments. It found that the rents were
unchallenged and were reasonable throughout the period of the
lease, and that the option prices, negotiated at arm's length
between the parties, represented fair estimates of market value on
the applicable dates. It rejected any negative Page 435 U. S. 570 inference from the fact that the rentals, combined with the
options, were sufficient to amortize the New York Life loan and to
pay Lyon a 6% return on its equity investment. It found that
Worthen would acquire an equity in the building only if it
exercised one of its options to purchase, and that it was highly
unlikely, as a practical matter, that any purchase option would
ever be exercised. It rejected any inference to be drawn from the
fact that the lease was a "net lease." It found that Lyon had mixed
motivations for entering into the transaction, including the need
to diversify as well as the desire to have the benefits of a "tax
shelter." App. 296, 299.

															The United States Court of Appeals for the Eighth Circuit
reversed. 536 F.2d 746 (1976). It held that the Commissioner
correctly determined that Lyon was not the true owner of the
building, and therefore was not entitled to the claimed deductions.
It likened ownership for tax purposes to a "bundle of sticks," and
undertook its own evaluation of the facts. It concluded, in
agreement with the Government's contention, that Lyon "totes an
empty bundle" of ownership sticks. Id. at 751. It stressed
the following: (a) the lease agreements circumscribed Lyon's right
to profit from its investment in the building by giving Worthen the
option to purchase for an amount equal to Lyon's $500,000 equity
plus 6% compound interest and the assumption of the unpaid balance
of the New York Life mortgage. [ Footnote 5 ] (b) The option prices did not take into
account possible appreciation of the value of the building or
inflation. [ Footnote 6 ] (c) Any
award realized as a Page 435 U. S. 571 result of destruction or condemnation of the building in excess
of the mortgage balance and the $500,000 would be paid to Worthen,
and not Lyon. [ Footnote 7 ] (d)
The building rental payments during the primary term were exactly
equal to the mortgage payments. [ Footnote 8 ] (e) Worthen retained control over the ultimate
disposition of the building through its various options to
repurchase and to renew the lease, plus its ownership of the site.
[ Footnote 9 ] (f) Worthen
enjoyed all benefits, and bore all burdens, incident to the
operation and ownership of the building, so that, in the Court of
Appeals' view, the only economic advantages accruing to Lyon, in
the event it were considered to be the true owner of the property,
were income tax savings of approximately $1.5 million during the
first 11 Page 435 U. S. 572 years of the arrangement. [ Footnote 10 ] Id. at 752-753. [ Footnote 11 ] The court concluded, id. at 753, that the transaction was "closely akin" to
that in Helvering v. Lazarus Co., 308 U.
S. 252 (1939).

															"In sum, the benefits, risks, and burdens which [Lyon] has
incurred with respect to the Worthen building are simply too
insubstantial to establish a claim to the status of owner for tax
purposes. . . . The vice of the present lease is that all of [its]
features have been employed in the same transaction with the
cumulative effect of depriving [Lyon] of any significant ownership
interest."

															536 F.2d at 754.

															We granted certiorari, 429 U.S. 1089 (1977), because of an
indicated conflict with American Realty Trust v. United
States, 498 F.2d 1194 (CA4 1974). II This Court, almost 50 years ago, observed that

															"taxation is not so much concerned with the refinements of title
as it is with actual command over the property taxed -- the actual
benefit for which the tax is paid." Corliss v. Bowers, 281 U. S. 376 , 281 U. S. 378 (1930). In a number of cases, the Court has refused to permit the
transfer of formal legal title to shift the incidence of taxation
attributable to ownership of property where the transferor
continues to retain significant control Page 435 U. S. 573 over the property transferred. E.g., Commissioner v.
Sunnen, 333 U. S. 591 (1948); Helvering v. Clifford, 309 U.
S. 331 (1940). In applying this doctrine of substance
over form, the Court has looked to the objective economic realities
of a transaction rather than to the particular form the parties
employed. The Court has never regarded "the simple expedient of
drawing up papers," Commissioner v. Tower, 327 U.
S. 280 , 327 U. S. 291 (1946), as controlling for tax purposes when the objective economic
realities are to the contrary.

															"In the field of taxation, administrators of the laws, and the
courts, are concerned with substance and realities, and formal
written documents are no rigidly binding." Helvering v. Lazarus & Co., 308 U.S. at 308 U. S. 255 . See also Commissioner v. P. G. Lake, Inc., 356 U.
S. 260 , 356 U. S.
266 -267 (1958); Commissioner v. Court Holding
Co., 324 U. S. 331 , 324 U. S. 334 (1945). Nor is the parties' desire to achieve a particular tax
result necessarily relevant. Commissioner v. Duberstein, 363 U. S. 278 , 363 U. S. 286 (1960).

															In the light of these general and established principles, the
Government takes the position that the Worthen-Lyon transaction, in
its entirety, should be regarded as a sham. The agreement as a
whole, it is said, was only an elaborate financing scheme designed
to provide economic benefits to Worthen and a guaranteed return to
Lyon. The latter was but a conduit used to forward the mortgage
payments, made under the guise of rent paid by Worthen to Lyon, on
to New York Life as mortgagee. This, the Government claims, is the
true substance of the transaction as viewed under the microscope of
the tax laws. Although the arrangement was cast in sale and
lease-back form, in substance. it was only a financing transaction,
and the terms of the repurchase options and lease renewals so
indicate. It is said that Worthen could reacquire the building
simply by satisfying the mortgage debt and paying Lyon its $500,000
advance plus interest, regardless of the fair market value of the
building at the time; similarly, when the mortgage was paid off,
Worthen could extend the lease at Page 435 U. S. 574 drastically reduced bargain rentals that likewise bore no
relation to fair rental value, but were simply calculated to pay
Lyon its $500,000 plus interest over the extended term. Lyon's
return on the arrangement in no event could exceed 6% compound
interest (although the Government conceded it might well be less,
Tr. of Oral Arg. 32). Furthermore, the favorable option and lease
renewal terms made it highly unlikely that Worthen would abandon
the building after it, in effect, had "paid off" the mortgage. The
Government implies that the arrangement was one of convenience
which, if accepted on its face, would enable Worthen to deduct its
payments to Lyon as rent, and would allow Lyon to claim a deduction
for depreciation, based on the cost of construction ultimately
borne by Worthen, which Lyon could offset against other income, and
to deduct mortgage interest that roughly would offset the inclusion
of Worthen's rental payments in Lyon's income. If, however, the
Government argues, the arrangement was only a financing transaction
under which Worthen was the owner of the building, Worthen's
payments would be deductible only to the extent that they
represented mortgage interest, and Worthen would be entitled to
claim depreciation; Lyon would not be entitled to deductions for
either mortgage interest or depreciation, and it would not have to
include Worthen's "rent" payments in its income, because its
function with respect to those payments was that of a conduit
between Worthen and New York Life.

															The Government places great reliance on Helvering v. Lazarus
& Co., supra, and claims it to be precedent that controls
this case. The taxpayer there was a department store. The legal
title of its three buildings was in a bank as trustee for land
trust certificate holders. When the transfer to the trustee was
made, the trustee at the same time leased the buildings back to the
taxpayer for 99 years, with option to renew and purchase. The
Commissioner, in stark contrast to his posture in the present case,
took the position that the Page 435 U. S. 575 statutory right to depreciation followed legal title. The Board
of Tax Appeals, however, concluded that the transaction between the
taxpayer and the bank, in reality, was a mortgage loan, and allowed
the taxpayer depreciation on the buildings. This Court, as had the
Court of Appeals, agreed with that conclusion. and affirmed. It
regarded the "rent" stipulated in the lease-back as a promise to
pay interest on the loan, and a "depreciation fund" required by the
lease as an amortization fund designed to pay off the loan in the
stated period. Thus, said the Court, the Board justifiably
concluded that the transaction, although in written form a transfer
of ownership with a lease-back, was actually a loan secured by the
property involved.

															The Lazarus case, we feel, is to be distinguished from
the present one, and is not controlling here. Its transaction was
one involving only two (and not multiple) parties, the taxpayer
department store and the trustee bank. The Court looked closely at
the substance of the agreement between those two parties, and
rightly concluded that depreciation was deductible by the taxpayer
despite the nomenclature of the instrument of conveyance and the
lease-back. See also Sun Oil Co. v. Commissioner, 562 F.2d
258 (CA3 1977) (a two-party case with the added feature that the
second party was a tax-exempt pension trust).

															The present case, in contrast, involves three parties, Worthen,
Lyon, and the finance agency. The usual simple two-party
arrangement was legally unavailable to Worthen. Independent
investors were interested in participating in the alternative
available to Worthen, and Lyon itself (also independent from
Worthen) won the privilege. Despite Frank Lyon's presence on
Worthen's board of directors, the transaction, as it ultimately
developed, was not a familial one arranged by Worthen, but one
compelled by the realities of the restrictions imposed upon the
bank. Had Lyon not appeared, another interested investor would have
been selected. Page 435 U. S. 576 The ultimate solution would have been essentially the same.
Thus, the presence of the third party, in our view, significantly
distinguishes this case from Lazarus, and removes the
latter as controlling authority. III It is true, of course, that the transaction took shape according
to Worthen's needs. As the Government points out, Worthen,
throughout the negotiations, regarded the respective proposals of
the independent investors in terms of its own cost of funds. E.g., App. 355. It is also true that both Worthen and the
prospective investors compared the various proposals in terms of
the return anticipated on the investor's equity. But all this is
natural for parties contemplating entering into a transaction of
this kind. Worthen needed a building for its banking operations and
other purposes, and necessarily had to know what its cost would be.
The investors were in business to employ their funds in the most
remunerative way possible. And, as the Court has said in the past,
a transaction must be given its effect in accord with what actually
occurred, and not in accord with what might have occurred. Commissioner v. National Alfalfa Dehydrating & Milling
Co., 417 U. S. 134 , 417 U. S.
148 -149 (1974); Central Tablet Mfg. Co. v. United
States, 417 U. S. 673 , 417 U. S. 690 (1974).

															There is no simple device available to peel away the form of
this transaction and to reveal its substance. The effects of the
transaction on all the parties were obviously different from those
that would have resulted had Worthen been able simply to make a
mortgage agreement with New York Life and to receive a $500,000
loan from Lyon. Then Lazarus would apply. Here, however,
and most significantly, it was Lyon alone, and not Worthen, who was
liable on the notes, first to City Bank and then to New York Life.
Despite the facts that Worthen had agreed to pay rent and that this
rent equaled the amounts due from Lyon to New York Life, should
anything go awry in the later years of the lease, Lyon Page 435 U. S. 577 was primarily liable. [ Footnote 12 ] No matter how the transaction could have
been devised otherwise, it remains a fact that, as the agreements
were placed in final form, the obligation on the notes fell
squarely on Lyon. [ Footnote
13 ] Lyon, an ongoing enterprise, exposed its very business
wellbeing to this real and substantial risk.

															The effect of this liability on Lyon is not just the abstract
possibility that something will go wrong and that Worthen will not
be able to make its payments. Lyon has disclosed this liability on
its balance sheet for all the world to see. Its financial position
was affected substantially by the presence of this long-term debt,
despite the offsetting presence of the building as an asset. To the
extent that Lyon has used its capital in this transaction, it is
less able to obtain financing for other business needs.

															In concluding that there is this distinct element of economic
reality in Lyon's assumption of liability, we are mindful that the
characterization of a transaction for financial accounting
purposes, on the one hand, and for tax purposes, on the other, need
not necessarily be the same. Commissioner v. Lincoln Savings
& Loan Assn., 403 U. S. 345 , 403 U. S. 355 (1971); Old Colony R. Co. v. Commissioner, 284 U.
S. 552 , 284 U. S. 562 (1932). Accounting methods or descriptions, without more, do not
lend substance to that which has no substance. But, in this case,
accepted accounting methods, as understood by the several parties
to the respective agreements and as applied to the transaction by
others, gave the transaction a meaningful character consonant with
the form it was given. [ Footnote
14 ] Worthen Page 435 U. S. 578 was not allowed to enter into the type of transaction which the
Government now urges to be the true substance of the arrangement.
Lyon and Worthen cannot be said to have entered Page 435 U. S. 579 into the transaction intending that the interests involved were
allocated in a way other than that associated with a sale and
lease-back.

															Other factors also reveal that the transaction cannot be viewed
as anything more than a mortgage agreement between Worthen and New
York Life and a loan from Lyon to Worthen. There is no legal
obligation between Lyon and Worthen representing the $500,000
"loan" extended under the Government's theory. And the assumed 6%
return on this putative loan -- required by the audit to be
recognized in the taxable year in question -- will be realized only
when and if Worthen exercises its options.

															The Court of Appeals acknowledged that the rents alone, due
after the primary term of the lease and after the mortgage has been
paid, do not provide the simple 6% return which, the Government
urges, Lyon is guaranteed, 536 F.2d at 752. Thus, if Worthen
chooses not to exercise its options, Lyon is gambling that the
rental value of the building during the last 10 years of the ground
lease, during which the ground rent is minimal, will be sufficient
to recoup its investment before it must negotiate again with
Worthen regarding the ground lease. There are simply too many
contingencies, including variations in the value of real estate, in
the cost of money, and in the capital structure of Worthen, to
permit the conclusion that the parties intended to enter into the
transaction as Page 435 U. S. 580 structured in the audit, and according to which the Government
now urges they be taxed.

															It is not inappropriate to note that the Government is likely to
lose little revenue, if any, as a result of the shape given the
transaction by the parties. No deduction was created that is not
either matched by an item of income or that would not have been
available to one of the parties if the transaction had been
arranged differently. While it is true that Worthen paid Lyon less
to induce it to enter into the transaction because Lyon anticipated
the benefit of the depreciation deductions it would have as the
owner of the building, those deductions would have been equally
available to Worthen had it retained title to the building. The
Government so concedes. Tr. of Oral Arg. 22-23. The fact that
favorable tax consequences were taken into account by Lyon on
entering into the transaction is no reason for disallowing those
consequences. [ Footnote 15 ]
We cannot ignore the reality that the tax laws affect the shape of
nearly every business transaction. See Commissioner v.
Brown, 380 U. S. 563 , 380 U. S.
579 -580 (1965) (Harlan, J., concurring). Lyon is not a
corporation with no purpose other than to hold title to the bank
building. It was not created by Worthen or even financed to any
degree by Worthen.

															The conclusion that the transaction is not a simple sham to be
ignored does not, of course, automatically compel the further
conclusion that Lyon is entitled to the items claimed as
deductions. Nevertheless, on the facts, this readily follows. As
has been noted, the obligations on which Lyon paid interest Page 435 U. S. 581 were its obligations alone, and it is entitled to claim
deductions therefor under § 163(a) of the 1954 Code, 26 U.S.C. §
163(a).

															As is clear from the facts, none of the parties to this sale and
lease-back was the owner of the building in any simple sense. But
it is equally clear that the facts focus upon Lyon as the one whose
capital was committed to the building and as the party, therefore,
that was entitled to claim depreciation for the consumption of that
capital. The Government has based its contention that Worthen
should be treated as the owner on the assumption that, throughout
the term of the lease, Worthen was acquiring an equity in the
property. In order to establish the presence of that growing
equity, however, the Government is forced to speculate that one of
the options will be exercised, and that, if it is not, this is only
because the rentals for the extended term are a bargain. We cannot
indulge in such speculation in view of the District Court's clear
finding to the contrary. [ Footnote 16 ] We therefore conclude that it is Lyon's
capital that is invested in the building according to the agreement
of the parties, and it is Lyon that is entitled to depreciation
deductions, under § 167 of the 1954 Code, 26 U.S.C. § 167. Cf.
United States v. Chicago B. & Q. R. Co., 412 U.
S. 401 (1973). IV We recognize that the Government's position, and that taken by
the Court of Appeals, is not without superficial appeal. One,
indeed, may theorize that Frank Lyon's presence on the Worthen
board of directors; Lyon's departure from its principal corporate
activity into this unusual venture; the parallel between the
payments under the building lease and the amounts due from Lyon on
the New York Life mortgage; the provisions relating to condemnation
or destruction of the Page 435 U. S. 582 property; the nature and presence of the several options
available to Worthen; and the tax benefits, such as the use of
double declining balance depreciation, that accrue to Lyon during
the initial years of the arrangement, form the basis of an argument
that Worthen should be regarded as the owner of the building and as
the recipient of nothing more from Lyon than a $500,000 loan.

															We, however, as did the District Court, find this theorizing
incompatible with the substance and economic realities of the
transaction: the competitive situation as it existed between
Worthen and Union National Bank in 1965 and the years immediately
following; Worthen's undercapitalization; Worthen's consequent
inability, as a matter of legal restraint, to carry its building
plans into effect by a conventional mortgage and other borrowing;
the additional barriers imposed by the state and federal
regulators; the suggestion, forthcoming from the state regulator,
that Worthen possess an option to purchase; the requirement, from
the federal regulator, that the building be owned by an independent
third party; the presence of several finance organizations
seriously interested in participating in the transaction and in the
resolution of Worthen's problem; the submission of formal proposals
by several of those organizations; the bargaining process and
period that ensued; the competitiveness of the bidding; the bona
fide character of the negotiations; the three-party aspect of the
transaction; Lyon's substantiality [ Footnote 17 ] and its independence from Worthen; the fact
that diversification was Lyon's principal motivation; Lyon's being
liable alone on the successive notes to City Bank and New York
Life; the reasonableness, as the District Court found, of the
rentals and of the option prices; the substantiality of the
purchase prices; Page 435 U. S. 583 Lyon's not being engaged generally in the business of financing;
the presence of all building depreciation risks on Lyon; the risk,
borne by Lyon, that Worthen might default or fail, as other banks
have failed; the facts that Worthen could "walk away" from the
relationship at the end of the 25-year primary term, and probably
would do so if the option price were more than the then-current
worth of the building to Worthen; the inescapable fact that, if the
building lease were not extended, Lyon would be the full owner of
the building, free to do with it as it chose; Lyon's liability for
the substantial ground rent if Worthen decides not to exercise any
of its options to extend; the absence of any understanding between
Lyon and Worthen that Worthen would exercise any of the purchase
options; the nonfamily and nonprivate nature of the entire
transaction; and the absence of any differential in tax rates and
of special tax circumstances for one of the parties -- all convince
us that Lyon has far the better of the case. [ Footnote 18 ]

															In so concluding, we emphasize that we are not condoning
manipulation by a taxpayer through arbitrary labels and dealings
that have no economic significance. Such, however, has not happened
in this case.

															In short, we hold that where, as here, there is a genuine
multiple-party transaction with economic substance which is
compelled or encouraged by business or regulatory realities, is Page 435 U. S. 584 imbued with tax-independent considerations, and is not shaped
solely by tax avoidance features that have meaningless labels
attached, the Government should honor the allocation of rights and
duties effectuated by the parties. Expressed another way, so 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. What those attributes are in
any particular case will necessarily depend upon its facts. It
suffices to say that, as here, a sale and lease-back, in and of
itself, does not necessarily operate to deny a taxpayer's claim for
deductions. [ Footnote
19 ]

															The judgment of the Court of Appeals, accordingly, is
reversed. It is so ordered. MR. JUSTICE WHITE dissents, and would affirm the judgment
substantially for the reasons stated in the opinion in the Court of
Appeals for the Eighth Circuit. 536 F.2d 746 (1976).

															[ Footnote 1 ]

															Worthen, as of June 30, 1967, had capital stock of $4 million
and surplus of $5 million. During the period the building was under
construction, Worthen became a national bank subject to the
supervision and control of the Comptroller of the Currency.

															[ Footnote 2 ]

															This arrangement appeared advisable and was made because
purchases of materials by Worthen (which then had become a national
bank) were not subject to Arkansas sales tax. See Ark.Stat.Ann. § 84-1904(1) (1960); First Agricultural Nat. Bank
v. Tax Comm'n, 392 U. S. 339 (1968). Sales of the building elements to Lyon also were not
subject to state sales tax, since they were sales of real estate. See Ark.Stat.Ann. § 84-1902(c) (Supp. 1977).

															[ Footnote 3 ]

															This, of course, is on the assumption that Worthen exercises its
option to extend the building lease. If it does not, Lyon remains
liable for the substantial rents prescribed by the ground lease.
This possibility brings into sharp focus the fact that Lyon, in a
very practical sense, is at least the ultimate owner of the
building. If Worthen does not extend, the building lease expires
and Lyon may do with the building as it chooses.

															The Government would point out, however, that the net amounts
payable by Worthen to Lyon during the building lease's extended
terms, if all are claimed, would approximate the amount required to
repay Lyon's $500,000 investment at 6% compound interest. Brief for
United States 14.

															[ Footnote 4 ]

															These figures do not include uncontested adjustments not
involved in this litigation.

															[ Footnote 5 ]

															Lyon here challenges this assertion on the grounds that it had
the right and opportunities to sell the building at a greater
profit at any time; the return to Lyon was not insubstantial, and
was attractive to a true investor in real estate; the 6% return was
the minimum Lyon would realize if Worthen exercised one of its
options, an event the District Court found highly unlikely; and
Lyon would own the building and realize a greater return than 6% if
Worthen did not exercise an option to purchase.

															[ Footnote 6 ]

															Lyon challenges this observation by pointing out that the
District Court found the option prices to be the negotiated
estimate of the parties of the fair market value of the building on
the option dates and to be reasonable. App. 303, 299.

															[ Footnote 7 ]

															Lyon asserts that this statement is true only with respect to
the total destruction or taking of the building on or after
December 1, 1980. Lyon asserts that it, not Worthen, would receive
the excess above the mortgage balance in the event of total
destruction or taking before December 1, 1980, or in the event of
partial damage or taking at any time. Id. at 408=410,
411.

															[ Footnote 8 ]

															Lyon concedes the accuracy of this statement, but asserts that
it does not justify the conclusion that Lyon served merely as a
conduit by which mortgage payments would be transmitted to New York
Life. It asserts that Lyon was the sole obligor on the New York
Life note, and would remain liable in the event of default by
Worthen. It also asserts that the fact the rent was sufficient to
amortize the loan during the primary term of the lease was a
requirement imposed by New York Life, and is a usual requirement in
most long-term loans secured by a long-term lease.

															[ Footnote 9 ]

															As to this statement, Lyon asserts that the Court of Appeals
ignored Lyon's right to sell the building to another at any time;
the District Court's finding that the options to purchase were not
likely to be exercised; the uncertainty that Worthen would renew
the lease for 40 years; Lyon's right to lease to anyone at any
price during the last 10 years of the ground lease; and Lyon's
continuing ownership of the building after the expiration of the
ground lease.

															[ Footnote 10 ]

															In response to this, Lyon asserts that the District Court found
that the benefits of occupancy Worthen will enjoy are common in
most long-term real estate leases, and that the District Court
found that Lyon had motives other than tax savings in entering into
the transaction. It also asserts that the net cash after-tax
benefit would be $312,220, not $1.5 million.

															[ Footnote 11 ]

															Other factors relied on by the Court of Appeals, 536 F.2d at
752, were the allocation of the investment credit to Worthen, and a
claim that Lyon's ability to sell the building to a third party was
"carefully circumscribed" by the lease agreements. The investment
credit by statute is freely allocable between the parties, § 48(d)
of the 1954 Code, 26 U.S.C. § 48(d), and the Government has not
pressed either of these factors before this Court.

															[ Footnote 12 ]

															New York Life required Lyon, not Worthen, to submit financial
statements periodically. See Note Purchase Agreement, App.
453-454, 458-459.

															[ Footnote 13 ]

															It may well be that the remedies available to New York Life
against Lyon would be far greater than any remedy available to it
against Worthen, which, as lessee, is liable to New York Life only
through Lyon's assignment of its interest as lessor.

															[ Footnote 14 ]

															We are aware that accounting standards have changed
significantly since 1968, and that the propriety of Worthen's and
Lyon's methods of disclosing the transaction in question may be a
matter for debate under these new standards. Compare Accounting Principles Bd. Opinion No. 5, Reporting of Leases in
Financial Statements of Lessee (1964), and Accounting
Principles Bd. Opinion No. 7, Accounting for Leases in Financial
Statements of Lessors (1966), with Financial Accounting
Standards Board, Statement of Financial Accounting Standards No.
13, Accounting for Leases (1976). See also Comptroller of
the Currency, Banking Circular No. 95 (Nov. 11, 1977), instructing
that national banks revise their financial statements in accord
with FASB Standard No. 13. Standard No. 13, however, by its terms,
states, � 78, that there are many instances where tax and financial
accounting treatments diverge. Further, Standard No. 13 is
nonapplicable with respect to a lease executed prior to January 1,
1977 (as was the Lyon-Worthen lease), until January 1, 1981.
Obviously, Banking Circular No. 95 was not in effect in 1968, when
the Lyon-Worthen lease was executed.

															Then-existing pronouncements of the Internal Revenue Service
gave Lyon very little against which to measure the transaction. The
most complete statement on the general question of characterization
of leases as sales, Rev.Rul. 55-540, 1955-2 Cum.Bull. 39, by its
terms, dealt only with equipment leases. In that ruling, it was
stated that the Service will look at the intent of the parties at
the time the agreement was executed to determine the proper
characterization of the transaction. Generally, an intent to enter
into a conditional sales agreement will be found to be present if
(a) portions of the rental payments are made specifically
applicable to an equity acquired by the lessee, (b) the lessee will
acquire a title automatically after certain payments have been
made, (c) the rental payments are a disproportionately large amount
in relation to the sum necessary to complete the sale, (d) the
rental payments are above fair rental value, (e) title can be
acquired at a nominal option price, or (f) some portion of the
rental payments are identifiable as interest. See also Rev.Rul. 6122, 1960-1 Cum.Bull. 56; Rev.Rul. 72-543, 1972-2
Cum.Bull. 87.

															The Service announced more specific guidelines, indicating under
what circumstances it would answer requests for rulings on leverage
leasing transactions, in Rev.Proc. 75-21, 1975-1 Cum.Bull. 715. In
general, "[u]nless other facts and circumstances indicate a
contrary intent," the Service will not rule that a lessor in a
leveraged lease transaction is to be treated as the owner of the
property in question unless (a) the lessor has incurred and
maintains a minimal investment equal to 20% of the cost of the
property, (b) the lessee has no right to purchase except at fair
market value, (c) no part of the cost of the property is furnished
by the lessee, (d) the lessee has not lent to the lessor or
guaranteed any indebtedness of the lessor, and (e) the lessor must
demonstrate that it expects to receive a profit on the transaction
other than the benefits received solely from the tax treatment.
These guidelines are not intended to be definitive, and it is not
clear that they provide much guidance in assessing real estate
transactions. See Rosenberg & Weinstein,
Sale-leasebacks: An analysis of these transactions after the Lyon decision, 45 J.Tax. 146, 147 n. 1 (1976).

															[ Footnote 15 ]

															Indeed, it is not inevitable that the transaction, as treated by
Lyon and Worthen, will not result in more revenues to the
Government, rather than less. Lyon is gambling that, in the first
11 years of the lease, it will have income that will be sheltered
by the depreciation deductions, and that it will be able to male
sufficiently good use of the tax dollars preserved thereby to make
up for the income it will recognize and pay taxes on during the
last 14 years of the initial term of the lease, and against which
it will enjoy no sheltering deduction.

															[ Footnote 16 ]

															The general characterization of a transaction for tax purposes
is a question of law subject to review. The particular facts from
which the characterization is to be made are not so subject. See American Realty Trust v. United States, 498 F.2d 1194,
1198 (CA4 1974).

															[ Footnote 17 ]

															Lyon's consolidated balance sheet of December 31, 1968, showed
assets of $12,225,612, and total stockholders' equity of
$3,818,671. Of the assets, the sum of $2,674,290 represented its
then investment in the Worthen building. App. 587-588.

															[ Footnote 18 ]

															Thus, the facts of this case stand in contrast to many others in
which the form of the transaction actually created tax advantages
that, for one reason or another, could not have been enjoyed had
the transaction taken another form. See, e.g., Sun Oil Co. v.
Commissioner, 562 F.2d 258 (CA3 1977) (sale and lease-back of
land between taxpayer and tax-exempt trust enabled the taxpayer to
amortize, through its rental deductions, the cost of acquiring land
not otherwise depreciable). Indeed, the arrangements in this case
can hardly be labeled as tax avoidance techniques in light of the
other arrangements being promoted at the time. See, e.g., Zeitlin, Tax Planning in Equipment Leasing Shelters, 1969
So.Cal.Tax Inst. 621; Marcus, Real Estate Purchase-Leasebacks as
Secured Loans, 2 Real Estate L.J. 664 (1974).

															[ Footnote 19 ] See generally Commissioner v. Danielson, 378 F.2d 771
(CA3), cert. denied, 389 U.S. 858 (1967), on
remand, 50 T.C. 782 (1968); Levinson v. Commissioner, 45 T.C. 380 (1966); World Publishing Co. v. Commissioner, 299 F.2d 614 (CA8 1962); Northwest Acceptance Corp. v.
Commissioner, 58 T.C. 836 (1972), aff'd, 500 F.2d
1222 (CA9 1974); Cubic Corp. v. United States, 541 F.2d
829 (CA9 1976).

															MR. JUSTICE STEVENS, dissenting.

															In my judgment, the controlling issue in this case is the
economic relationship between Worthen and petitioner, and matters
such as the number of parties, their reasons for structuring the
transaction in a particular way, and the tax benefits which may
result are largely irrelevant. The question whether a leasehold has
been created should be answered by examining the character and
value of the purported lessor's reversionary estate.

															For a 25-year period, Worthen has the power to acquire full
ownership of the bank building by simply repaying the Page 435 U. S. 585 amounts, plus interest, advanced by the New York Life Insurance
Company and petitioner. During that period, the economic
relationship among the parties parallels exactly the normal
relationship between an owner and two lenders, one secured by a
first mortgage and the other by a second mortgage. [ Footnote 2/1 ] If Worthen repays both loans, it will
have unencumbered ownership of the property. What the character of
this relationship suggests is confirmed by the economic value that
the parties themselves have placed on the reversionary
interest.

															All rental payments made during the original 25-year term are
credited against the option repurchase price, which is exactly
equal to the unamortized cost of the financing. The value of the
repurchase option is thus limited to the cost of the financing, and
Worthen's power to exercise the option is cost-free. Conversely,
petitioner, the nominal owner of the reversionary estate, is not
entitled to receive any value for the surrender of its supposed
rights of ownership. [ Footnote 2/2 ]
Nor does Page 435 U. S. 586 it have any power to control Worthen's exercise of the option.
[ Footnote 2/3 ]

															"It is fundamental that 'depreciation is not predicated upon
ownership of property but rather upon an investment in
property. ' No such investment exists when payments of the
purchase price in accordance with the design of the parties yield
no equity to the purchaser." Estate of Franklin v. Commssioner, 544 F.2d 1045, 1049
(CA9 1976) (citations omitted; emphasis in original). Here, the
petitioner has, in effect, been guaranteed that it will receive its
original $500,000 plus accrued interest. But that is all. It incurs
neither the risk of depreciation, [ Footnote 2/4 ] nor the benefit of possible appreciation.
Under the terms of the sale-leaseback, it will stand in no better
or worse position after the 11th year of the lease, when Worthen
can first exercise its option to repurchase -- whether the property
has appreciated or depreciated. [ Footnote 2/5 ] And this remains true throughout the rest
of the 25-year period. Page 435 U. S. 587 Petitioner has assumed only two significant risks. First, like
any other lender, it assumed the risk of Worthen's insolvency.
Second, it assumed the risk that Worthen might not exercise its
option to purchase at or before the end of the original 25-year
term. [ Footnote 2/6 ] If Worthen
should exercise that right not to repay, perhaps it would then be
appropriate to characterize petitioner as the owner and Worthen as
the lessee. But speculation as to what might happen in 25 years
cannot justify the present characterization of petitioner as the
owner of the building. Until Worthen has made a commitment either
to exercise or not to exercise its option, [ Footnote 2/7 ] I think the Government is correct in its
view that petitioner is not the owner of the building for tax
purposes. At present, since Worthen has Page 435 U. S. 588 the unrestricted right to control the residual value of the
property for a price which does not exceed the cost of its
unamortized financing, I would hold, as a matter of law, that it is
the owner.

															I therefore respectfully dissent.

															[ Footnote 2/1 ]

															"[W]here a fixed price, as in Frank Lyon Company, is designed
merely to provide the lessor with a predetermined fixed return, the
substantive bargain is more akin to the relationship between a
debtor and creditor than between a lessor and lessee."

															Rosenberg & Weinstein, Sale-leasebacks: An analysis of these
transactions after the Lyon decision, 45 J.Tax. 146, 149
(1976).

															[ Footnote 2/2 ]

															It is worth noting that the proposals submitted by two other
potential investors in the building, see ante at 435 U. S. 564 ,
did contemplate that Worthen would pay a price above the financing
costs for acquisition of the leasehold interest. For instance,
Goldman, Sachs & Company proposed that, at the end of the
lease's primary term, Worthen would have the option to repurchase
the property for either its fair market value or 20% of its
original cost, whichever was the greater. See Brief for
United States 8 n. 7. A repurchase option based on fair market
value, since it acknowledges the lessor's equity interest in the
property, is consistent with a lessor-lessee relationship. See
Breece Veneer & Panel Co. v. Commissioner, 232 F.2d 319
(CA7 1956); LTV Corp. . Commissioner, 63 T.C. 39, 50
(1974); see generally Comment, Sale and Lease-back
Transactions, 52 N.Y.U.L.Rev. 672, 688-689, n. 117 (1977).

															[ Footnote 2/3 ]

															The situation in this case is thus analogous to that, in Corliss v. Bowers, 281 U. S. 376 ,
where the Court held that the grantor of a trust who retains an
unrestricted cost-free power of revocation remains the owner of the
trust assets for tax purposes. Worthen's power to exercise its
repurchase option is similar; the only restraints upon it are those
normally associated with the repayment of a loan, such as
limitations on the timing of repayment and the amount due at the
stated intervals.

															[ Footnote 2/4 ]

															Petitioner argues that it bears the risk of depreciation during
the primary term of the lease, because the option price decreases
over time. Brief for Petitioner 230. This is clearly incorrect.
Petitioner will receive $500,000 plus interest, and no more or
less, whether the option is exercised as soon as possible or only
at the end of 25 years. Worthen, on the other hand, does bear the
risk of depreciation, since its opportunity to make a profit from
the exercise of its repurchase option hinges on the value of the
building at the time.

															[ Footnote 2/5 ]

															After the 11th year of the lease, there are three ways that the
lease might be terminated. The property might be condemned, the
building might be destroyed by act of God, or Worthen might
exercise its option to purchase. In any such event, if the property
had increased in value, the entire benefit would be received by
Worthen, and petitioner would receive only its $500,000 plus
interest. See Reply Brief for Petitioner 8-9, n. 2.

															[ Footnote 2/6 ]

															The possibility that Worthen might not exercise its option is a
risk for petitioner, because, in that event, petitioner's advance
would be amortized during the ensuing renewal lease terms, totaling
40 years. Yet there is a possibility that Worthen would choose not
to renew for the full 40 years, or that the burdens of owning a
building and paying a ground rental of $10,000 during the years
2034 through 2044 would exceed the benefits of ownership. Ante at 435 U. S.
579 .

															[ Footnote 2/7 ]

															In this case, the lessee is not "economically compelled" to
exercise its option. See American Realty Trust v. United
States, 498 F.2d 1194 (CA4 1974). Indeed, it may be more
advantageous for Worthen to let its option lapse, since the present
value of the renewal leases is somewhat less than the price of the
option to repurchase. See Brief for United States 40 n.
26. But whether or not Worthen is likely to exercise the option, as
long as it retains its unrestricted cost-free power to do so, it
must be considered the owner of the building. See Sun Oil Co.
v. Commissioner, 562 F.2d 258, 267 (CA3 1977) (repurchase
option enabling lessee to acquire leased premises by repaying
financing costs indicative of lessee's equity interest in those
premises).

															In effect, Worthen has an option to "put" the building to
petitioner if it drops in value below $500,000 plus interest. Even
if the "put" appears likely because of bargain lease rates after
the primary terms, that would not justify the present
characterization of petitioner as the owner of the building.