- 114 -
the bank. The bank's rental payments were equal to Frank Lyon's
principal and interest payments on the mortgage. The bank had an
option to repurchase the building by taking over the mortgage and
paying Frank Lyon's initial $500,000 investment. The Supreme
Court approved Frank Lyon Co.'s deduction of depreciation,
interest, and other expenses associated with its ownership of the
building. The Court concluded that the company's purchase was "a
genuine multiple-party transaction with economic substance which
is compelled or encouraged by business or regulatory realities,
is imbued with tax-independent considerations, and is not shaped
solely by tax-avoidance features that have meaningless labels
attached". Id. at 583-584.
Petitioners here have failed to establish that their
employee leasing transactions had economic substance similar to
the arrangement in Frank Lyon. Under the Frank Lyon criteria,
the transactions before us were not "imbued with tax-independent
considerations". They are in fact characterized by "tax-
avoidance features that have meaningless labels attached".
Petitioners cite other cases of legitimate financial
arrangements in which an investor engaged in a "circular off-
setting group of obligations". See, e.g., Emershaw v.
Commissioner, 949 F.2d 841, 848 (6th Cir. 1991), affg. T.C. Memo.
1990-246. In such cases the taxpayer proved that he "minimized
potential cash-flow problems by arranging that income from his
investment will cover the obligations he has incurred in making
Page: Previous 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118 119 120 121 122 123 NextLast modified: May 25, 2011