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unextinguished cost of the first lease was regarded as part of
the cost of the second lease that had to be amortized over the
term of the second lease.
Petitioner argues that terminating the First Lease resulted
in an economic loss in the year of termination and that the
termination provided no future benefit. Petitioner further
argues that Pig & Whistle Co. v. Commissioner, supra, and Phil
Gluckstern's, Inc. v. Commissioner, supra, in which the
termination fees were capitalized, are distinguishable from the
present case. Petitioner maintains that in those cases the
lessee canceled a lease only to enter into a second lease of the
same property with the same lessor, and that therefore the second
lease was in substance a modification of the first lease. In
petitioner’s view, the payments made to cancel the old lease were
therefore actually made to obtain the modifications whose benefit
extended throughout the term of the replacement leases. Because
the computers covered by the two leases in the case at hand were
different from each other, petitioner maintains that the Second
Lease was not merely a modification of the First Lease.
The cases brought to our attention by petitioner and
respondent occupy opposite ends of a spectrum. At one end is the
case where a lessee pays a lessor to terminate a lease and no
subsequent lease is entered into between the parties. In such a
case the termination fee is clearly deductible in the year
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Last modified: May 25, 2011