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Under the lease agreement, all costs, expenses, and
obligations relating to Severo’s, including taxes, utilities, and
insurance, were to be paid by Benavidez. Guaderrama was to be
indemnified by Benavidez for any costs or expenses paid by
Guaderrama. If Severo’s was partially or totally destroyed and
had to be repaired or rebuilt, Benavidez was not allowed to abate
the rent. Under the lease agreement, Guaderrama was not liable
for any damage to persons or property arising from any cause.
If there was an accident on the premises, Benavidez, not
Guaderrama, would be liable.
The Guaderramas reported the transaction as a lease on their
Federal income tax returns for taxable years ending January 31,
1993 and 1994. Benavidez reported the transaction consistent
with a financing arrangement on his Federal income tax return for
the 1992 and 1993 taxable years.
Respondent took a protective position in his notices of
deficiency and with respect to the Guaderramas, treated the
transaction as a sale and with respect to Benavidez, treated the
transaction as a lease. In the notice of deficiency issued to
the Guaderramas, respondent increased capital gain income for the
year ended January 31, 1993, and increased interest income for
the years ended January 31, 1993 and 1994. In the notice of
deficiency issued to Benavidez, respondent disallowed interest
expense and depreciation deductions for the 1992 and 1993 taxable
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