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purchase, but rather simply a transfer of property to be held as
collateral in a financing arrangement.
Risks and Responsibilities
For purposes of determining the tax consequences of the
transaction, another factor we consider is who bears the risks
and burdens of ownership. Under the arrangement between the two
parties, Benavidez is responsible for all taxes, utilities, and
insurance and assumed the full burden and cost of keeping the
premises in good condition. Benavidez is also responsible for
all repairs or any damage to the premises, and Guaderrama is not
liable for any damage to persons or property arising from any
cause whatsoever. Benavidez agreed to indemnify and hold
harmless Guaderrama from any and all claims and liability for
damage to persons or property arising from any cause. Moreover,
diminution of rental payments even in the event of a casualty or
total destruction is not allowed. Thus, inconsistent with
customary leases, this “lease” imposes essentially all of such
burdens, risks, and responsibilities for the property upon
Benavidez.
The Terms of the Payments
The rental payment in this transaction is based on the
construction costs of the restaurant plus 15 percent interest.
The inclusion of an interest component is indicative of a
financing arrangement. See Judson Mills v. Commissioner, 11 T.C.
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