- 16 -
value of the going business concern. This is indicative of a
financing arrangement, not a lease.
The Potential for Profit or Loss
A significant factor to be used in determining ownership of
property is the extent to which the taxpayer has potential for
profit or loss as a result of holding the property. See Frank
Lyon Co. v. United States, 435 U.S. at 579; Sun Oil Co. v.
Commissioner, 562 F.2d at 268.
In this case, the transaction severely limits Guaderrama’s
ability to participate in any appreciation in the value of the
property. Because of the repurchase option at less than fair
market value, it is a virtual certainty that Benavidez will
exercise the option and repurchase Severo’s. Thus, any
appreciation in value will be realized by Benavidez, not
Guaderrama. Furthermore, all rental payments are at a fixed
amount, with no allowance for inflation or increases in property
value.
In addition, the transaction was structured so that profits
and losses resulting from the operation of the premises will
inure to Benavidez. Benavidez owns the right to operate and use
the restaurant however he sees fit, and any profits or losses
resulting from the operation of the restaurant belong to
Benavidez. Guaderrama, on the other hand, has a fixed rate of
return. Regardless of how successful Severo’s is, Guaderrama is
Page: Previous 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 NextLast modified: May 25, 2011