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15-percent return on his investment.7 This is consistent with a
financing arrangement.
Conclusion
As “lessee”, Benavidez bore the burdens, risks, and
responsibilities for Severo’s, including the obligation to
provide Guaderrama with a fixed return under all circumstances
and conditions. This is indicative of ownership, not of a
leasehold interest. Structurally, the “lease” is very similar to
a debt financing as it contains a schedule of payments based on a
fixed interest rate. Furthermore, the rents have no connection
with the economic value of the property, but instead they are
related to a fixed interest return on the costs of construction.
As such, the Guaderramas had little potential for economic profit
other than the fixed interest income. Finally, the option to
acquire Severo’s at the end of the lease is, in essence, a form
of equity for Benavidez because the value to Guaderrama is really
just the present value of the future payments for 15 years at a
specified rate.
Based on all of the factors discussed above, we conclude
that the transaction was a financing arrangement, and Benavidez
is entitled to deduct allowable depreciation and interest expense
7 We also note that, inconsistent with their belief that the
transaction was a lease, the Guaderramas did not claim
depreciation on Severo’s as they would have been entitled to had
they truly owned the premises and simply “leased” them to
Benavidez.
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