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The main thrust of petitioner’s argument is that it was
effectively doing two different things, even though it had solely
exercised the option of acquiring the vessel for the contract
price. On brief, petitioner went to great lengths to convince us
that section 167 deals solely with depreciation or amortization
and that section 162 (concerning ordinary and necessary business
deductions) governs the portion of its transaction that effected
the termination of the lease. Respondent does not question
petitioner’s premise that section 162 deals with the pure
situation where there is an expenditure to cancel or terminate a
burdensome contract or lease. The approach that petitioner uses
to make its point is to argue that the value of the vessel
without considering the lease is $14 million, and so the
remaining $94 million of the $108 million acquisition price was
paid to cancel a lease13. Petitioner’s approach has met with
12(...continued)
vessel. The difference was built into the contract terms so that
it was not due to some change in conditions, such as
extraordinary wear of the vessel (leased asset).
13 We note that the parties, for purposes of this summary
judgment motion, agree that the vessel’s value, without
considering the value of the subject lease, was $14 million.
Petitioner would attribute the difference between the $108
million acquisition cost and the $14 million to cancellation of
the lease. Respondent, on the other hand would attribute the
difference to value of the use of the acquired vessel for the
remainder of its useful life. Respondent’s approach is in line
with the approach, if not the intent, of sec. 167(c)(2) and
existing case law. As discussed infra, the fair market value of
the vessel when petitioner acquired it was more than $14 million
(continued...)
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