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acquisition of a capital asset. When section 167(c)(2) was
enacted, with the exception of some precedent in the Sixth
Circuit, the courts did not permit the approach sought by
petitioner here--allocating part of the cost of acquiring a
leased asset to a deductible expense (attributable to the
termination of a burdensome lease).
Generally, the courts have held16 that in the acquisition of
a leased asset, the portion of the cost attributable to an
existing lease is to be associated with or attributable to the
value of the asset. The value of the asset without considering
the lease has not been considered the true measure of the asset’s
value. To value the asset without considering the lease would be
to ignore a stream of income (rent) to which the owner of the
asset is entitled. A seller of an asset would not separate the
lease from the leased asset and ignore what may be the asset’s
principal source of value. At some point in the life of a leased
asset, the income (rent) to be derived may exceed the residual
value of the asset. That is why the vessel here (about halfway
through the term of a 20-year lease) may have a value (without
considering the lease) of about $14 million, whereas the income
16 The opinions in which this question was considered date
back more than 40 years and preceded the enactment of sec.
167(c)(2) by more than 30 years.
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