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stream from the remaining life of the lease may have been valued
at about $94 million.17
Respondent contends that case precedent in existence prior
to the enactment of section 167(c)(2) is consistent with the
restriction contained in section 167(c)(2); i.e., that the buyer
may not allocate to the lease any portion of the acquisition cost
of the leased property. As explained above, petitioner contends
that its transaction is a two-part transaction and should be
bifurcated into the cost of acquiring a capital asset and the
cost of canceling or terminating a burdensome lease. Although
the acquisition of the vessel may have effectively terminated the
lease, the transaction which caused the lease termination was
capital in nature. Accordingly, a significant prerequisite to
petitioner’s success is its ability to bifurcate the cost
expended to acquire the capital asset and allocate the cost into
two portions--one attributable to the capital asset and the other
to the cost of terminating the burdensome lease.
Petitioner argues that the value of the vessel at the time
of the acquisition was substantially less than it was required to
17 The acquisition of a leased asset by the lessee is
somewhat unique when compared to the acquisition of the asset by
a third party. That is so because at the time of acquisition of
a leased asset by the lessee, the leasehold interest merges into
the fee ownership whereas a third-party purchaser of a leased
asset does not experience a merger of interests. Petitioner’s
approach would result in highly beneficial treatment to lessees
that would not otherwise be available under sec. 167(c)(2) to
lessors and others who might acquire leased assets.
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