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Financing Did Not Constitute Genuine Debt
Assuming arguendo that the transaction in issue was not a tax
avoidance scheme devoid of economic substance, still petitioners
would not be entitled to the claimed depreciation unless the
transaction constituted a sale for Federal income tax purposes.
See e.g., Packard v. Commissioner, 85 T.C. 397, 419 (1985).
Depreciation is not predicated on legal title but rather on an
actual investment in property. Mayerson v. Commissioner, 47 T.C.
340, 350 (1966). Likewise, to be deductible, interest must be paid
on genuine indebtedness. Knetsch v. United States, 364 U.S. 361
(1960).
A sale-leaseback will not be respected for Federal tax
purposes unless the lessor retains significant and genuine
attributes of a traditional owner-lessor. Frank Lyon Co. v. United
States, supra at 584; Levy v. Commissioner, 91 T.C. 838 (1988);
Estate of Thomas v. Commissioner, 84 T.C. at 432. Accordingly, it
is the existence of the benefits and burdens of ownership that
determines how a sale-leaseback agreement will be treated for tax
purposes. Frank Lyon Co. v. United States, supra at 582-584.
We have considered whether RD Leasing obtained and held
sufficient benefits and burdens of ownership to be regarded as the
owner of the equipment for Federal income tax purposes.
Factors of particular significance in determining whether a
taxpayer is the owner of property are: (1) The taxpayer’s equity
interest in the property as a percentage of the purchase price; (2)
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