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applied as a credit against the rent for the current year.
This appears to us to be a correct interpretation of the
facts. Actually, petitioner paid nothing for the
improvements; the cost thereof was borne by the lessor
through the credit applied against the agreed rental.
Consequently, petitioner has no capital investment to
amortize or depreciate. The transaction is no different
than if the lessor had paid directly for the improvements
and the lessee directly paid the full agreed rent. On this
issue, therefore, we hold that the determination of the
Commissioner is erroneous.
In order for this exception to apply, the lessor and the
lessee must intend that some or all of the lessee’s capital
expenditures are rent, and this intent must be plainly disclosed.
In Cunningham v. Commissioner, 28 T.C. 670, 680 (1957), affd. 258
F.2d 231 (9th Cir. 1958), we described the situation as follows:
In M.E. Blatt Co. v. United States, supra [305 U.S.
267, 277 (1938)], the Supreme Court has clearly stated that
whether the value of such improvements constitutes rent
depends upon the intention of the parties, and that even
when the improvements are required by the terms of the lease
this value will not be deemed rent unless the intention that
it shall be such is plainly disclosed. Such intent in our
opinion is to be derived not only from the terms of the
lease but from the surrounding circumstances. This is
recognized by the respondent in his published ruling I.T.
4009, 1950-1 C.B. 13.
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