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of the first lease, or costs incurred to cancel the
first lease, are not currently deductible but rather
are costs of continuing the first lease in modified
form. [Id.]
In U.S. Bancorp & Consol. Subs., the Court analogized the
cancellation of a lease and the execution of a new lease for the
same property as in substance a modification of the original
lease, which requires that the costs incurred in order to effect
such modification be capitalized. Under U.S. Bancorp & Consol.
Subs. v. Commissioner, supra at 240 (citing Pig & Whistle Co. v.
Commissioner, 9 B.T.A. 668 (1927); Phil Gluckstern’s, Inc. v.
Commissioner, T.C. Memo. 1956-9), costs paid or incurred to
modify a lease, like the expenditures at issue here, must be
capitalized and may not be deducted when paid or incurred.
Petitioner argues that U.S. Bancorp & Consol. Subs. is
distinguishable from the instant case because in U.S. Bancorp &
Consol. Subs. the new lease covered property (i.e., a new more
powerful mainframe computer) different from the property that the
old lease covered, while in the instant case the modified 1985
sale and leaseback covered the same property that the 1985 sale
and leaseback covered. We reject that argument. In U.S. Bancorp
& Consol. Subs., the Court found unpersuasive the taxpayer’s
argument that it was significant that the new lease involved
there covered property different from the property that the
original lease covered. That argument, according to the Court,
ignored the integrated nature of those two leases. U.S. Bancorp
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