ABC Beverage Corp. v. United States

ABC makes and distributes soft drinks and other non-alcoholic beverages for Dr Pepper Snapple Group and leased a Hazelwood, Missouri facility. After concluding that its rent was too high, it exercised an option to buy the property. Appraisals valued the property without the lease at $2.75 million, and ABC determined that the fair market value with the lease would be at least $9 million. ABC bought the property for more than $9 million. On its tax return, ABC reported $2.75 million as its cost of acquiring the property and deducted $6.25 million as a business expense for terminating the lease. The IRS disallowed the deduction and assessed a tax deficiency; ABC paid the deficiency and sued for a refund. On summary judgment, the district court ruled in favor of ABC. The Sixth Circuit affirmed. Because the lease terminated when ABC acquired the property, the property was not acquired subject to a lease, and I.R.C. section 167(c)(2) does not apply to bar ABC’s deduction. The government conceded that ABC could deduct a lease termination payment if it first paid to terminate the lease and then purchased the property. The court declined “to elevate this transaction’s form over its substance.” View "ABC Beverage Corp. v. United States" on Justia Law