Nature of the Case
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Facts
Lyon (P) is a corporation engaged in the distribution of home furnishings, primarily Whirlpool and RCA electrical products. Worthen in 1965 was an Arkansas-chartered bank and a member of the Federal Reserve System. Frank Lyon was Lyon's majority shareholder and board chairman; he also served on Worthen's board. Worthen initially hoped to finance, to build, and to own the proposed facility at a total cost of $9 million for the site, building, and adjoining parking deck. Its financial plans fell apart. Worthen then proposed a sale-and-leaseback arrangement. The State Bank Department and the Federal Reserve System approved this approach, but the Department required that Worthen possess an option to purchase the leased property at the end of the 15th year of the lease at a set price, and the federal regulator required that the building be owned by an independent third party. P made a proposal, and a deal was struck. Worthen itself began construction. In May 1968 Worthen, P, City Bank, and New York Life executed complementary and interlocking agreements under which the building was sold by Worthen to P as it was constructed, and Worthen leased the completed building back from P. The building lease was a 'net lease,' under which Worthen was responsible for all expenses usually associated with the maintenance of an office building, including repairs, taxes, utility charges, and insurance, and was to keep the premises in good condition, excluding, however, reasonable wear and tear. These repurchase option prices were the sum of the unpaid balance of the New York Life mortgage, P's $500,000 investment, and 6% interest compounded on that investment. In December 1969, the building was completed, and Worthen took possession. At that time, P received the permanent loan from New York Life, and it discharged the interim loan from City Bank. The actual cost of constructing the office building and parking complex (excluding the cost of the land) exceeded $10,000,000. On its 1969 return, P accrued rent from Worthen for December. It asserted as deductions one month's interest to New York Life; one month's depreciation on the building; interest on the construction loan from City Bank; and sums for legal and other expenses incurred in connection with the transaction. The Commissioner (D) determined that P was 'not the owner for tax purposes and denied the deductions. D determined that the sale-and-leaseback arrangement was a financing transaction in which P loaned Worthen $500,000 and acted as a conduit for the transmission of principal and interest from Worthen to New York Life. P paid the assessment and filed a timely claim for its refund. The claim was denied, and this suit, to recover the amount so paid, was instituted in the United States District Court. The District Court ruled in P's favor and held that its claimed deductions were allowable. It found that the rents were unchallenged and were reasonable throughout the period of the lease, and that the option prices, negotiated at arm's length between the parties, represented fair estimates of market value on the applicable dates. It rejected any negative inference from the fact that the rentals, combined with the options, were sufficient to amortize the New York Life loan and to pay Lyon a 6% return on its equity investment. It found that Worthen would acquire an equity in the building only if it exercised one of its options to purchase, and that it was highly unlikely, as a practical matter, that any purchase option would ever be exercised. It rejected any inference to be drawn from the fact that the lease was a 'net lease.' It found that Lyon had mixed motivations for entering into the transaction, including the need to diversify as well as the desire to have the benefits of a 'tax shelter.' On appeal, the Eighth Circuit reversed. It likened ownership for tax purposes to a 'bundle of sticks' and undertook its own evaluation of the facts. It concluded that P 'totes an empty bundle' of ownership sticks. In sum, it held that the benefits, risks, and burdens which P has incurred with respect to the Worthen building are simply too insubstantial to establish a claim to the status of owner for tax purposes. The Supreme Court granted certiorari.
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