Frank Lyon Co. v. United States
United States Supreme Court
435 U.S. 561 (1978)
Frank Lyon Co. (plaintiff) entered a sale-and-leaseback deal with Worthen Bank, letting Worthen sell its new building to Lyon and lease it back long-term, structured to help Worthen overcome regulatory obstacles to constructing the building; Lyon participated to diversify its business and remained solely liable on the construction loan from New York Life if Worthen's lease payments stopped. Regulators approved the deal, and neither party sought special tax benefits from its structure. Lyon claimed mortgage-interest and depreciation deductions as the building's owner; the IRS Commissioner disallowed them, finding Lyon was not the building's true owner for tax purposes. The district court sided with Lyon, but the Eighth Circuit reversed for the Commissioner.
Whether, when the form of a transaction substantially reflects its underlying economic reality, the transaction's federal tax consequences should follow that form as the parties intended.