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Income Tax Keyed to Graetz
Frank Lyon Co. v. United States
Citation:435 U.S. 561 (1978)
In 1965, Frank Lyon Company (Lyon) engaged in a sale-and-leaseback agreement with Worthen Bank & Trust Company (Worthen) of Little Rock, Arkansas. The aim of the arrangement was for Lyon to buy a building from Worthen which was being built into a new bank location for Worthen. State and federal regulations prevented Worthen from financing the project directly, thus prompting the sale-and-leaseback arrangement. Worthen would then lease the building back from Lyon, with Worthen having options to purchase the building at various intervals. Lyon would maintain ownership over the building at the end of Worthen’s lease if Worthen decided not to buy. The parties contracted for a “net lease” where Worthen would pay all expenses for the building, and would pay an equivalent to Lyon’s monthly mortgage interest payments on a loan issued by New York Life Insurance, an agency which financed the transaction. The Commissioner of Internal Revenue disallowed Lyon’s deductions of these mortgage interest payments.
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