Lease Termination Fee of $6.25M Allowed

ABC Beverage Corporation (“ABC”) determined its lease payments under a 40-year lease of a bottling plant in Hazelwood, Missouri were in excess of market rates and therefore exercised a right-to-buy option under the lease. Appraisals obtained by ABC placed the value of the property without the lease at $2.75 million. ABC determined that the value of the property with the 40-year lease to be at least $9 million, and negotiated a purchase price in excess of $9 million. ABC deducted the $6.25 million difference calling it a lease termination fee. The IRS disallowed the deduction and concluded the $6.25 million should be capitalized under IRC 167(c)(2), which states that “no portion of the adjusted basis [of property subject to lease] shall be […]