Restructuring Business Transactions for Federal Income Tax Purposes

Abstract

A common phenomenon in the federal income tax field is the "restructured transaction"-a business arrangement that is classified differently by the Internal Revenue Service and the courts than by the private parties who entered into it. For example, an owner of business equipment may agree to lease it for an extended period with an option to purchase, on terms virtually insuring that the lessee will exercise the option because the aggregate rent to be paid equals the value of the property (plus an allowance to reflect the fact that payments are to be made over a period of years) and the option price is minimal. If the transaction is treated as the implementing documents provide and the parties intend, the owner reports gain or loss only if and when the option is exercised, and can deduct depreciation on the property in the interim. Conversely, the lessee can deduct the rent as a business expense as paid or accrued, and can depreciate the property only on becoming its owner by exercising the option.