UNITED STATES TAX COURT



UNION CARBIDE FOREIGN SALES CORPORATION, ET AL.,1 Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



    Docket Nos. 14641-97, 14642-97,       Filed November 8, 2000.
                14643-97, 11119-99.



         P leased an asset, and the terms of the lease
    became onerous or burdensome. Under lease agreements,
    P was entitled to either terminate the lease or
    purchase the leased asset by the payment of a certain
    sum. P chose to acquire the leased asset and, relying
    on Cleveland Allerton Hotel, Inc. v. Commissioner, 

(6th Cir. 1948), revg. a Memorandum Opinion of
    this Court dated May 7, 1947, seeks to bifurcate and
    allocate the asset acquisition cost into two portions.
    P asserts one portion should represent the value of the
    leased asset without considering the value of the
    existing lease. P further asserts that the remaining
    portion should be allowed as a business deduction for


    1
       Cases of the following petitioners are consolidated
herewith: UOP, Catalysts, Adsorbents and Process Systems, Inc.,
Tax Matters Partner, docket No. 14642-97; Union Carbide
Corporation and Subsidiaries, docket No. 14643-97; and Union
Carbide Corporation and Subsidiaries, docket No. 11119-99.
                               - 2 -

     terminating a burdensome lease. R contends that sec.
     167(c)(2), I.R.C., enacted in 1993, requires that the
     acquisition cost must be allocated solely to the
     acquired tangible capital asset. P contends that the
     holding of Cleveland Allerton Hotel, Inc. permits the
     allocation.
          Held: Sec. 167(c)(2), I.R.C., interpreted to
     prohibit allocation of any portion of the asset
     acquisition cost to a deduction for P’s termination of
     a burdensome lease.



     Harold J Heltzer, Philip F. McGovern, Jerry L. Robinson, and

Howard Mark Weinman, for petitioners.

     Steven R. Winningham, Joseph F. Long, Carmino J.

Santaniello, S. Katy Lin, and Robin L. Peacock, for respondent.



                              OPINION

     GERBER, Judge:   Respondent moved for partial summary

judgment on the legal question of whether section 167(c)(2)2

applies to petitioner’s3 acquisition of ownership of a previously

leased oceangoing vessel.   Respondent contends that section

167(c)(2) would require petitioner to allocate to the depreciable

asset all of its cost and, further, that petitioner was not

entitled to allocate a portion of the cost to a deduction for


     2
       Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the periods under
consideration, and Rule references are to the Tax Court Rules of
Practice and Procedure.
     3
       References to “petitioner” in this group of related and
consolidated cases refers to Union Carbide Corp., petitioner in
docket Nos. 14643-97 and 11119-99.
                               - 3 -

relief from the terms of a burdensome lease.   Petitioner argues

that section 162 is applicable to the portion of the cost that it

contends was attributable to buying its way out of an onerous or

burdensome lease.   Our consideration of whether section 167(c)(2)

applies in these circumstances is a question of first impression.

                            Background

     For purposes of this motion for partial summary judgment,4

the parties agree about the underlying facts and that this matter

is ripe for consideration of the legal question.   Although

respondent generally questions the substance of this transaction,

for purposes of the legal question presented in his motion,

respondent accepts the form of and/or petitioner’s explanation

for the subject transaction.   If respondent is unsuccessful in

his motion, a trial will be necessary to address respondent’s

position regarding the substance of the transaction(s) and

related issues including the basis of the vessel in question.5

     The asset under consideration, the Chemical Pioneer is a

seagoing vessel that was manufactured to petitioner’s

specifications for the transport of liquid chemicals.   When the



     4
       With the exception of what appears to be a computational
issue, all other issues in these consolidated cases have been
resolved by agreement of the parties.
     5
       In addition, there are several procedural motions
outstanding that we will need to address if the motion for
partial summary judgment is not dispositive of the substantive
issue.
                                 - 4 -

vessel was completed during 1983, petitioner did not wish to show

it as an asset on its balance sheet, so petitioner arranged a

series of transactions that permitted it to lease rather than own

the vessel.   For purposes of the legal question we consider, it

is only necessary to understand that petitioner leased the vessel

and then, several years later, wanted to be relieved from the

burdensome terms of the lease.    Under the agreements, petitioner

had the choice of paying either to terminate the lease or to

acquire the vessel.   Petitioner chose to acquire the vessel under

the terms of the agreements.   By acquiring the vessel, however,

petitioner effectively terminated the burdensome lease.

     We describe the following transactional steps employed for

purposes of completeness:   (1) The vessel was transferred to a

trust created by Merrill Lynch Leasing, Inc. (Merrill Lynch), and

of which Bankers Trust Co. (Bankers) was trustee; (2) Bankers, as

trustee, entered into a Bareboat Charter6 through January 3,

2004, (20 years) with a partnership named Union Marine Transport

Co. (UMTC), which consisted of two equal partners--petitioner’s

subsidiary, Chemical Marine Fleet, Inc., and a subsidiary of

Marine Transport Lines, Inc. (MTL), an unrelated entity that

petitioner had previously utilized for operation and management

of its oceangoing transport of chemicals; (3) UMTC concurrently



     6
       This was described by the parties as a long-term lease of
a ship.
                                 - 5 -

entered into a contract (sublease) with petitioner, under which

petitioner reserved 75 percent of the vessel’s capacity and was

responsible for 100 percent of the payments due under the

Bareboat Charter; (4) UMTC also entered into an operating

agreement with Marine Transport Management, Inc. (a subsidiary of

MTL), to manage and operate the vessel; and, (5) UMTC entered

into a marketing agreement with another MTL subsidiary to market

the portion of the vessel not used by petitioner, including the

25 percent not reserved by petitioner.

     The terms of the Bareboat Charter permitted petitioner to

terminate the lease and walk away from the arrangement by the

payment of a scheduled amount.    Petitioner, however, chose to

acquire the vessel.   On December 29, 1993, petitioner purchased,

for $107,748,925, Merrill Lynch’s interest in the grantor trust

that held the vessel, including the title to the vessel and

rights to its use.    The $107,748,925 payment was about 20 percent

less than the amount that petitioner would have had to pay to

terminate the lease without acquiring ownership of the vessel.7

On June 30, 1994, the Bareboat Charter and related contracts were

canceled, the UMTC partnership was dissolved, and petitioner

acquired title to the vessel from the trust.    After December

1993, petitioner did not make any (lease) payments under the


     7
       For purposes of deciding the issue in this summary
judgment motion, it should not matter whether it was more or less
costly to acquire the vessel or to simply terminate the lease.
                               - 6 -

Bareboat Charter.   Any payment made by petitioner would have

resulted in a wash under the various agreements.   The UMTC

partnership and the sublease arrangements remained in effect, and

the marketing and third-party leases continued to operate

normally under the agreement until sometime in 1994.

     Solely for purposes of his motion, respondent also accepts

the fact that the lease was burdensome and that, at the time

petitioner acquired it, the value of the vessel was $13,865,000,

without considering the value of the lease8.   Under this

scenario, petitioner is seeking to allocate $93,883,295, or 87

percent, of the $107,748,295 purchase price to the termination of

the burdensome lease, leaving $13,865,000 attributable to its

basis in the vessel.

     Petitioner questions respondent’s assumption in his motion

that the lease remained in existence and was not terminated until

June 30, 1994.   Petitioner argues that the lease was effectively

terminated in December 1993 after the vessel was purchased, and

the June 30, 1994, termination was merely a formality.

Petitioner contends, however, that respondent’s position that

section 167(c)(2) applies would fail under either scenario.




     8
       Respondent’s concessions cause sec. 167(c)(2) to be the
focal point of this opinion and our consideration.
                                  - 7 -

                                Discussion

       A.   Summary Judgment.    Summary judgment may be granted if

it is demonstrated that no genuine issue exists as to any

material fact and that a decision may be entered as a matter of

law.   See Rule 121(b); Sundstrand Corp. v. Commissioner, 

, 520 (1992), affd. 

(7th Cir. 1994).         The moving

party bears the burden of proving that there is no genuine issue

of material fact, and factual inferences will be read in a manner

most favorable to the party opposing summary judgment.         In that

regard and solely for purposes of deciding the issue here, we

accept petitioner’s interpretation that the lease terminated upon

acquisition of the vessel.      The parties’ contentions with respect

to section 167(c)(2) are delineated in a way that would obviate

the need to decide whether any of the leases continued to exist

after the acquisition of the vessel.         That is so because

petitioner contends that the statute applies to property only if

acquired subject to a lease that continues in the future, and

respondent contends that the statute would apply here because the

property acquired was subject to a lease when acquired.

Construing the transactional facts here most favorably to the

defending party, we are to decide whether a lessee of an asset

who purchases that asset for the purpose of terminating the lease

is subject to section 167(c)(2).      Accordingly, we may render

judgment on the issue as a matter of law.         See Rule 121(b).   The
                               - 8 -

pleadings, exhibits, transcript of argument, and affidavits

contain the facts and information used for the purpose of ruling

on the motion herein.

     B.   Analysis of Section 167(c)(2).   Section 167(c)(2) was

enacted as section 13261(b)(2) of the Omnibus Budget

Reconciliation Act of 1993, Pub. L. 103-66, 107 Stat. 532.      It

was part of a larger package of provisions aimed at the treatment

of intangibles that was enacted in section 197.9    Under the

regimen of section 197, various intangibles are identified,

categorized, and subjected to uniform tax treatment.    As part of

this larger package of rules, section 167(c)(2) was enacted to

specifically exclude leasehold interests, including subleases,

from the effect of section 197.   Even though leases were removed

from the effect of section 197, by enacting section 167(c)(2)

Congress intended uniform treatment for all situations where a

tangible asset was “acquired subject to a lease”.    In that

regard, section 167(c)(2) is designed to prevent taxpayers from

allocating any of the cost of acquiring tangible property to




     9
       Prior to the enactment of sec. 197, depreciation or
amortization of intangibles was governed by sec. 1.167(a)–(3),
Income Tax Regs., and was a source of considerable controversy
between taxpayers and the Internal Revenue Service. See Staff of
Joint Comm. on Taxation, Technical Explanation of the Tax
Simplification Act of 1993 (J. Comm. Print 1993), Title V,
Treatment of Intangibles, Amortization of goodwill and certain
other intangibles (sec. 501 of the bill and new sec. 197 of the
Code), at 147.
                               - 9 -

leases or subleases to which the property is subject.   See H.

Rept. 103-111, at 769 & n.139 (1993), 1993-3 C.B. at 345.

     The statute is concise, to the point, and expressed as

follows:

     SEC. 167(c). Basis for Depreciation.--
          (1) In general.--The basis on which exhaustion,
     wear and tear, and obsolescence are to be allowed in
     respect of any property shall be the adjusted basis
     provided in section 1011, for the purpose of
     determining the gain on the sale or other disposition
     of such property.
          (2) special rule for property subject to lease.--
     If any property is acquired subject to a lease--
               (A) no portion of the adjusted basis shall be
          allocated to the leasehold interest, and
               (B) the entire adjusted basis shall be taken
          into account in determining the depreciation
          deduction (if any) with respect to the property
          subject to the lease. [Sec. 167(c)(1) and (2).]

     The parties do not dispute that if we decide that the vessel

acquired by petitioner is “property subject to a lease,” as

referenced in the statute, then no portion of the acquisition

cost can be attributed to any lease in question.   Where the

parties part company is in their interpretation of the phrase “If

any property is acquired subject to a lease”.   Respondent argues

that petitioner acquired the vessel subject to the lease to the

UMTC partnership; i.e., the lease under which petitioner was

entitled to use the vessel.   Petitioner, on the other hand,

argues that the statute only applies to property that is subject

to a lease when acquired and will continue to be subject to the

same lease afterwards.   Petitioner argues that its purpose in
                               - 10 -

acquiring the vessel was to terminate the lease, and therefore,

it did not acquire property subject to a lease.    We must decide

which party’s interpretation (or possibly whether both

interpretations) was intended.    Under respondent’s position,

petitioner would be entitled to depreciate the acquisition cost

(approximately $108 million) over the remaining life of the

vessel.    Petitioner, however, seeks to deduct 87 percent of the

acquisition cost (approximately $94 million) in the year of

acquisition of the vessel as the cost of terminating a burdensome

lease.    The remaining amount (approximately $14 million) was to

be attributable to the depreciable basis of the vessel.

Ultimately, this controversy concerns the timing of deductions in

connection with petitioner’s acquisition of the vessel and its

attempt to terminate the lease.

     There is no question about whether the vessel was subject to

a lease at the time it was acquired by petitioner.    Petitioner

argues, however, that as a matter of proper grammatical syntax

the statutory language has been phrased to require that acquired

property must remain subject to a lease to come within the

allocation requirements of section 167(c)(2).    Petitioner

suggests that Congress would have used the phrase “If any

property subject to a lease is acquired” to achieve the outcome

advanced by respondent.   Petitioner contends that respondent

appears to treat the phrase “subject to a lease” as if it
                                - 11 -

modified the word “property”.    Petitioner contends that the

placement of the phrase “subject to a lease” shows that it

modifies the word “acquired” which, grammatically, should mean

that the property remains subject to a lease in the hands of the

acquiring party.

     Respondent agrees that the phrase “subject to a lease”

modifies the term “acquired”, but contends that “It does so * * *

as part of the past participial phrase ‘acquired subject to a

lease’, which, used in conjunction with the verb ‘is’, modifies

and governs ‘property’”.   Respondent contends that such usage

constitutes a past participial phrase and that “acquired subject

to a lease” merely denotes the gaining of possession.    Respondent

also points out that the phrase has been placed in the past tense

by the use of the word “acquired” and is without continuing or

future tense.   Finally, respondent references 1 U.S.C. sec. 1

(1994), which provides that “words used in the present tense

include the future as well as the present”.    From this statement,

respondent reasons that, conversely, words stated in the past

tense (such as “acquired”) do not include the future.    Thus,

respondent concludes that Congress intended to limit the subject

phrase to the point of the acquisition of the asset.

     Although we appreciate the parties’ arguments concerning

grammar, Congress’ intent should not be decided solely by

reference to finite nuances to be found in the rules of grammar.
                               - 12 -

That is especially so here, where neither party’s grammar

argument is obviously more correct than the other’s.   We do not

focus solely on such distinctions to decide the intent of

Congress in this case.

     Normally, we begin our inquiry by looking to the plain

language of the statute to interpret its meaning.    See Consumer

Prod. Safety Commn. v. GTE Sylvania, Inc., 

, 108

(1980).   When interpreting the words used in a statute, we give

them their ordinary meaning.    See Jones v. Liberty Glass Co., 

, 531 (1947).    Considering the phrase “If any property

subject to a lease is acquired” we reach the conclusion that

either party’s interpretation is possible, depending on the

intent of Congress.   The question we must answer is whether the

legislation was directed only to situations where a lease is to

continue beyond the time of acquisition of the property subject

to that lease or whether it applies to an acquisition of property

by a lessee where the lease merges into the lessee’s new

property ownership interest.

     The legislative history provides no direct assistance or

decisive indicator to answer our particular inquiry.   The

conference report contains the following general statement:

          Interests under leases of tangible property.--The
     term “section 197 intangible” does not include any
     interest as a lessor or lessee under an existing lease
     of tangible property (whether real or personal). The
     cost of acquiring an interest as a lessor under a lease
     of tangible property where the interest as lessor is
                               - 13 -

       acquired in connection with the acquisition of the
       tangible property is to be taken into account as part
       of the cost of the tangible property. For example, if
       a taxpayer acquires a shopping center that is leased to
       tenants operating retail stores, the portion (if any)
       of the purchase price of the shopping center that is
       attributable to the favorable attributes of the leases
       is to be taken into account as a part of the basis of
       the shopping center and is to be taken into account in
       determining the depreciation deduction allowed with
       respect to the shopping center.
            The cost of acquiring an interest as a lessee
       under an existing lease of tangible property is to be
       taken into account under present law (see section 178
       of the Code and Treas. Reg. sec. 1.162-11(a)) rather
       than under the provisions of the bill. * * * [Fn.
       refs. omitted.10]

H. Conf. Rept. 103-213, at 681-682 (1993), 1993-3 C.B. 393, 559-

560.

       Petitioner focuses on the use of the phrase “under an

existing lease” in the first paragraph of the above-quoted

commentary.    The use of that terminology could refer either to a

lease in existence at the time of the acquisition or to a lease

that continues in existence.    Petitioner links the use of that

phrase to the legislative commentary and the single example that

addresses circumstances where the lease would continue beyond the

acquisition date.    Petitioner would have us accept that this




       10
       Sec. 1.162-11(a), Income Tax Regs., similar to sec.
167(c)(2), requires the purchaser of a leasehold interest to
amortize an annual aliquot part of the cost over the remaining
term of the lease. As pertinent to this discussion, sec. 178
addresses lease renewal options as affecting the remaining term
of a lease.
                              - 14 -

factor shows that section 167(c)(2) applies only where the lease

is to continue.

     Respondent correctly points out that the example and

discussion of continuing leases does not “expressly condition the

application of section 167(c)(2) on the acquisition of a

continuing ‘interest of a lessor under a lease of tangible

property.’”   In the context of the commentary and the example, we

agree with respondent that it was not intended to limit the

application to a particular type of transaction set forth in the

example.   Although the example discusses a lease that continues

beyond the time of acquisition, it is clear that the example is

not intended to be all-inclusive.   More particularly, the

statutory language could easily apply to leases that terminate

upon or immediately after acquisition and/or leases that continue

beyond acquisition of the leased asset.   Accordingly, the

legislative history does not provide definitive guidance or a

direct answer to our inquiry of whether section 167(c)(2) applies

only to a situation where a lease is to continue in futuro.    The

commentary and the example do make it absolutely clear, however,

that all costs were intended to be allocated to the depreciable

tangible property.

     Petitioner also points out that one of the purposes for

enacting section 167(c)(2) was to deal with a specific

controversy between lessor/taxpayers and the Internal Revenue
                              - 15 -

Service.   Those situations involved the amortization of the

premium value of an acquired lease on facts similar to the

example in the legislative 

.   We agree with

petitioner that one of the motivating factors for enacting

section 167(c)(2) was to deal with that problem.   The statutory

language, however, would ostensibly apply to anyone acquiring

property and is not in any manner limited to acquisitions for a

premium and/or by a purchaser of an asset subject to a lease that

is to continue into the future.

     The parties have gone to great lengths to reword and/or

hypothesize the meaning of statutory phrase in controversy.    The

phrase we consider, however, is quite succinct--“If any property

is acquired subject to a lease”.   The threshold for application

of section 167(c)(2) applies to “any property” that “is acquired”

when it is “subject to a lease”.   If property was not subject to

a lease when it was acquired, section 167(c)(2) would not apply.

So we must decide whether the property here was subject to a

lease when it was acquired.   The plain language of the statute is

not limited in its application to acquisitions by lessors.     Nor

does it delineate a requirement that the lease must continue

after the acquisition, only that the property be acquired subject

to a lease.

     In order to interpret the phrase “subject to a lease” solely

as a continuing requirement as suggested by petitioner, we would
                               - 16 -

have to look outside the statutory language.    It appears that

section 167(c)(2) would be triggered irrespective of whether the

lease had a remaining term of 1 day or 10 years.    With that

premise, it is difficult to accept petitioner’s argument that its

own circumstances should be exempted from the statutory

requirements.   If we accept petitioner’s interpretation that the

lease must continue, a taxpayer would be able to avoid the

intended effect of section 167(c)(2) merely by a simultaneous

acquisition of tangible property, cancellation of the “existing

lease”, and the renegotiation of a new lease.    Under petitioner’s

interpretation, section 167(c)(2) would be rendered impotent and

meaningless.    Whether we accept the fact that petitioner’s lease

terminated upon, 6 months after, or sometime more distant from

the acquisition of the vessel, the lease did not terminate until

petitioner acquired the vessel.   Accordingly, petitioner acquired

the vessel at a time when it was subject to the lease.11


     11
       Respondent points out that in Kloppenberg & Co. v.
Commissioner, T.C. Memo. 1986-325, where the taxpayer was
similarly attempting to value a capital asset without considering
the value of the lease, this Court used the phrase “subject to
[a] lease” in the same manner in which respondent advocates that
it be used here. In disagreeing with the taxpayer’s approach in
Kloppenberg, we stated:
     No one disputes that after May 3, 1978, * * * [the
     taxpayer] owned the * * * property in fee simple.
     However, * * * [the taxpayer’s] argument that the lease
     should therefore be disregarded ignores the fact that
     * * * [the taxpayer] owned a significant interest in
     the * * * property prior to the challenged transaction.
     It is not the value of the combined interest which
                                                   (continued...)
                              - 17 -

     C.   Petitioner’s Alternative Position.    Although we have

decided that petitioner’s acquisition of the vessel is governed

by section 167(c)(2), the same result would have been reached

even if section 167(c)(2) had not been enacted.     Petitioner

argues that we should treat the acquisition as though it were two

separate payments or portions.   Petitioner contends that one

portion would be attributable to the acquisition of a vessel

worth substantially less than the $108 million total payment and

the other should be attributable to the cancellation of a

burdensome lease.   Respondent points out that petitioner chose

the approach to acquire the vessel instead of making the payment

to terminate the burdensome lease.     We note that petitioner’s

cost to acquire the vessel was approximately 20 percent less than

the cost of the option permitting termination of the lease.

Petitioner, therefore, wishes us to treat the acquisition of the

vessel as though it had, in effect, exercised both choices--

petitioner wishes “to have its cake and eat it too!”12


     11
      (...continued)
      * * * [the taxpayer] owned after May 3, 1978, which is
     in issue. Rather, it is the interest which * * * [the
     taxpayer] purchased from * * * [the owner/lessor] on
     that date, i.e., a fee simple interest subject to the
     outstanding lease. * * * [Id.; with emphasis as
     suggested by respondent.]
     12
       Petitioner obviously followed the less costly approach
from a financial perspective, but not necessarily from a tax
perspective. Petitioner has provided no explanation for the 20
percent larger cost to terminate the lease than to acquire the
                                                   (continued...)
                                - 18 -

     The main thrust of petitioner’s argument is that it was

effectively doing two different things, even though it had solely

exercised the option of acquiring the vessel for the contract

price.    On brief, petitioner went to great lengths to convince us

that section 167 deals solely with depreciation or amortization

and that section 162 (concerning ordinary and necessary business

deductions) governs the portion of its transaction that effected

the termination of the lease.    Respondent does not question

petitioner’s premise that section 162 deals with the pure

situation where there is an expenditure to cancel or terminate a

burdensome contract or lease.    The approach that petitioner uses

to make its point is to argue that the value of the vessel

without considering the lease is $14 million, and so the

remaining $94 million of the $108 million acquisition price was

paid to cancel a lease13.   Petitioner’s approach has met with


     12
      (...continued)
vessel. The difference was built into the contract terms so that
it was not due to some change in conditions, such as
extraordinary wear of the vessel (leased asset).
     13
       We note that the parties, for purposes of this summary
judgment motion, agree that the vessel’s value, without
considering the value of the subject lease, was $14 million.
Petitioner would attribute the difference between the $108
million acquisition cost and the $14 million to cancellation of
the lease. Respondent, on the other hand would attribute the
difference to value of the use of the acquired vessel for the
remainder of its useful life. Respondent’s approach is in line
with the approach, if not the intent, of sec. 167(c)(2) and
existing case law. As discussed infra, the fair market value of
the vessel when petitioner acquired it was more than $14 million
                                                   (continued...)
                              - 19 -

success in only one circuit and has not met with success in this

Court, the Court of Appeals for the Second Circuit, and the

Supreme Court.14

     Petitioner attempts to bolster its argument by referencing

several cases where transactions were split or bifurcated to

permit differing results with respect to each portion of the

transaction.   With one exception,15 the courts have not permitted

a current deduction to terminate a burdensome lease where the

lessee purchased the leased asset.     There are cases permitting a

current deduction for the cost of terminating a burdensome lease

or contract obligation, but those cases do not involve the



     13
      (...continued)
because of the value of the stream of income attributable to the
lease. In the factual setting of this case, the fair market
value of the vessel (as opposed to the value without considering
the existing lease) included the stream of rental income.
Accordingly a willing seller would not have ignored the value
attributable to the use of the vessel, especially where the
lessee was obligated to pay for that use, irrespective of whether
the lessee used the vessel. When petitioner acquired the vessel,
it acquired the physical asset and the right to its use.
Petitioner in attempting to attribute the majority of the
acquisition cost to an expense for canceling the lease, ignores
its ability to use or lease the vessel. Accordingly, it is
difficult to reconcile petitioner’s approach to value.
     14
       To some extent the case law that predated the enactment
of sec. 167(c)(2) is instructive in interpreting the statute.
The very approach suggested by petitioner has been thoroughly
considered by this and other courts.
     15
       The exception is to be found in Cleveland Allerton Hotel,
Inc. v. Commissioner, 

(6th Cir. 1948), revg. a
Memorandum Opinion of this Court dated May 7, 1947, which is
discussed in detail later in this opinion.
                               - 20 -

acquisition of a capital asset.    When section 167(c)(2) was

enacted, with the exception of some precedent in the Sixth

Circuit, the courts did not permit the approach sought by

petitioner here--allocating part of the cost of acquiring a

leased asset to a deductible expense (attributable to the

termination of a burdensome lease).

     Generally, the courts have held16 that in the acquisition of

a leased asset, the portion of the cost attributable to an

existing lease is to be associated with or attributable to the

value of the asset.   The value of the asset without considering

the lease has not been considered the true measure of the asset’s

value.    To value the asset without considering the lease would be

to ignore a stream of income (rent) to which the owner of the

asset is entitled.    A seller of an asset would not separate the

lease from the leased asset and ignore what may be the asset’s

principal source of value.   At some point in the life of a leased

asset, the income (rent) to be derived may exceed the residual

value of the asset.   That is why the vessel here (about halfway

through the term of a 20-year lease) may have a value (without

considering the lease) of about $14 million, whereas the income




     16
       The opinions in which this question was considered date
back more than 40 years and preceded the enactment of sec.
167(c)(2) by more than 30 years.
                              - 21 -

stream from the remaining life of the lease may have been valued

at about $94 million.17

     Respondent contends that case precedent in existence prior

to the enactment of section 167(c)(2) is consistent with the

restriction contained in section 167(c)(2); i.e., that the buyer

may not allocate to the lease any portion of the acquisition cost

of the leased property.   As explained above, petitioner contends

that its transaction is a two-part transaction and should be

bifurcated into the cost of acquiring a capital asset and the

cost of canceling or terminating a burdensome lease.   Although

the acquisition of the vessel may have effectively terminated the

lease, the transaction which caused the lease termination was

capital in nature.   Accordingly, a significant prerequisite to

petitioner’s success is its ability to bifurcate the cost

expended to acquire the capital asset and allocate the cost into

two portions--one attributable to the capital asset and the other

to the cost of terminating the burdensome lease.

     Petitioner argues that the value of the vessel at the time

of the acquisition was substantially less than it was required to


     17
       The acquisition of a leased asset by the lessee is
somewhat unique when compared to the acquisition of the asset by
a third party. That is so because at the time of acquisition of
a leased asset by the lessee, the leasehold interest merges into
the fee ownership whereas a third-party purchaser of a leased
asset does not experience a merger of interests. Petitioner’s
approach would result in highly beneficial treatment to lessees
that would not otherwise be available under sec. 167(c)(2) to
lessors and others who might acquire leased assets.
                              - 22 -

pay and the difference is attributable to the lease cancellation.

Petitioner’s characterization is no different from the arguments

that have been made in several cases considered by this and other

courts prior to the enactment of section 167(c)(2).   Except for

the holding in one circuit, courts have not permitted a lessee’s

allocation of a portion of the acquisition cost of a leased

capital asset to the cancellation of a burdensome lease in order

to permit a business deduction under section 162.   The Supreme

Court, the Court of Appeals for the Second Circuit, and this

Court have all reasoned that the value attributable to the

lease’s income stream represents value that a third-party buyer

would be required to pay the seller for the leased asset.    As

pointed out above, no seller would part with a leased asset

without receiving value for the income attributable to the lease.

Using that rationale, the Supreme Court approved the Court of

Appeals for the Second Circuit’s approach of allowing the

acquisition cost (including the portion attributable to the value

of the lease) to be made part of the acquired asset’s depreciable

basis.

      Petitioner’s argument was addressed about 40 years ago in

two seminal cases:   Cleveland Allerton Hotel, Inc. v.

Commissioner, 

(6th Cir. 1948), revg. a Memorandum

Opinion of this Court dated May 7, 1947, and Millinery Ctr. Bldg.
                              - 23 -

Corp. v. Commissioner, 

(1954), affd. in part, revd.

in part 

(2d Cir. 1955), affd. 

(1956).

     Cleveland Allerton Hotel, Inc. involved a hotel that was

built on land subject to a 100-year lease with a $25,000 annual

rental.   About 20 years into the lease the hotel owner acquired

the underlying land for $441,250.   At the time of the

acquisition, the unimproved and/or unencumbered value of the land

was $200,000, and the adjusted basis for the building was

$267,150.   The taxpayer/building owner added to the adjusted

basis of the building, for depreciation purposes, the excess paid

over the $200,000 value of the land.   The question considered by

this Court was whether respondent erred in disallowing

depreciation by the taxpayer in excess of the preacquisition

adjusted basis ($267,150).

     This Court decided that the taxpayer’s purchase of the land

for $441,250 was the value any purchaser would have paid for land

that had the benefit of an income-producing lease.   Accordingly,

it was concluded that the entire acquisition cost represented a

nondepreciable capital expenditure attributable to the cost of

the land.   On appeal, the Court of Appeals for the Sixth Circuit

reversed, concluding that the taxpayer was entitled to currently

deduct, as a business expense, the excess of $441,250 over the

$200,000 value of the unencumbered land as a cost of

extinguishing the lease.
                              - 24 -

     In Millinery Ctr. Bldg. Corp. v. 

, the

facts were essentially the same as in Cleveland Allerton Hotel,

Inc. v. 

, and the taxpayer, relying on the

Court of Appeals’ holding in Cleveland Allerton Hotel, Inc.,

sought to deduct the excess of the acquisition cost of the

underlying leased land over the unimproved value of the land.

This Court, choosing not to follow the holding of the Court of

Appeals for the Sixth Circuit, held that the excess was not

currently deductible as an ordinary and necessary business

expense.   In addition, this Court held that the taxpayer was not

entitled to add the excess of the amount paid over the unimproved

value of the land to the depreciable basis of the building.

     On appeal, the Court of Appeals for the Second Circuit

affirmed this Court’s holding that the excess was not currently

deductible as a business expense.   The Court of Appeals, however,

reversed our holding that the taxpayer was not entitled to

allocate a portion of the acquisition cost to the depreciable

basis of the building.   Accordingly, the Court of Appeals agreed

with this Court and disagreed with the Court of Appeals for the

Sixth Circuit with respect to whether any portion of the cost

allocable to the lease was currently deductible.   Because of this

conflict between the Courts of Appeals, the Supreme Court granted

the taxpayer’s certiorari petition.
                              - 25 -

     The Supreme Court affirmed the holding of the Court of

Appeals for the Second Circuit; i.e., that the taxpayer was

entitled to an allocation of the acquisition cost between the

building and land and entitled to depreciate the basis over the

remaining useful life of the building.18   The Supreme Court noted

that, as lessee of the land, the taxpayer’s “ownership” or use of

its building was subject to significant control by the lessor and

to conditions of the lease.   For example, the taxpayer’s right to

use its building was burdened by the payment of rent and the

obligation to relinquish use of the building and/or to demolish

the building at the end of the lease term.   This point suggests

that in purchasing the land, the taxpayer may, to some extent,

have been perfecting unfettered ownership in the building.

     In addition, the Supreme Court pointed out that the

Millinery Ctr. Bldg. Corp. v. 

, taxpayer did

not prove that its rental payments were excessive for what it was

leasing, and, therefore, the Supreme Court left for another day

the question of the deductibility of payments for relief from the

terms of a lease.   In deciding that the approach of the Court of



     18
       The allocation permitted was between a depreciable
(building) and a nondepreciable (land) portion of the merged
interest. The Government did not seek Supreme Court review of
the depreciation allowance of that portion of the acquisition
cost that exceeded the value of the building’s remaining economic
life. No portion was permitted to be deducted as current
business expense attributable to the effective cancellation of
the land lease.
                               - 26 -

Appeals for the Second Circuit was correct, however, it would

appear that the approach of the Court of Appeals for the Sixth

Circuit was   rejected.   Accordingly, the vitality of the holding

in Cleveland Allerton Hotel, Inc. v. 

, holding

is questionable.19   In spite of these circumstances, petitioner

strongly urges that it is entitled to rely on the Cleveland

Allerton Hotel, Inc. holding.20   Further complicating

petitioner’s situation, any appeal of our decision here would be

to the Court of Appeals for the Second Circuit--the “Millinery

Ctr. circuit”.   That, of course, militates against petitioner’s

chances for success on appeal, because petitioner would have to




     19
       Petitioner has provided only one case with comparable
facts and squarely on point that followed Cleveland Allerton
Hotel, Inc. v. 

. See Troc, Inc. v. United
States, 

(N.D. Ohio 1954). In that regard, we
note that the Troc, Inc. case preceded the Supreme Court’s
opinion in Millinery Ctr. Bldg. Corp. v. Commissioner, 

(1956) and that it was within the Sixth Circuit Court of
Appeals’ venue.
     20
       Petitioner also relies on Priv. Ltr. Rul. 98-42-006
(June 22, 1998) and Field Service Advice 199918022 (May 7, 1999),
both of which were issued subsequent to the transaction in
question and, accordingly, could not have been relied upon. The
administrative discussions give petitioner some solace in their
discussions of Cleveland Allerton and the absence of any
discussion of or reliance on sec. 167(c)(2). Irrespective of the
positions or discussions contained in those administrative
documents, they are statutorily of no precedential value. See
sec. 6110(k)(3). Respondent argues that the cited ruling and
advice are distinguishable. Accordingly, whether the discussion
or positions in rulings or internal advice memoranda are
favorable or unfavorable to taxpayers, in the present situation
we give them no weight.
                              - 27 -

sway the thinking of the appellate court that expressly disagreed

with the Cleveland Allerton Hotel, Inc. holding.21

     Accordingly, at the time of the enactment of section

167(c)(2), the weight of case authority did not permit the relief

sought by petitioner.   More significantly, in affirming the

Second Circuit Court of Appeals, the Supreme Court’s holding in

Millinery Ctr. Bldg. Corp. v. 

, resulted in

the same outcome as the one prescribed by section 167(c)(2);

i.e., no allocation of the acquisition cost to the lease was

permitted in circumstances where a leased asset is acquired.

Further, both the case precedent and the statute require that all

of the cost be allocated to the depreciable capital asset.22



     21
       Respondent attempts to resolve these entangled
circumstances by reference to our holding in Golsen v.
Commissioner, 

(1970), affd. 

(10th Cir.
1971). There we expressed the view that we would conform to the
holding of a Federal Court of Appeals that is squarely on point,
irrespective of whether we agree with that Court of Appeals’
holding. We have specifically disagreed with the holding of the
Court of Appeals for the Sixth Circuit’s Cleveland Allerton
holding. See Millinery Ctr. Bldg. Corp. v. Commissioner, 

, 823-824 (1954), affd. in part, revd. in part 

(2d Cir. 1955), affd. 

(1956). The appeal of this
case, as noted above, will be to the Court of Appeals for the
Second Circuit, which agreed with our holding and disagreed with
the Court of Appeals for the Sixth Circuit. See Millinery Ctr.
Bldg. Corp. v. 

.
     22
       Where land with improvements was acquired, the courts
have permitted the excess of the purchase price over the value of
the land to be allocated to the building, a depreciable asset.
In the present case, no such nondepreciable asset (such as land)
is involved, and under sec. 167(c)(2) all of the acquisition cost
is to be allocated to the acquired leased property.
                                - 28 -

Therefore, the existing case law and statutory provision are

generally in harmony.    It may also be fair to say that Congress

was aware of the Supreme Court’s holding in Millinery Ctr. Bldg.

Corp. v. 

, when it enacted section 167(c)(2)

for leases as part of a larger statutory package intended to

result in uniform treatment for intangibles.

     We note that allocation of the acquisition cost of a leased

asset under section 167(c)(2) operates irrespective of whether it

would have been more or less beneficial to the taxpayer to

allocate otherwise.     In petitioner’s situation, it obviously

would be more beneficial if 87 percent of the acquisition payment

for the vessel was currently deductible as a business expense

incurred to terminate a burdensome lease.     We can think of no

reason why petitioner, as a lessee, should be treated any

differently from a nonlessee/taxpayer who acquires a leased

asset.   In that regard, petitioner has not provided any

persuasive evidence showing that Congress intended to exclude the

acquisition of a leased capital asset by the lessee.     Nor has it

shown that Congress intended that the lessees should be allowed

to allocate a portion of the acquisition cost of an asset to a

lease and that lessors should not be so entitled.

     In summary, petitioner has not shown that there is any

reason to read section 167(c)(2) to exclude transactions where a

lessee purchases the leased asset or to read the statute as
                              - 29 -

applicable only to existing leases that are to continue in

futuro.   In addition, the existing case precedent is in harmony

with section 167(c)(2) by not permitting allocation of a portion

of the purchase price of a leased asset to the value or cost of

the lease.

     Accordingly, we hold that section 167(c)(2) applies to

petitioner’s acquisition of the vessel, and respondent’s Motion

for Partial Summary Judgment will be granted.


                                    An appropriate order will be

                               issued.