Category: Deductions & Credits
Subject: Lease Down Payments
Title: Amortization of "Buy-Down" of Lease
IRC Sections: 167
Filename: 1141.html
Date Produced: 2/96

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Background
Taxpayer (TP) is the lessee of heavy construction equipment. As part of the lease, TP agreed to pay what appears to be a "down payment" at the beginning of the lease. The amount in question is not refundable and is not a security deposit. The so-called down payment is intended to reduce the amount of the lease payments over the term of the lease, in essence a "buy-down" of the lease. TP reports its income on the accrual method of accounting.

Issue
What is the proper treatment of the down payment?

Answer
The down payment should be amortized ratably over the life of the lease.

Discussion
Regulation Section 1.162-11 makes it clear that any amount paid to acquire a leasehold is to be deducted ratably over the life of the lease.

There is a fair amount of case law dealing with various kinds of up-front lease payments attributable to the entire lease term (as opposed to simple prepayments of periodic lease amounts). These cases hold that such up-front payments represent a capital asset associated with acquiring the use of the property subject to the lease and are therefore deductible ratably over the life of the lease. See, for example, Wolan v. Comr., 184 F.2d 101 (10th Cir. 1950); Baton Coal Company v. Comr., 51 F.2d 469 (3d Cir. 1931), cert. denied, 284 U.S. 674 (1931); Steinway and Sons v. Comr., 46 T.C. 375 (1966), acq., 1967-2 C.B. 3; Wood v. Comr., 34 T.C.M. 817 (1975); Washington Package Store, Inc. v. Comr., 23 T.C.M. 1805 (1964); Jack's Cookie Co. v. U.S. 597 F.2d 395 (4th Cir. 1979), rev'g and rem'g unreported D.C. decision, cert. denied, 444 U.S. 899 (1979).