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Frank Lyon Co. v. United States

United States Supreme Court
435 U.S. 561 (1978)


The Frank Lyon Company (Lyon) (plaintiff), a retailer, agreed to a sale-and-leaseback transaction with the Worthen Bank & Trust Company (Worthen) and the New York Life Insurance Company (NYL). Worthen was to sell the building to Lyon, and Lyon was to lease back the building to Worthen long term. The transaction was designed to help Worthen overcome regulatory and financial obstacles to the construction of a new building. Lyon’s participation was motivated primarily by its interest in diversifying its business. Lyon expected that Worthen would eventually exercise a leaseback option to repurchase the building after several years. After state and federal regulators approved the transaction, Lyon mortgaged the building to NYL in return for NYL’s loan of most of the money needed to complete the building’s construction. If Worthen’s leaseback payments stopped, Lyon would remain the sole party legally responsible for repaying NYL’s loan. The parties did not indicate any desire or intent to gain special tax benefits from the transaction. Lyon claimed federal tax deductions for its mortgage payments and building depreciation. The commissioner of internal revenue (commissioner) determined that Lyon did not own the building for tax purposes, and disallowed the deductions. Lyon filed suit against the United States government (defendant) in federal district court, seeking a refund. The district court ruled for Lyon. The United States Court of Appeals for the Eighth Circuit reversed in the commissioner’s favor. The United States Supreme Court granted certiorari.

Rule of Law


Holding and Reasoning (Blackmun, J.)

Dissent (Stevens, J.)

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