Helvering v. F. & R. Lazarus & Co.

Background

A department store owned and used three buildings for its business. In 1928 the store transferred legal title to a bank acting as trustee for land-trust certificate holders, and the trustee leased the buildings back to the store for ninety-nine years with options to renew and buy. When the store claimed depreciation for 1930 and 1931 the Commissioner denied the deduction because legal title rested with the trustee. The Board of Tax Appeals found the written transfer was really security for a loan and allowed the deductions; the Courts of Appeals were split, so the case reached the Supreme Court.

Reasoning

The central question was whether the store, rather than the trustee that held legal title, bore the loss from wear and tear and so could claim depreciation. The Court accepted the Board's findings that the written transfer functioned as a loan secured by the property: the stated rent operated as five percent interest and the "depreciation fund" was an amortization plan to repay the debt. Applying the equitable doctrine that an absolute deed may be treated as a mortgage when given as security, and emphasizing that tax cases look to substance over form, the Court held the store effectively bore the capital loss and was entitled to the statutory depreciation deduction. The judgment below was affirmed.

Real world impact

Tax administrators and courts will examine the economic substance of sale-and-leaseback arrangements, not just formal legal title. Businesses using such transfers may claim depreciation when the facts show a secured loan rather than an actual sale. The decision reinforces the Board's authority to consider evidence of economic reality in tax disputes.