Handlery Hotels, Inc., a California Corporation v. United States

I. BACKGROUND

The plaintiff-appellant, Handlery Hotels, Inc. (“Handlery”), lessor, paid $85,000 to its then lessee, Kreis-Grundy Corporation (“Kreis”), to terminate a lease having an unexpired term of three years remaining. Concurrently, Handlery entered into a new and more favorable lease with Casual Corner of Stonestown, Inc. (“Casual Corner”) for a term of twenty years.

Prior to the above transactions Handlery was interested in negotiating with Kreis for an extension of Kreis’ existing lease at a higher monthly rental but instead decided to seek a new lease.

Handlery amortized the $85,000 cancellation payment over the three-year unexpired term of the old lease. The Commissioner of Internal Revenue disallowed the three-year amortization period and recomputed the taxes on the basis of a twenty-year amortization period, a period equal to the duration of the new lease. Handlery paid the deficiency and brought this action against the United States for refund.

In the court below, both Handlery and the United States filed motions for summary judgment. The district court denied Handlery’s motion and granted the government’s motion, holding that the cancellation payment was a cost…