Altria Group, Inc. v. United States, 2011 U.S. App. LEXIS 19644

Altria claimed $24,337,623 in 1996–1997 deductions from nine leveraged-lease transactions with tax-indifferent entities; four representative transactions were tried (three SILO, one LILO).
In each transaction, Altria leased a facility from a tax-indifferent counterparty, immediately subleased it back for a shorter term, and paid a large accommodation fee plus a fully funded end-of-term purchase option.
Financing involved a head-lease rent funded by a nonrecourse loan, a sublease rent funded by the defeasance structure, and separate debt and equity defeasance accounts; funds moved in a loop among lender, Altria, and the tax-indifferent entity, with no meaningful liquidity or risk to the tax-indifferent party.
The end-of-sublease purchase option was fully funded by equity defeasance; if not exercised, Altria could renew or replace subleases or take possession, but the agreements insulated the tax-indifferent entity from owning residual value.
The district court instructed the jury on substance over form using flexible factors; the jury concluded the four transactions lacked genuine ownership/leasehold interests and the nonrecourse debt was not genuine, leading to denial of deductions; Altria appeals the jury instructions and related rulings.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether the purchase option likelihood can be considered in ownership analysis	Altria contends likelihood is not a separate factor; must be certain.	Government argues multiple post-lease scenarios must be considered; certainty not required.	Yes; purchase-option likelihood may be considered as part of the overall analysis.
Whether explicit equity and residual-value thresholds were required	Altria sought specific numeric thresholds for meaningful equity and residual value.	No rigid numerical tests; facts control under Frank Lyon.	No rigid numbers required; case-specific facts govern ownership analysis.
Whether 'Control' and 'Cash Flows' are relevant factors	These factors are neutral; not determinative of ownership.	Control and cash flows are relevant to assessing true ownership.	Proper to include; collectively support substance-over-form analysis.
Whether the jury instructions on nonrecourse debt were correct	Bailey requires debt genuineness based on collateral, etc.	Defeasance structure can negate genuineness; other factors permissible.	District court properly allowed consideration of additional factors beyond mere collateral comparison.

Knetsch v. United States, 364 U.S. 361 (1960) (substance over form; not all unlikely outcomes control tax consequences)
Gregory v. Helvering, 293 U.S. 465 (1935) (tax purposes depend on what was intended by the statute's substance)
Helvering v. Gregory, 69 F.2d 809 (2d Cir.1934) (early articulation of substance over form in tax)
Frank Lyon Co. v. United States, 435 U.S. 561 (1978) (substance and economic realities govern; form is not dispositive)
Bailey v. Comm'r, 993 F.2d 288 (2d Cir.1993) (debt genuineness; nonrecourse debt generally genuine if collateral coverage exists)
Newman v. Comm'r, 902 F.2d 159 (2d Cir.1990) (touchstone for determining substance in transfer-and-leaseback)