§1241 — Cancellation of lease or distributor’s agreement
11 citing cases
Statute Text — 26 U.S.C. §1241
Amounts received by a lessee for the cancellation of a lease, or by a distributor of goods for the cancellation of a distributor’s agreement (if the distributor has a substantial capital investment in the distributorship), shall be considered as amounts received in exchange for such lease or agreement.
Treasury Regulations
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Treas. Reg. §1.1241-1Cancellation of lease or distributor's agreement
(a) In general. Section 1241 provides that proceeds received by lessees or distributors from the cancellation of leases or of certain distributorship agreements are considered as amounts received in exchange therefor. Section 1241 applies to leases of both real and personal property. Distributorship agreements to which section 1241 applies are described in paragraph (c) of this section. Section 1241 has no application in determining whether or not a cancellation not qualifying under that section is a sale or exchange. Further, section 1241 has no application in determining whether or not a lease or a distributorship agreement is a capital asset, even though its cancellation qualifies as an exchange under section 1241.
(b) Definition of cancellation. The term cancellation of a lease or a distributor's agreement, as used in section 1241, means a termination of all the contractual rights of a lessee or distributor with respect to particular premises or a particular distributorship, other than by the expiration of the lease or agreement in accordance with its terms. A payment made in good faith for a partial cancellation of a lease or a distributorship agreement is recognized as an amount received for cancellation under section 1241 if the cancellation relates to a severable economic unit, such as a portion of the premises covered by a lease, a reduction in the unexpired term of a lease or distributorship agreement, or a distributorship in one of several areas or of one of several products. Payments made for other modifications of leases or distributorship agreements, however, are not recognized as amounts received for cancellation under section 1241.
(c) Amounts received upon cancellation of a distributorship agreement. Section 1241 applies to distributorship agreements only if they are for marketing or marketing and servicing of goods. It does not apply to agreements for selling intangible property or for rendering personal services as, for example, agreements establishing insurance agencies or agencies for the brokerage of securities. Further, it applies to a distributorship agreement only if the distributor has made a substantial investment of capital in the distributorship. The substantial capital investment must be reflected in physical assets such as inventories of tangible goods, equipment, machinery, storage facilities, or similar property. An investment is not considered substantial for purposes of section 1241 unless it consists of a significant fraction or more of the facilities for storing, transporting, processing, or otherwise dealing with the goods distributed, or consists of a substantial inventory of such goods. The investment required in the maintenance of an office merely for clerical operations is not considered substantial for purposes of this section. Furthermore, section 1241 shall not apply unless a substantial amount of the capital or assets needed for carrying on the operations of a distributorship are acquired by the distributor and actually used in carrying on the distributorship at some time before the cancellation of the distributorship agreement. It is immaterial for the purposes of section 1241 whether the distributor acquired the assets used in performing the functions of the distributorship before or after beginning his operations under the distributorship agreement. It is also immaterial whether the distributor is a retailer, wholesaler, jobber, or other type of distributor. The application of this paragraph may be illustrated by the following examples:
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Treas. Reg. §1.1241-1(a)In general.
In general. Section 1241 provides that proceeds received by lessees or distributors from the cancellation of leases or of certain distributorship agreements are considered as amounts received in exchange therefor. Section 1241 applies to leases of both real and personal property. Distributorship agreements to which section 1241 applies are described in paragraph (c) of this section. Section 1241 has no application in determining whether or not a cancellation not qualifying under that section is a sale or exchange. Further, section 1241 has no application in determining whether or not a lease or a distributorship agreement is a capital asset, even though its cancellation qualifies as an exchange under section 1241.
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Treas. Reg. §1.1241-1(b)Definition of cancellation.
Definition of cancellation. The term cancellation of a lease or a distributor's agreement, as used in section 1241, means a termination of all the contractual rights of a lessee or distributor with respect to particular premises or a particular distributorship, other than by the expiration of the lease or agreement in accordance with its terms. A payment made in good faith for a partial cancellation of a lease or a distributorship agreement is recognized as an amount received for cancellation under section 1241 if the cancellation relates to a severable economic unit, such as a portion of the premises covered by a lease, a reduction in the unexpired term of a lease or distributorship agreement, or a distributorship in one of several areas or of one of several products. Payments made for other modifications of leases or distributorship agreements, however, are not recognized as amounts received for cancellation under section 1241.
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Treas. Reg. §1.1241-1(c)Amounts received upon cancellation of a distributorship agreement.
Amounts received upon cancellation of a distributorship agreement. Section 1241 applies to distributorship agreements only if they are for marketing or marketing and servicing of goods. It does not apply to agreements for selling intangible property or for rendering personal services as, for example, agreements establishing insurance agencies or agencies for the brokerage of securities. Further, it applies to a distributorship agreement only if the distributor has made a substantial investment of capital in the distributorship. The substantial capital investment must be reflected in physical assets such as inventories of tangible goods, equipment, machinery, storage facilities, or similar property. An investment is not considered substantial for purposes of section 1241 unless it consists of a significant fraction or more of the facilities for storing, transporting, processing, or otherwise dealing with the goods distributed, or consists of a substantial inventory of such goods. The investment required in the maintenance of an office merely for clerical operations is not considered substantial for purposes of this section. Furthermore, section 1241 shall not apply unless a substantial amount of the capital or assets needed for carrying on the operations of a distributorship are acquired by the distributor and actually used in carrying on the distributorship at some time before the cancellation of the distributorship agreement. It is immaterial for the purposes of section 1241 whether the distributor acquired the assets used in performing the functions of the distributorship before or after beginning his operations under the distributorship agreement. It is also immaterial whether the distributor is a retailer, wholesaler, jobber, or other type of distributor. The application of this paragraph may be illustrated by the following examples:
11 Citing Cases
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1241(a), 100 Stat. 2576; Staff of Joint Comm. on Taxation, General Explanation of the Tax Reform Act of 1986, at 1036, 1037 (J. Comm. Print 1987). Generally, if services are performed in the United States, they give rise to U.S. source income, section 861(a)(3), and services performed outside the United States give rise to foreign source incom
Petitioner paid Spyropoulos legal expenses for the sole purpose of disposing of the leasehold interest in rooms 103 and 141. Thus, the legal expenditures of $22,500 are capital expenditures that are offset against the gain realized by petitioner. In exchange for vacating rooms 103 and 141, petitioner received use of the new apartment ren
terest that is treated as income from sources within the United States, if the interest is not effectively connected income to the recipient. Interest that is treated as income from sources without the United States is 25 The Tax Reform Act of 1986, sec. 1241(b)(1)(A), 100 Stat. 2579, replaced the words "residents, corporate or otherwise" in sec. 861(a)(1) with the words "noncorporate residents or domestic corporations." The current sec. 861(a)(1), therefore, does not refer to foreign corporatio
terest that is treated as income from sources within the United States, if the interest is not effectively connected income to the recipient. Interest that is treated as income from sources without the United States is 25 The Tax Reform Act of 1986, sec. 1241(b)(1)(A), 100 Stat. 2579, replaced the words "residents, corporate or otherwise" in sec. 861(a)(1) with the words "noncorporate residents or domestic corporations." The current sec. 861(a)(1), therefore, does not refer to foreign corporatio