A sublease was found to be a lease transaction because this was its legal form and legal substance. There was no option to purchase, and the risks and obligations substantially remained with the sublessor. However, an "Initial Lease Payment" made pursuant to the sublease was ruled to be part of the cost of a leasehold interest rather than deductible rent given that the taxpayer could not demonstrate that the annual rentals under the sublease agreement were substantially lower than fair market value rentals, the initial lease payment was non-refundable in the case of early termination and it was subject to various adjustments on the closing date which had nothing to do with the annual use of the facilities under the sublease.
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