Certain payments for the use of property or services
Accrual method on present value basis
In the case of the lessor or lessee under any section 467 rental agreement, there shall be taken into account for purposes of this title for any taxable year the sum of—
the amount of the rent which accrues during such taxable year as determined under subsection (b), and
interest for the year on the amounts which were taken into account under this subsection for prior taxable years and which are unpaid.
Accrual of rental payments
Allocation follows agreement
Except as provided in paragraph (2), the determination of the amount of the rent under any section 467 rental agreement which accrues during any taxable year shall be made—
by allocating rents in accordance with the agreement, and
by taking into account any rent to be paid after the close of the period in an amount determined under regulations which shall be based on present value concepts.
Constant rental accrual in case of certain tax avoidance transactions, etc.
Agreements to which paragraph (2) applies
Paragraph (2) applies to any rental payment agreement if—
such agreement is a disqualified leaseback or long-term agreement, or
such agreement does not provide for the allocation referred to in paragraph (1)(A).
Disqualified leaseback or long-term agreement
For purposes of this subsection, the term “disqualified leaseback or long-term agreement” means any section 467 rental agreement if—
such agreement is part of a leaseback transaction or such agreement is for a term in excess of 75 percent of the statutory recovery period for the property, and
a principal purpose for providing increasing rents under the agreement is the avoidance of tax imposed by this subtitle.
Exceptions to disqualification in certain cases
The Secretary shall prescribe regulations setting forth circumstances under which agreements will not be treated as disqualified leaseback or long-term agreements, including circumstances relating to—
changes in amounts paid determined by reference to price indices,
rents based on a fixed percentage of lessee receipts or similar amounts,
reasonable rent holidays, or
changes in amounts paid to unrelated 3rd parties.
Recapture of prior understated inclusions under leaseback or long-term agreements
In general
If—
the lessor under any section 467 rental agreement disposes of any property subject to such agreement during the term of such agreement, and
such agreement is a leaseback or long-term agreement to which paragraph (2) of subsection (b) did not apply,
the recapture amount shall be treated as ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle.
Recapture amount
For purposes of paragraph (1), the term “recapture amount” means the lesser of—
the prior understated inclusions, or
the excess of the amount realized (or in the case of a disposition other than a sale, exchange, or involuntary conversion, the fair market value of the property) over the adjusted basis of such property.
The amount determined under subparagraph (B) shall be reduced by the amount of any gain treated as ordinary income on the disposition under any other provision of this subtitle.
Prior understated inclusions
For purposes of this subsection, the term “prior understated inclusion” means the excess (if any) of—
the amount which would have been taken into account by the lessor under subsection (a) for periods before the disposition if subsection (b)(2) had applied to the agreement, over
the amount taken into account under subsection (a) by the lessor for periods before the disposition.
Leaseback or long-term agreement
Special rules
Under regulations prescribed by the Secretary—
exceptions similar to the exceptions applicable under section 1245 or 1250 (whichever is appropriate) shall apply for purposes of this subsection,
any transferee in a disposition excepted by reason of subparagraph (A) who has a transferred basis in the property shall be treated in the same manner as the transferor, and
for purposes of sections 170(e) and 751(c), amounts treated as ordinary income under this section shall be treated in the same manner as amounts treated as ordinary income under section 1245 or 1250.
Section 467 rental agreements
In general
Except as otherwise provided in this subsection, the term “section 467 rental agreements” means any rental agreement for the use of tangible property under which—
there is at least one amount allocable to the use of property during a calendar year which is to be paid after the close of the calendar year following the calendar year in which such use occurs, or
there are increases in the amount to be paid as rent under the agreement.
Section not to apply to agreements involving payments of $250,000 or less
This section shall not apply to any amount to be paid for the use of property if the sum of the following amounts does not exceed $250,000—
the aggregate amount of payments received as consideration for such use of property, and
the aggregate value of any other consideration to be received for such use of property.
For purposes of the preceding sentence, rules similar to the rules of clauses (ii) and (iii) of section 1274(c)(4)(C) shall apply.
Definitions
For purposes of this section—
Constant rental amount
Leaseback transaction
Statutory recovery period
In general
In the case of: | The statutory recovery period is: |
|---|---|
3-year property | 3 years |
5-year property | 5 years |
7-year property | 7 years |
10-year property | 10 years |
15-year and 20-year property | 15 years |
Residential rental property and nonresidential real property | 19 years |
Any railroad grading or tunnel bore | 50 years. |
Special rule for property not depreciable under section 168
Discount and interest rate
Related person
Certain options of lessee to renew not taken into account
Comparable rules where agreement for decreasing payments
Comparable rules for services
Regulations
Source
(Added Pub. L. 98–369, div. A, title I, § 92(a),Notes
Amendments
Effective Date of 2003 Amendment
Effective Date of 1988 Amendment
Effective Date of 1986 Amendment
Effective Date
In general.—
Except as otherwise provided in this subsection, the amendments made by this section [enacting this section] shall apply with respect to agreements entered into after
Exceptions.—
The amendments made by this section shall not apply—
to any agreement entered into pursuant to a written agreement which was binding on
subject to the provisions of paragraph (3), to any agreement to lease property if—
there was in effect a firm plan, evidenced by a board of directors’ resolution, memorandum of agreement, or letter of intent on
construction of the property was commenced (but such property was not placed in service) on or before
to any agreement to lease property if—
the lessee of such property adopted a firm plan to lease the property, evidenced by a resolution of the Finance Committee of the Board of Directors of such lessee, on
the sum of the present values of the rents payable by the lessee under the lease at the inception thereof equals at least $91,223,034, assuming for purposes of this clause—
the annual discount rate is 12.6 percent,
the initial payment of rent occurs 12 months after the commencement of the lease, and
subsequent payments of rents occur on the anniversary date of the initial payment, and
during—
the first 5 years of the lease, at least 9 percent of the rents payable by the lessee under the agreement are paid, and
the second 5 years of the lease, at least 16.25 percent of the rents payable by the lessee under the agreement are paid.
Paragraph (3)(B)(ii)(II) shall apply for purposes of clauses (ii) and (iii) of subparagraph (C), as if, as of the beginning of the last stage, the separate agreements were treated as 1 single agreement relating to all property covered by the agreements, including any property placed in service before the property to which the agreement for the last stage relates. If the lessor under the agreement described in subparagraph (C) leases the property from another person, this exception shall also apply to any agreement between the lessor and such person which is integrally related to, and entered into at the same time as, such agreement, and which calls for comparable payments of rent over the primary term of the agreement.
Schedule of deemed rental payments.—
In general.—
In any case to which paragraph (2)(B) applies, for purposes of the Internal Revenue Code of 1986 [formerly I.R.C. 1954], the lessor shall be treated as having received or accrued (and the lessee shall be treated as having paid or incurred) rents equal to the greater of—
the amount of rents actually paid under the agreement during the taxable year, or
the amount of rents determined in accordance with the schedule under subparagraph (B) for such taxable year.
Schedule.—
In general.—
The schedule under this subparagraph is as follows:
“Portion of lease term: | Cumulative percentage of total rent deemed paid: |
|---|---|
1st ⅕ | 10 |
2nd ⅕ | 25 |
3rd ⅕ | 45 |
4th ⅕ | 70 |
Last ⅕ | 100. |
Operating rules.—
For purposes of this schedule—
the rent allocable to each taxable year within any portion of a lease term described in such schedule shall be a level pro rata amount properly allocable to such taxable year, and
any agreement relating to property which is to be placed in service in 2 or more stages shall be treated as 2 or more separate agreements.
Paragraph not to apply.—
This paragraph shall not apply to any agreement if the sum of the present values of all payments under the agreement is greater than the sum of the present value of all the payments deemed to be paid or received under the schedule under subparagraph (B). For purposes of computing any present value under this subparagraph, the annual discount rate shall be equal to 12 percent, compounded semiannually.”