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PROPOSAL FOR US TAX LAW 1999: LIMIT INAPPROPRIATE TAX BENEFITS FOR LESSORS OF TAX-EXEMPT USE PROPERTY
Current Law
Under current law, certain property leased to governments, tax-exempt organizations, or
foreign persons is considered to be
A tax-exempt use property.@ There are a number of restrictions on the ability of lessors of tax-exempt use property to claim tax benefits from transactions related to the tax-exempt use property. For example, a lessor of tax-exempt use property cannot depreciate theproperty using an accelerated method of depreciation. Instead, the lessor must depreciate the property using a straight-line method over a term that is the longer of class life or 125 percent of the lease term.Under Section 469, an individual generally may not deduct net losses from activities (including leases) in which the taxpayer does not materially participate. Any losses disallowed may be carried forward to offset taxable income generated from such activities.
Reasons for Change
The Administration is concerned that certain leasing transactions involving tax-exempt use property are being used to generate inappropriate tax benefits. These transactions are structured to take advantage of mismatches between reported income and expense and the tax-exempt status of an accommodating party in order to generate significant tax benefits for a U.S. lessor which can shelter other income.
Proposal
The proposal would apply principles similar to those that apply under Section 469 to leases involving tax-exempt use property. Thus, a lessor of tax-exempt use property would not be able to recognize a net loss from a leasing transaction involving tax-exempt use property during the lease term. A lessor would be able to carry forward a net loss from a leasing transaction and use it to offset net gains from the transaction in subsequent years. In the year the leasing transaction terminates, the lessor would be able to recognize any previously unrecognized net loss.
A special rule would define a leasing transaction to include the lease itself and all related
agreements (i.e., sales, loans, and option agreements) entered into by the lessor with respect to the lease of the tax-exempt use property. Thus, for example, if a taxpayer purchased property from a foreign government, leased the property to the foreign government, financed the purchase with a nonrecourse loan from a bank, and entered into an option to sell the property to a third party, each of these individual transactions would be considered part of the overall leasing transaction.
The proposal would be effective for leasing transactions entered into on or after the date of enactment.