[4830-01-u]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[IA-292-84]
RIN 1545-AU11
Section 467 Rental Agreements
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public
hearing.
SUMMARY: This document contains proposed regulations relating to
the treatment of rent and interest under certain agreements for
the lease of tangible property. The proposed regulations apply
to certain rental agreements that provide increasing or
decreasing rents, or deferred or prepaid rent. This document
also provides notice of a public hearing on these regulations.
DATES: Written comments, requests to appear and outlines of
topics to be discussed at the public hearing scheduled for
September 25, 1996, must be received by September 3, 1996.
ADDRESSES: Send submissions to: CC:DOM:CORP:R (IA-292-84), room
5228, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC 20044. In the alternative, submissions may be
hand delivered between the hours of 8 a.m. and 5 p.m. to
CC:DOM:CORP:R (IA-292-84), Courier's Desk, Internal Revenue
Service, 1111 Constitution Avenue NW., Washington, DC. The
public hearing will be held in the Commissioner's Conference
Room, 3rd Floor, 1111 Constitution Avenue NW., Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed
regulations, Forest Boone of the Office of Assistant Chief
Counsel (Income Tax and Accounting) at (202) 622-4960; concerning
submissions and the public hearing, Mike Slaughter at (202) 622-
7190 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed amendments to the Income Tax
Regulations (26 CFR part 1) relating to section 467 of the
Internal Revenue Code (Code). This section was added by the Tax
Reform Act of 1984. In general, section 467 requires parties to
certain rental agreements to accrue rent and interest in
accordance with the rules specified in section 467. These
proposed regulations provide guidance regarding the applicability
of section 467, and the amount of rent and interest required to
be accrued under section 467. No inference should be drawn from
any provision in the proposed regulations concerning whether an
arrangement constitutes a lease for Federal income tax purposes.
Explanation of Provisions
1. Section 467 rental agreements
Section 467(a) provides that, if a rental agreement is a
section 467 rental agreement, the lessor and lessee must take
into account for a taxable year the section 467 rent and the
section 467 interest for that year. A section 467 rental
agreement is a rental agreement that has increasing or decreasing
rents, or prepaid or deferred rents. A rental agreement has
increasing or decreasing rents if the annualized fixed rent
allocated to any rental period exceeds the annualized fixed rent
allocated to any other rental period in the lease term. The
proposed regulations provide that a rent holiday at the beginning
of the lease term is disregarded in determining whether the
rental agreement has increasing or decreasing rent if the rent
holiday period is three months or less.
In addition, the proposed regulations provide that a rental
agreement has increasing or decreasing rent if it requires (or
may require) the payment of contingent rent, other than
contingent rent that is contingent due to (a) a provision
computing rent based on a percentage of the lessee's gross or net
receipts (but only if the percentage does not vary throughout the
term of the lease); (b) adjustments based on a reasonable price
index; or (c) a provision requiring the lessee to pay real estate
taxes, insurance premiums, maintenance costs, or any other cost
(other than a debt service cost) that relates to the leased
property and is not within the control of the lessor or lessee or
a person related to the lessor or lessee.
Section 467(d)(1)(A) provides that a rental agreement has
deferred rent if rent allocated to a calendar year is payable
after the close of the succeeding calendar year. The proposed
regulations provide that there is prepaid rent if rent allocated
to a calendar year is payable prior to the beginning of the prior
calendar year.
Section 467(d)(2) provides that section 467 does not apply
to a rental agreement if the aggregate rental payments and other
consideration to be received for the use of the property do not
exceed $250,000.
2. Section 467 rent
Under the proposed regulations, the section 467 rent for a
taxable year is the sum of the fixed rent for any rental periods
that begin and end in the taxable year, a ratable portion of the
fixed rent for other rental periods beginning or ending in the
taxable year, and any contingent rent that accrues in the taxable
year. In general, the proposed regulations provide that rental
periods may be of any length as long as (a) the rental periods
are one year or less, cover the entire lease term, and do not
overlap, and (b) each scheduled payment under the rental
agreement occurs within 30 days of the beginning or end of a
rental period. The amount of fixed rent for a rental period
depends on the terms of the rental agreement.
A. Disqualified leaseback or long-term agreement
Section 467 provides that if the section 467 rental
agreement is a leaseback or long-term agreement and has
increasing or decreasing rents a principal purpose of which is
tax avoidance (a disqualified leaseback or long-term agreement),
the fixed rent for each rental period is the constant rental
amount. The proposed regulations provide that (a) the
Commissioner, rather than the parties to the rental agreement,
will determine whether a rental agreement is a disqualified
leaseback or long-term agreement and (b) a rental agreement will
not be disqualified unless it requires more than $2,000,000 in
rental payments and other consideration. The proposed
regulations also provide that, if either the lessor or the lessee
is not subject to Federal income tax on its income or is a tax-
exempt entity (within the meaning of section 168(h)(2)), the
rental agreement will be closely scrutinized, and clear and
convincing evidence will be required to establish that tax
avoidance is not a principal purpose for providing increasing or
decreasing rent.
Section 467(b)(5) provides that regulations should set forth
circumstances under which section 467 rental agreements will not
be treated as disqualified leasebacks or long-term agreements,
including circumstances relating to the use of price indices,
percentage rents, reasonable rent holidays, or changes in amounts
paid to third parties. In addition to these safe harbors, which
have been included in the proposed regulations, the Conference
Committee Report stated that the Committee anticipated that
regulations under section 467 would adopt standards under which
leases providing for fluctuations in rents by no more than a
reasonable percentage above or below the average rent over the
term of the lease will be deemed not motivated by tax avoidance.
The report cited the standards for advance rulings on leveraged
lease transactions set forth in Rev. Proc. 75-21 (1975-1 C.B.
715), and stated that such standards may not be appropriate for
real estate leases. H.R. Rep. No. 861, 98th Cong., 2d Sess. 893
(1984).
The proposed regulations contain a safe harbor providing
that tax avoidance will not be considered to be a principal
purpose for providing increasing or decreasing rents if the rents
allocable to each calendar year of the lease do not vary from the
average annual rents over the entire lease term by more than 10
percent. This safe harbor is based on, but is not identical to,
the safe harbor contained in Rev. Proc. 75-21. The proposed
regulations do not provide a safe harbor specifically applicable
to real estate leases. The IRS and the Treasury Department
invite comments regarding the nature and extent of a safe harbor
for such leases, as well as comments on whether additional safe
harbors are appropriate either generally or for particular
industries.
Section 467(e)(1) provides that the constant rental amount
is the amount that, if paid at the end of each rental period,
would result in a present value equal to the present value of all
amounts payable under the disqualified leaseback or long-term
agreement. If constant rental accrual is required, all rental
periods must be equal in length except for an initial or final
short rental period.
B. Agreements without adequate interest
If the section 467 rental agreement is not a disqualified
leaseback or long-term agreement and does not provide adequate
interest for prepaid or deferred rent, the proposed regulations
provide that the fixed rent for each rental period is the
proportional rental amount. The proportional rental amount is
the fixed rent allocated to the rental period under the rental
agreement multiplied by a fraction, the numerator of which is the
present value of the amounts payable as fixed rent and interest
on fixed rent under the rental agreement and the denominator of
which is the present value of the fixed rent allocated to each
rental period under the rental agreement. Under the proposed
regulations, a rental agreement provides adequate interest if (a)
no deferred or prepaid rent is required under the agreement, (b)
there is deferred or prepaid rent but the agreement requires the
payment of interest at an adequate single fixed rate, or (c)
there is deferred or prepaid rent but the present values of rent
payments and rent accruals meet certain tests set forth in the
proposed regulations.
C. Rental agreement accrual
The proposed regulations provide that if neither the
constant rental amount nor the proportional rental amount is
required to be accrued, the fixed rent for a rental period is the
fixed rent allocated to that rental period in accordance with the
section 467 rental agreement. The amount of fixed rent allocated
to a rental period by the rental agreement depends on whether the
agreement provides a specific allocation of fixed rent. The
proposed regulations provide that if a rental agreement provides
a specific allocation of fixed rent, the amount of fixed rent
allocated to each rental period during the lease term is the
amount of rent allocated to that period by the agreement. For
this purpose, a rental agreement that allocates rent to a period
is treated as allocating rent ratably within that period. Thus,
if a rental agreement provides that $120,000 is allocated to each
calendar year in the lease term, $10,000 of rent is allocated to
each calendar month. In general, under the proposed regulations,
a rental agreement specifically allocates fixed rent if the
agreement unambiguously specifies, for periods of no longer than
a year, a fixed amount of rent for which the lessee becomes
liable on account of the use of the property during that period.
If a section 467 rental agreement does not provide a
specific allocation of fixed rent, the amount of fixed rent
allocated to a rental period is the amount of fixed rent payable
during that rental period.
3. Section 467 interest
The section 467 interest for a taxable year is the sum of
the interest on fixed rent for any rental period that begins and
ends in the taxable year, a ratable portion of the interest on
fixed rent for any other rental period beginning or ending in the
taxable year, and any interest that accrues on contingent rent
during the taxable year. If a section 467 rental agreement
provides an adequate stated rate of interest, the interest on
fixed rent for a rental period is the interest provided in the
agreement for that period. If no adequate stated rate of
interest is provided, the interest on fixed rent for a rental
period is determined under the section 467 loan rules.
Under the proposed regulations, there is a deemed loan (a
section 467 loan) in a rental period if, at the beginning of that
period, there is a difference between the amount of fixed rent
payable under the section 467 rental agreement and the amount of
fixed rent required to be accrued under the proposed regulations.
For rental periods in which there is a section 467 loan, the
interest for the rental period is equal to the product of the
principal balance of the section 467 loan at the beginning of the
rental period and the yield of the section 467 loan.
In general, the principal balance of a section 467 loan as
of the beginning of any rental period is the difference between
the cumulative amount of accrued fixed rent and interest and the
cumulative amount of fixed rent and interest payable under the
section 467 rental agreement. The yield of a section 467 loan is
the discount rate at which the sum of the present values of all
amounts payable by the lessee as fixed rent and interest on fixed
rent, plus the sum of the negative present values of all amounts
payable by the lessor as interest on prepaid fixed rent, equals
the sum of the present values of the fixed rent allocated to the
rental periods.
The amount constituting a section 467 loan may be either
positive or negative. For purposes of applying any aspect of the
proposed regulations relating to a section 467 loan, the
principal balance of the loan should be clearly identified as
either positive or negative. For example, if the principal
balance of a loan at the beginning of a rental period is a
negative number, the interest on the loan for that period will
also be a negative number.
4. Rental agreements with variable rates of interest
The proposed regulations provide rules for section 467
rental agreements that provide for certain types of variable
rates of interest. The rules in the proposed regulations are
similar to the rules provided in 1.1275-5 for the computation of
original issue discount (OID) for variable rate debt instruments
providing for interest at qualified floating rates. Under the
proposed regulations, a rental agreement provides variable
interest if the rental agreement provides for stated interest
that is paid or compounded at least annually at a rate or rates
that meet the requirements of 1.1275-5(a)(3)(i)(A) or (B) and
1.1275-5(a)(4). If a rental agreement provides for fluctuations
in interest other than pursuant to one or more qualified floating
rates the interest will be subject to the rules for contingent
payments.
Under the proposed regulations, if a section 467 rental
agreement provides variable interest, the fixed rate substitutes
(determined in the same manner as under 1.1275-5(e) treating the
agreement date as the issue date) for the variable rates of
interest called for by the agreement must be used in computing
the proportional rental amount, the constant rental amount, the
principal balance of a section 467 loan, and the yield of a
section 467 loan. Further, in determining the interest on fixed
rent for any rental period, the variable interest adjustment
amount must be taken into account. The variable interest
adjustment amount for a rental period is the difference between
(a) the amount of interest that would have accrued during the
rental period under the terms of the rental agreement, and (b)
the amount of interest that would have accrued during the rental
period under the terms of the agreement using the fixed rate
substitutes.
5. Rental agreements with contingent payments
The proposed regulations reserve on the issue of the section
467 treatment of contingent rent. The IRS and the Treasury
Department anticipate that regulations addressing this issue will
provide rules for contingent rent similar to those provided for
computing OID for contingent payment debt instruments in 1.1275-
4. The IRS and the Treasury Department invite comments regarding
the application of the 1.1275-4 rules to section 467 rental
agreements.
6. Recapture
Section 467(c) provides that if a section 467 rental
agreement is a leaseback or long-term agreement providing for
increasing rent but is not subject to constant rental accrual,
and the property subject to the agreement is disposed of, a
portion of the gain realized on the disposition is required to be
recaptured by the lessor as ordinary income. Accordingly, a
leaseback or long-term agreement could be subject to section
467(c) even though it does not require more than $2,000,000 in
rental payments and other consideration and is thus not subject
to constant rental accrual.
The recapture amount is equal to the lesser of the prior
understated inclusions or the section 467 gain. The prior
understated inclusions are the excess of (a) the aggregate amount
of section 467 rent and section 467 interest for the period
during which the lessor held the property, determined as if the
section 467 rental agreement were a disqualified leaseback or
long-term agreement, over (b) the aggregate amount of section 467
rent and section 467 interest accrued by the lessor during that
period. The section 467 gain is the excess of (a) the amount
realized from the disposition, over (b) the sum of the adjusted
basis of the property and the amount of any gain from the
disposition that is treated as ordinary income under any
provision of subtitle A of the Code other than section 467(c)
(e.g., section 1245 or 1250).
In the case of a disposition that is not a sale, exchange,
or involuntary conversion, the section 467 gain is the excess of
(a) the fair market value of the property on the date of
disposition, over (b) the sum of the adjusted basis of the
property and the amount of any gain from the disposition that is
treated as ordinary income under Code provisions other than
section 467(c). The regulations provide exceptions to this
recapture rule for dispositions by gift, transfers at death, and
certain tax-free transactions.
7. Other disposition rules
Under the proposed regulations, if property subject to a
section 467 rental agreement is sold, exchanged, or otherwise
disposed of, the section 467 rent for a period is taken into
account by the owner of the property during the period. The
lessee, however, must continue to take section 467 rent and
section 467 interest into account without regard to the change of
ownership.
Further, if there is a sale, exchange or other disposition
of property subject to a section 467 rental agreement, the
beginning balance of the transferor's section 467 loan after the
transfer equals the net present value at the time of the transfer
of all amounts subsequently payable as fixed rent and interest on
fixed rent to the transferor and all amounts subsequently payable
as interest on prepaid fixed rent by the transferor. The
transferor must continue to take into account interest on the
transferor's section 467 loan balance after the transfer. The
beginning balance of the transferee's section 467 loan is equal
to the principal balance of the section 467 loan immediately
before the transfer reduced by the beginning balance of the
transferor's section 467 loan after the transfer. Amounts
payable to the transferor after the transfer are not taken into
account in adjusting the transferee's section 467 loan balance.
Finally, under the proposed regulations, if there is a
disposition of property subject to a section 467 rental
agreement, the transferor and transferee must treat the beginning
balance of the transferee's section 467 loan as a liability that
is either assumed in connection with the transfer of the property
or secured by the property acquired subject to the liability (if
negative) and as a reduction in the consideration for the
transfer of the property (if positive). In the case of a
positive section 467 loan balance, a reduction in the
consideration for the transfer of the property is appropriate
because the transferee will also be deemed to have acquired an
asset other than the property itself, i.e., the loan, and a
portion of the total consideration should be allocated to the
loan balance. Similar rules apply to transfers of leasehold
interests under section 467 rental agreements.
In order to account for any timing differences that may
exist between a schedule of payments under a section 467 rental
agreement and a separate schedule providing an allocation of
rent, it will be necessary, in appropriate cases, to determine
the amount of a section 467 loan balance even if the rental
agreement does not have either deferred or prepaid rent or if the
rental agreement has deferred or prepaid rent but provides
adequate stated interest. The proposed regulations provide that
the section 467 loan rules apply to rental agreements described
in the preceding sentence, but only for purposes of the rules
relating to dispositions of property subject to a section 467
rental agreement and the rules relating to transfers of leasehold
interests under a section 467 rental agreement.
Although the proposed regulations contain rules applicable
to all dispositions of property subject to a section 467 rental
agreement and all transfers of leasehold interests under a
section 467 rental agreement, the regulations reserve guidance on
the question of whether special rules should be provided for
transfers of property and leasehold interests in transactions in
which gain or loss is not recognized in whole or in part.
Examples of these transactions would include transfers between a
partnership and one or more of its partners, transfers to a
controlled corporation under section 351, transfers pursuant to a
reorganization described in section 368(a), like-kind exchanges
subject to section 1031, and transfers by gift or upon the death
of the owner of the property or the holder of the leasehold
interest. The IRS and Treasury Department invite comments on
whether special rules should be provided for any of these
transactions.
8. Proposed effective date
The regulations are proposed to be effective for (1) rental
agreements entered into after the date that final regulations
under section 467 are published and (2) disqualified leasebacks
and long-term agreements entered into after June 3, 1996. No
inference should be drawn from the proposed effective date
concerning the treatment of rental agreements entered into before
the regulations are applicable. Moreover, the IRS will, in
appropriate circumstances, apply the provisions of section 467
requiring constant rental accrual to rental agreements entered
into on or before June 3, 1996.
9. Issues not addressed
The proposed regulations do not address the application of section 467 to payments for services. The IRS and the Treasury
Department invite comments on the appropriate scope of rules
under section 467 for transactions involving deferred payments
for services in light of the scope of section 404. In addition,
the IRS and the Treasury Department invite comments on whether
rules should be provided for transactions involving prepayments
for services.
The proposed regulations do not address the application of
section 467 to transactions sometimes referred to as "lease
strips" or "stripping transactions", as described in Notice 95-53
(1995-44 I.R.B. 21). Notice 95-53 provides that regulations will
be issued pursuant to section 7701(l) (and, as appropriate, other
sections of the Code) recharacterizing stripping transactions.
The IRS and the Treasury Department invite comments on whether
rules should be provided that would apply section 467 to such
transactions.
The proposed regulations do not provide for an adjustment to
section 467 rent and interest where a section 467 rental
agreement is modified. The IRS and the Treasury Department
invite comments on the appropriate treatment of the lessor and
lessee in these cases.
The proposed regulations do not provide rules addressing the
treatment of payments by the lessor to induce a lessee to enter
into a rental agreement.
Special Analyses
It has been determined that this notice of proposed
rulemaking is not a significant regulatory action as defined in
EO 12866. Therefore, a regulatory assessment is not required.
It also has been determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C. chapter 5) and the
Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to
these proposed regulations, and, therefore, a Regulatory
Flexibility Analysis is not required. Pursuant to section
7805(f) of the Internal Revenue Code, this notice of proposed
rulemaking will be submitted to the Chief Counsel for Advocacy of
the Small Business Administration for comment on its impact on
small businesses.
Comments and Public Hearing
Before these proposed regulations are adopted as final
regulations, consideration will be given to any written comments
(a signed original and eight (8) copies) that are submitted
timely to the IRS. All comments will be available for public
inspection and copying.
A public hearing has been scheduled for September 25, 1996
at 10 a.m. in the Commissioner's Conference Room, 1111
Constitution Avenue NW., Washington, DC. Because of access
restrictions, visitors will not be admitted beyond the Internal
Revenue Building lobby more than 15 minutes before the hearing
starts.
The rules of 26 CFR 601.601(a)(3) apply to the hearing.
Persons that wish to present oral comments at the hearing
must submit written comments and submit an outline of the topics
to be discussed and the time to be devoted to each topic by
September 3, 1996. A period of 10 minutes will be allotted to
each person for making comments.
An agenda showing the scheduling of the speakers will be
prepared after the deadline for receiving outlines has passed.
Copies of the agenda will be available free of charge at the
hearing.
Drafting Information
The principal author of these proposed regulations is Forest
Boone of the Office of Assistant Chief Counsel (Income Tax and
Accounting). However, other personnel from the IRS and Treasury
Department participated in their development.
List of Subjects in 26 CFR part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as
follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended
by adding entries in numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.467-1 is also issued under 26 U.S.C. 467.
Section 1.467-2 is also issued under 26 U.S.C. 467.
Section 1.467-3 is also issued under 26 U.S.C. 467.
Section 1.467-4 is also issued under 26 U.S.C. 467.
Section 1.467-5 is also issued under 26 U.S.C. 467.
Section 1.467-6 is also issued under 26 U.S.C. 467.
Section 1.467-7 is also issued under 26 U.S.C. 467.
Section 1.467-8 is also issued under 26 U.S.C. 467.
* * *
Par. 2. In 1.61-8, the first sentence of paragraph (b) is
revised to read as follows:
1.61-8 Rents and royalties.
* * * * *
(b) * * * Except as provided in section 467 and the
regulations thereunder, gross income includes advance rentals,
which must be included in income for the year of receipt
regardless of the
period covered or the method of accounting employed by the
taxpayer. * * *
* * * * *
Par. 3. In 1.451-1, paragraph (g) is added to read as
follows:
1.451-1 General rule for taxable year of inclusion.
* * * * *
(g) Timing of income from section 467 rental agreements.
For the timing of income with respect to section 467 rental
agreements, see section 467 and the regulations thereunder.
Par. 4. Section 1.461-1 is amended by:
1. Adding a sentence at the end of paragraph (a)(1).
2. Adding paragraph (a)(2)(iii)(E).
The additions read as follows:
1.461-1. General rule for taxable year of deduction.
(a) * * * (1) * * * See section 467 and the regulations
thereunder for rules under which a liability arising out of the
use of property pursuant to a section 467 rental agreement is
taken into account.
(2) * * *
(iii) * * *
(E) Except as otherwise provided by regulations or other
published guidance issued by the Commissioner, in the case of a
liability arising out of the use of property pursuant to a
section 467 rental agreement, the all events test (including
economic performance) is considered met in the taxable year in
which the liability is to be taken into account under section 467
and the regulations thereunder.
* * * * *
Par. 5. Section 1.461-4 is amended by:
1. Revising the heading of paragraph (d)(3)(ii).
2. Redesignating the text of paragraph (d)(3)(ii) following
the heading as paragraph (d)(3)(ii)(A) and adding a heading for
newly designated paragraph (d)(3)(ii)(A).
2. Adding paragraph (d)(3)(ii)(B).
3. Adding sentence at the end of the introductory text of
paragraph (d)(7).
The revisions and additions read as follows:
1.461-4 Economic performance.
* * * * *
(d) * * *
(3) * * *
(ii) Exceptions--(A) Volume, frequency of use, or income.
* * *
(B) Section 467 rental agreements. In the case of a
liability arising out of the use of property pursuant to a
section 467 rental agreement, economic performance occurs as
provided in 1.461-1(a)(2)(iii)(E).
* * * * *
(7) * * * Assume further that the examples do not involve
section 467 rental agreements and, therefore, section 467 is not
applicable.
* * * * *
Par. 6. Sections 1.467-0 through 1.467-8 are added to read
as follows:
1.467-0 Table of contents.
This section lists the major captions that appear in
1.467-1 through 1.467-8.
1.467-1 Treatment of lessors and lessees generally.
(a) Overview.
(1) In general.
(2) Cases in which rules are inapplicable.
(3) Limited effect for rental agreements with total rents
between $250,000 and $2,000,000.
(4) Summary of rules.
(i) Basic rules.
(ii) Special rules.
(b) Method of accounting for section 467 rental agreements.
(c) Section 467 rental agreements.
(1) In general.
(2) Increasing or decreasing rent.
(i) Fixed rent.
(A) In general.
(B) Certain rent holidays disregarded.
(ii) Fixed rent allocated to a rental period.
(A) Specific allocation.
(1) In general.
(2) Rental agreements specifically allocating fixed rent.
(B) No specific allocation.
(iii) Contingent rent.
(A) In general.
(B) Certain contingent rent disregarded.
(3) Deferred or prepaid rent.
(i) Deferred rent.
(ii) Prepaid rent.
(iii) Rent allocated to a calendar year.
(iv) Examples.
(4) Rental agreements involving total payments of $250,000 or
less.
(i) In general.
(ii) Special rules in computing amount described in paragraph
(c)(4)(i).
(d) Section 467 rent.
(1) In general.
(2) Fixed rent for a rental period.
(i) Constant rental accrual.
(ii) Proportional rental accrual.
(iii) Section 467 rental agreement accrual.
(e) Section 467 interest.
(1) In general.
(2) Interest on fixed rent for a rental period.
(i) In general.
(ii) Section 467 rental agreements with adequate interest.
(3) Treatment of interest.
(f) Modification of a rental agreement.
(g) Treatment of amounts payable by lessor to lessee.
(1) Interest.
(2) Other amounts. [Reserved]
(h) Meaning of terms.
(i) [Reserved]
(j) Computational rules.
(1) Counting conventions.
(2) Conventions regarding timing of rent and payments.
(i) In general.
(ii) Time amount is payable.
(3) Annualized fixed rent.
(4) Allocation of fixed rent within a period.
(5) Rental period length.
1.467-2 Rent accrual for section 467 rental agreements without
adequate interest.
(a) Section 467 rental agreement for which proportional rental
accrual is required.
(b) Adequate interest on fixed rent.
(1) In general.
(2) Section 467 rental agreements that provide for a variable
rate of interest.
(c) Computation of proportional rental amount.
(1) In general.
(2) Section 467 rental agreements that provide for a variable
rate of interest.
(d) Present value.
(e) Applicable Federal rate.
(1) In general.
(2) Source of applicable Federal rates.
(3) 110 percent of applicable Federal rate.
(4) Term of the section 467 rental agreement.
(i) In general.
(ii) Section 467 rental agreements with variable interest.
(f) Examples.
1.467-3 Disqualified leasebacks and long-term agreements.
(a) General rule.
(b) Disqualified leaseback or long-term agreement.
(1) In general.
(2) Leaseback.
(3) Long-term agreement.
(i) In general.
(ii) Statutory recovery period.
(A) In general.
(B) Special rule for leases of properties having different
statutory recovery periods.
(c) Tax avoidance as principal purpose for increasing or
decreasing rent.
(1) In general.
(2) Safe harbors.
(d) Calculating constant rental amount.
(1) In general.
(2) Initial or final short periods.
(3) Method to determine constant rental amount; no short
periods.
(i) Step 1.
(ii) Step 2.
(iii) Step 3.
(e) Example.
1.467-4 Section 467 loan.
(a) In general.
(1) Overview.
(2) No section 467 loan in the case of certain section 467
rental agreements.
(3) Rental agreements subject to constant rental accrual.
(4) Special rule in applying the provisions of 1.467-7(e) or
1.467-7(f).
(b) Principal balance.
(1) In general.
(2) Section 467 rental agreements that provide for prepaid fixed
rent and adequate stated interest.
(3) Timing of payments.
(c) Yield.
(1) In general.
(i) Method of determining yield.
(ii) Method of stating yield.
(iii) Rounding adjustments.
(2) Yield of section 467 rental agreements for which constant
rental amount or proportional rental amount is computed.
(3) Determination of present values.
(d) Contingent payments.
(e) Section 467 rental agreements that call for payments before
or after the lease term.
(f) Examples.
1.467-5 Section 467 rental agreements with variable interest.
(a) Variable interest on deferred or prepaid rent.
(1) In general.
(2) Exceptions.
(b) Variable rate treated as fixed.
(1) In general.
(2) Variable interest adjustment amount.
(i) In general.
(ii) Sign of adjustment.
(3) Section 467 loan balance.
(c) Examples.
1.467-6 Section 467 rental agreements with contingent payments.
[Reserved]
1.467-7 Section 467 recapture and other rules relating to
dispositions.
(a) Section 467 recapture.
(b) Recapture amount.
(1) In general.
(2) Prior understated inclusions.
(i) In general.
(ii) Partial rental periods.
(3) Section 467 gain.
(i) In general.
(ii) Certain dispositions.
(c) Special rules.
(1) Gifts.
(2) Dispositions at death.
(3) Certain tax-free exchanges.
(i) In general.
(ii) Dispositions covered.
(4) Dispositions by transferee.
(5) Like-kind exchanges and involuntary conversions.
(6) Installment sales.
(7) Dispositions covered by sections 170(e), 341(e)(12), or
751(c).
(d) Examples.
(e) Other rules relating to dispositions.
(1) In general.
(2) Treatment of section 467 loan.
(3) Special rules for transfers in certain nonrecognition
transactions. [Reserved]
(f) Treatment of assignments by lessee and lessee-financed
renewals.
(1) Substitute lessee use.
(2) Lessor use.
(3) Special rules for transfers in certain nonrecognition
transactions. [Reserved]
1.467-8 Effective date.
1.467-1 Treatment of lessors and lessees generally.
(a) Overview--(1) In general. When applicable, section
467 requires a lessor and lessee of tangible property to treat
rents consistently and to use the accrual method of accounting
regardless of their overall method of accounting. In addition,
in certain cases involving tax avoidance, the lessor and lessee
must take rent and stated or imputed interest into account under
a constant rental method, pursuant to which time value of money
principles are applied to treat the rent as having accrued
ratably over the entire lease term.
(2) Cases in which rules are inapplicable. Section 467
applies only to leases (or other similar arrangements) that
constitute section 467 rental agreements as defined in paragraph
(c) of this section. For example, a rental agreement is not a
section 467 rental agreement, and, therefore, is not subject to
the provisions of this section and 1.467-2 through 1.467-8 (the
section 467 regulations), if it specifies equal amounts of rent
for each month (or other similar period) throughout the lease
term and all payments of rent are due in the year to which the
rent relates (or in the preceding or succeeding year). In
addition, the section 467 regulations do not apply to a rental
agreement that requires total rents of $250,000 or less
determined, for this purpose, by disregarding any adjustments
based on a reasonable price index and the amount of any rent
resulting from the lessee's obligation to pay certain third-party
expenses of the lessor.
(3) Limited effect for rental agreements with total rents
between $250,000 and $2,000,000. A rental agreement is a section
467 rental agreement, and, therefore, the section 467 regulations
generally apply, if the agreement requires total rents of more
than $250,000 and does not specify equal amounts of rent for each
month (or other similar period) throughout the lease term. If,
however, the rental agreement requires total rents of $2,000,000
or less (determined by disregarding adjustments and excluding the
same types of rent that are disregarded or excluded for purposes
of the $250,000 threshold requirement) and all payments of rent
are due in the year to which the rent relates (or in the
preceding or succeeding year), the only effect of the section 467
regulations is to require the lessor and lessee to take rent into
account in the year to which the rent relates.
(4) Summary of rules--(i) Basic rules. Paragraph (c) of
this section provides rules for determining whether a rental
agreement is a section 467 rental agreement. Paragraphs (d) and
(e) of this section provide rules for determining the amount of
rent and interest, respectively, required to be taken into
account by a lessor and lessee under a section 467 rental
agreement. Paragraphs (f) through (h) and (j) of this section
provide various definitions and special rules relating to the
application of the section 467 regulations.
(ii) Special rules. Section 1.467-2 provides rules for
section 467 rental agreements that have deferred or prepaid rents
without providing for adequate interest. Section 1.467-3
provides rules for application of the constant rental accrual
requirement, including criteria for determining whether an
agreement is subject to this requirement. Section 1.467-4
provides rules for establishing and adjusting a section 467 loan,
, the amount that a lessor is deemed to have loaned to the
lessee, or vice versa, pursuant to the application of the section
467 regulations. Sections 1.467-5 and 1.467-6 provide rules for
applying the section 467 regulations where a rental agreement
requires variable interest or certain contingent payments.
Section 1.467-7 provides rules for the treatment of dispositions
by a lessor of property subject to a section 467 rental agreement
and the treatment of assignments by lessees and certain lessee-
financed renewals of a section 467 rental agreement. Finally,
1.467-8 provides the effective date rules for the section 467
regulations.
(b) Method of accounting for section 467 rental agreements.
If a rental agreement is a section 467 rental agreement, as
described in paragraph (c) of this section, the lessor and lessee
must each take into account for any taxable year--
(1) The section 467 rent for the taxable year (as defined
in paragraph (d) of this section); and
(2) The section 467 interest for the taxable year (as
defined in paragraph (e) of this section).
(c) Section 467 rental agreements--(1) In general. Except
as otherwise provided in paragraph (c)(4) of this section, the
term section 467 rental agreement means a rental agreement, as
defined in paragraph (h) of this section, that has increasing or
decreasing rents (as described in paragraph (c)(2) of this
section), or prepaid or deferred rents (as described in paragraph
(c)(3) of this section).
(2) Increasing or decreasing rent--(i) Fixed rent--(A) In
general. A rental agreement has increasing or decreasing rent if
the annualized fixed rent, as described in paragraph (j)(3) of
this section, allocated to any rental period exceeds the
annualized fixed rent allocated to any other rental period in the
lease term.
(B) Certain rent holidays disregarded. Notwithstanding the
provisions of paragraph (c)(2)(i)(A) of this section, a rental
agreement does not have increasing or decreasing rent if the
increasing or decreasing rent is solely attributable to a rent
holiday provision allowing reduced rent (including no rent) for a
period at the beginning of the lease term, but only if the
duration of the rent holiday does not exceed three months.
(ii) Fixed rent allocated to a rental period--(A) Specific
allocation--(1) In general. If a rental agreement provides a
specific allocation of fixed rent, as described in paragraph
(c)(2)(ii)(A)(2) of this section, the amount of fixed rent
allocated to each rental period during the lease term is the
amount of fixed rent allocated to that period by the rental
agreement.
(2) Rental agreements specifically allocating fixed rent.
A rental agreement specifically allocates fixed rent if the
rental agreement unambiguously specifies, for periods no longer
than a year, a fixed amount of rent for which the lessee becomes
liable on account of the use of the property during that period,
and the total amount of fixed rent specified is equal to the
total amount of fixed rent payable under the lease. For example,
a rental agreement providing that rent is $100,000 per calendar
year, and that provides for total payments of fixed rent equal to
the total amount specified, specifically allocates rent.
Similarly, a rental agreement that states the amount of rent
accruing each month or the amount of rent allocated to each year
contains a specific allocation if the total payments of fixed
rent equal the total amount specified. A rental agreement
stating only when rent is payable does not specifically allocate
rent.
(B) No specific allocation. If a rental agreement does not
provide a specific allocation of fixed rent (for example, because
the total amount of fixed rent specified is not equal to the
total amount of fixed rent payable under the lease), the amount
of fixed rent allocated to a rental period is the amount of fixed
rent payable during that rental period. If an amount of fixed
rent is payable before the beginning of the lease term, it is
allocated to the first rental period in the lease term. If an
amount of fixed rent is payable after the end of the lease term,
it is allocated to the last rental period in the lease term.
(iii) Contingent rent--(A) In general. A rental agreement
has increasing or decreasing rent if it requires (or may require)
the payment of contingent rent (as defined in paragraph (h) of
this section), other than contingent rent described in paragraph
(c)(2)(iii)(B) of this section.
(B) Certain contingent rent disregarded. Contingent rent
is disregarded for purposes of this paragraph (c)(2)(iii) to the
extent--
(1) The rent is contingent solely as the result of a
provision pursuant to which the rent is equal to a percentage of
the lessee's receipts (gross or net), but only if the percentage
does not vary throughout the term of the lease;
(2) The rent is contingent solely as the result of an
adjustment based on a reasonable price index, as defined in
paragraph (h) of this section; or
(3) The rent is contingent solely as the result of a
provision requiring the lessee to pay third-party costs, as
defined in paragraph (h) of this section.
(3) Deferred or prepaid rent--(i) Deferred rent. A rental
agreement has deferred rent under this paragraph (c)(3) if the
amount of rent allocated to a calendar year (determined under
paragraph (c)(3)(iii) of this section), when added to the rent
allocated to all preceding calendar years, exceeds the cumulative
amount of rent payable as of the close of the succeeding calendar
year.
(ii) Prepaid rent. A rental agreement has prepaid rent
under this paragraph (c)(3) if the amount of rent allocated to a
calendar year (determined under paragraph (c)(3)(iii) of this
section), when added to the rent allocated to all preceding
calendar years, is less than the cumulative amount of rent
payable before the beginning of the preceding calendar year.
(iii) Rent allocated to a calendar year. For purposes of
this paragraph (c)(3), the rent allocated to a calendar year is
the sum of--
(A) The fixed rent allocated to any rental period
(determined under paragraph (c)(2)(ii) of this section) that
begins and ends in the calendar year;
(B) A ratable portion of the fixed rent allocated to any
other rental period that begins or ends in the calendar year; and
(C) Any contingent rent that accrues during the calendar
year as provided in 1.467-6.
(iv) Examples. The following examples illustrate the
application of this paragraph (c)(3):
Example 1. (i) A and B enter into a rental agreement that
provides for the lease of property to begin on January 1, 1997,
and end on December 31, 2000. The rental agreement provides that
rent of $100,000 accrues during each year of the lease term.
Under the rental agreement, no rent is payable during calendar
year 1997, a payment of $100,000 is to be made on December 31,
1998, and December 31, 1999, and a payment of $200,000 is to be
made on December 31, 2000. A and B both select the calendar year
as their rental period. Thus, under paragraph (c)(3)(iii) of
this section, the amount of rent allocated to each rental period
under paragraph (c)(2)(ii) of this section is $100,000.
Therefore, the rental agreement does not have increasing or
decreasing rent as described in paragraph (c)(2)(i) of this
section.
(ii) Under paragraph (c)(3)(i) of this section, a rental
agreement has deferred rent if, at the close of a calendar year,
the cumulative amount of rent allocated under paragraph
(c)(3)(iii) of this section exceeds the cumulative amount of rent
payable as of the close of the succeeding year. In this example,
there is no deferred rent: the rent allocated to 1997 ($100,000)
does not exceed the cumulative rent payable as of December 31,
1998 ($100,000); the rent allocated to 1998 and preceding years
($200,000) does not exceed the cumulative rent payable as of
December 31, 1999 ($200,000); the rent allocated to 1999 and
preceding years ($300,000) does not exceed the cumulative rent
payable as of December 31, 2000 ($400,000); and the rent
allocated to 2000 and preceding years ($400,000) does not exceed
the cumulative rent payable as of December 31, 2001 ($400,000).
Therefore, because the rental agreement does not have increasing
or decreasing rent and does not have prepaid or deferred rent,
the rental agreement is not a section 467 rental agreement.
Example 2. (i) A and B enter into a rental agreement that
provides for the lease of personal property for ten years,
beginning on January 1, 1997, and ending on December 31, 2006.
The rental agreement provides for accruals of rent of $10,000
during each month of the lease term. Under paragraph (c)(3)(iii)
of this section, $120,000 is allocated to each calendar year.
The rental agreement provides for a $1,200,000 payment on
December 31, 1997.
(ii) The rental agreement does not have increasing or
decreasing rent as described in paragraph (c)(2)(i) of this
section. The rental agreement provides prepaid rent under
paragraph (c)(3)(ii) of this section because an amount of rent
allocated to a calendar year, when added to the rent allocated to
all preceding calendar years, is less than the cumulative amount
of rent payable before the beginning of the preceding calendar
year. For example, the rent allocated to 1999 and preceding
calendar years ($360,000) is less than the cumulative amount of
rent payable before the beginning of the preceding calendar year
($1,200,000 is payable on December 31, 1997). Accordingly, the
rental agreement is a section 467 rental agreement.
(4) Rental agreements involving total payments of $250,000
or less--(i) In general. A rental agreement is not a section
467 rental agreement if, taking into account any payments of
contingent rent, and any other contingent consideration, the sum
of the aggregate amount of rental payments under the rental
agreement and the aggregate value of other consideration to be
received for the use of property is not reasonably expected, as
of the agreement date (as defined in paragraph (h) of this
section), to exceed $250,000.
(ii) Special rules in computing amount described in
paragraph (c)(4)(i). The following rules apply in determining
the amount described in paragraph (c)(4)(i) of this section--
(A) Stated interest on deferred rent is not taken into
account. However, the Commissioner may recharacterize a portion
of stated interest as additional rent if a rental agreement
provides for interest on deferred rent at a rate that, in light
of all of the facts and circumstances, is clearly greater than
the arm's-length rate of interest that would have been charged in
a lending transaction between the lessor and lessee.
(B) Consideration that does not involve a cash payment is
taken into account at its fair market value. A liability that is
either assumed or secured by property acquired subject to the
liability is taken into account at its remaining principal amount
or, in the case of an obligation originally issued at a discount,
at its adjusted issue price.
(C) All leases that are part of the same transaction or a
series of related transactions are treated as a single lease.
Whether two or more leases are part of the same transaction or a
series of related transactions depends on all the facts and
circumstances.
(D) Any increase or decrease in rent payable solely as a
result of an adjustment based on a reasonable price index is not
taken into account.
(E) Contingent rent described in paragraph
(c)(2)(iii)(B)(3) of this section is not taken into account.
(d) Section 467 rent--(1) In general. The section 467
rent for a taxable year is the sum of--
(i) The fixed rent for any rental period (determined under
paragraph (d)(2) of this section) that begins and ends in the
taxable year;
(ii) A ratable portion of the fixed rent for any other
rental period beginning or ending in the taxable year; and
(iii) In the case of a section 467 rental agreement that
provides for contingent rent, the contingent rent that accrues
during the taxable year as provided in 1.467-6.
(2) Fixed rent for a rental period--(i) Constant rental
accrual. In the case of a section 467 rental agreement that is a
disqualified leaseback or long-term agreement (as described in
1.467-3(b)), the fixed rent for a rental period is the constant
rental amount (as determined under 1.467-3(d)).
(ii) Proportional rental accrual. In the case of a section
467 rental agreement that is not described in paragraph (d)(2)(i)
of this section, and does not provide adequate interest on fixed
rent (as determined under 1.467-2(b)), the fixed rent for a
rental period is the proportional rental amount (as determined
under 1.467-2(c)).
(iii) Section 467 rental agreement accrual. In the case of
a section 467 rental agreement that is not described in paragraph
(d)(2)(i) or (ii) of this section, the fixed rent for a rental
period is the amount of fixed rent allocated to the rental period
under the rental agreement, as determined under paragraph
(c)(2)(ii) of this section.
(e) Section 467 interest--(1) In general. The section 467
interest for a taxable year is the sum of--
(i) The interest on fixed rent for any rental period that
begins and ends in the taxable year;
(ii) A ratable portion of the interest on fixed rent for
any other rental period beginning or ending in the taxable year;
and
(iii) In the case of a section 467 rental agreement that
provides for contingent rent, any interest that accrues on the
contingent rent during the taxable year as provided in 1.467-6.
(2) Interest on fixed rent for a rental period--(i) In
general. Except as provided in paragraph (e)(2)(ii) of this
section and 1.467-5(b)(1)(ii), the interest on fixed rent for a
rental period is equal to the product of--
(A) The principal balance of the section 467 loan (as
described in 1.467-4(b)) at the beginning of the rental period;
and
(B) The yield of the section 467 loan (as described in
1.467-4(c)).
(ii) Section 467 rental agreements with adequate interest.
Except in the case of a section 467 rental agreement that is a
disqualified leaseback or long-term agreement, if a section 467
rental agreement provides adequate interest under 1.467-
2(b)(1)(i) (agreements with no deferred or prepaid rent) or
1.467-2(b)(1)(ii) (agreements with adequate stated interest at a
single fixed rate), the interest on fixed rent for a rental
period is the amount of interest provided in the rental agreement
for the period.
(3) Treatment of interest. If the section 467 interest for
a rental period is a positive amount, the lessor has interest
income and the lessee has an interest expense. If the section
467 interest for a rental period is a negative amount, the lessee
has interest income and the lessor has an interest expense.
(f) Modification of a rental agreement. If, after the
lease date, the lessor and lessee agree to a substantial
modification of the terms of a lease, the modified lease is
treated, except as provided in this paragraph (f), as a new
rental agreement for purposes of this section and 1.467-2
through 1.467-8. If a principal purpose of such a modification
is to avoid the purpose or intent of section 467, the
Commissioner may treat the original and modified lease as a
single rental agreement for purposes of this section and 1.467-
2 through 1.467-8.
(g) Treatment of amounts payable by lessor to lessee--(1)
Interest. For purposes of determining present value, any amounts
payable by the lessor to the lessee as interest on prepaid rent
are treated as negative amounts.
(2) Other amounts. [Reserved]
(h) Meaning of terms. The following meanings apply for
purposes of this section and 1.467-2 through 1.467-8--
(1) Agreement date means the earlier of the lease date or
the first date on which there is a binding written contract that
substantially sets forth the terms under which the property will
be leased.
(2) Contingent rent means any rent that is not fixed rent,
including any amount reflecting an adjustment based on a
reasonable price index.
(3) Fixed rent means any rent to the extent its amount and
the time at which it will be paid are fixed and determinable
under the terms of the section 467 rental agreement as of the
lease date, as defined in paragraph (h)(4) of this section. For
this purpose, the possibility of a breach or other early
termination of the rental agreement and any provision that makes
adjustments based on a reasonable price index are disregarded in
determining whether amounts specified in the agreement are fixed
rent.
(4) Lease date means the date on which the lessee first has
the right to use property that is the subject of the section 467
rental agreement.
(5) Lease term means the period during which the lessee has
the use of property subject to the section 467 rental agreement.
An option period is included in the lease term only if it is
expected, as of the agreement date, that the option will be
exercised by either the lessor or the lessee. For this purpose,
a lessor is generally expected to exercise an option if, for
example, as of the agreement date, the rent in effect for the
option period exceeds the expected market rental for the property
during such period. Similarly, a lessee is generally expected to
exercise an option if, for example, as of the agreement date, the
rent for the option period is less than the expected market
rental for such period. The lessor's or lessee's determination
that an option period is either included in or excluded from the
lease term is not binding on the Commissioner. If the lessee (or
a related person) agrees that one or both of them will or could
be obligated to make payments in the nature of rent (within the
meaning of 1.168(i)-2(b)(2)) for a period when another lessee
(the substitute lessee) or the lessor will have use of the
property subject to the rental agreement, the Commissioner may,
in appropriate cases, treat the period when the substitute lessee
or lessor will have use of the property as part of the lease
term. See paragraph 1.467-7(f) for special rules applicable to
the lessee, substitute lessee, and lessor.
(6) An adjustment is based on a reasonable price index if
the adjustment reflects inflation or deflation occurring over a
period during the lease term and is determined consistently under
any generally recognized index for measuring inflation or
deflation.
(7) Except as otherwise provided in this paragraph (h)(7),
two persons are related persons if they either have a
relationship to each other that is specified in section 267(b) or
section 707(b)(1) or are related entities within the meaning of
sections 168(h)(4)(A), (B), or (C). For purposes of determining
whether a section 467 rental agreement is a leaseback within the
meaning of 1.467-3(b)(2), two persons are related persons if
they are related persons within the meaning of section
465(b)(3)(C).
(8) Rental agreement includes any agreement, whether
written or oral, that provides for the use of tangible property
and is treated as a lease for Federal income tax purposes.
(9) Third-party costs include any real estate taxes,
insurance premiums, maintenance costs, or any other cost (other
than a debt service cost) that relates to the leased property and
is not within the control of the lessor or lessee or any related
person.
(i) [Reserved].
(j) Computational rules. For purposes of this section and
1.467-2 through 1.467-8, the following rules apply--
(1) Counting conventions. Any reasonable counting
convention may be used (e.g., 30 days per month/360 days per
year) to determine the length of a rental period or to perform
any computation. Rental periods of the same descriptive length,
for example annual, semiannual, quarterly, or monthly, may be
treated as being of equal length.
(2) Conventions regarding timing of rent and payments--(i)
In general. For purposes of determining present values and
yield--
(A) Except as otherwise provided in this section and
1.467-2 through 1.467-7, the rent allocated to a rental period
is taken into account on the last day of the rental period;
(B) Any amount payable during the first half of the first
rental period is treated as payable on the first day of that
rental period;
(C) Any amount payable during the first half of any other
rental period is treated as payable on the last day of the
preceding rental period; and
(D) Any amount payable during the second half of a rental
period is treated as payable on the last day of the rental
period.
(ii) Time amount is payable. For purposes of this
paragraph (j)(2), an amount is payable on the last day for timely
payment (that is, the last day such amount may be paid without
incurring interest, computed at an arm's-length rate, or a
substantial penalty charge) and an amount payable at the midpoint
of a rental period is treated as payable during the first half of
the rental period.
(3) Annualized fixed rent. Annualized fixed rent is
determined by multiplying the fixed rent allocated to the rental
period under paragraph (c)(2)(ii) of this section by a number
that represents the ratio of one year to the length of the rental
period. Thus, if the fixed rent allocated to a rental period is
$100,000 and the rental period is one month, the annualized fixed
rent allocated to the rental period is $1,200,000.
(4) Allocation of fixed rent within a period. A rental
agreement that allocates fixed rent to any period is treated as
allocating fixed rent ratably within that period. Thus, if a
rental agreement provides that $120,000 is allocated to each
calendar year in the lease term, $10,000 of rent is allocated to
each calendar month.
(5) Rental period length. Except as provided in 1.467-
3(d)(1) (relating to agreements for which constant rental accrual
is required), rental periods may be of any length and may vary in
length as long as--
(i) The rental periods are one year or less, cover the
entire lease term, and do not overlap;
(ii) Each scheduled payment under the rental agreement
(other than a payment scheduled to occur before or after the
lease term) occurs within 30 days of the beginning or end of a
rental period; and
(iii) In the case of a rental agreement that does not
provide a specific allocation of fixed rent, the rental periods
selected do not cause the agreement to be treated as a section
467 rental agreement unless all alternative rental period
schedules would result in such treatment.
1.467-2 Rent accrual for section 467 rental agreements without
adequate interest.
(a) Section 467 rental agreement for which proportional
rental accrual is required. Under 1.467-1(d)(2)(ii), the fixed
rent for each rental period is the proportional rental amount,
defined under paragraph (c) of this section, if--
(1) The section 467 rental agreement is not a disqualified
leaseback or long-term agreement under 1.467-3(b); and
(2) The section 467 rental agreement does not provide
adequate interest on fixed rent under paragraph (b) of this
section.
(b) Adequate interest on fixed rent--(1) In general. A
section 467 rental agreement provides adequate interest on fixed
rent if, disregarding any contingent rent--
(i) The rental agreement has no prepaid or deferred rent as
described in 1.467-1(c)(3);
(ii) The rental agreement has prepaid or deferred rent,
and--
(A) The rental agreement provides interest (the stated rate
of interest) on deferred or prepaid fixed rent at a single fixed
rate (as defined in 1.1273-1(c)(1)(iii));
(B) The stated rate of interest on fixed rent is no lower
than 110 percent of the applicable Federal rate (as defined in
paragraph (e)(3) of this section);
(C) The amount of deferred or prepaid fixed rent on which
interest is charged is adjusted at least annually to reflect the
amount of deferred or prepaid fixed rent as of a date no earlier
than the date of the preceding adjustment and no later than the
date of the succeeding adjustment; and
(D) The rental agreement requires interest to be paid or
compounded at least annually;
(iii) The rental agreement provides for deferred rent but
no prepaid rent, and the sum of the present values of all amounts
payable by the lessee as fixed rent (and interest, if any,
thereon) is equal to or greater than the sum of the present
values of the fixed rent allocated to each rental period; or
(iv) The rental agreement provides for prepaid rent but no
deferred rent, and the sum of the present values of all amounts
payable by the lessee as fixed rent, plus the sum of the negative
present values of all amounts payable by the lessor as interest,
if any, on prepaid fixed rent, is equal to or less than the sum
of the present values of the fixed rent allocated to each rental
period.
(2) Section 467 rental agreements that provide for a
variable rate of interest. For purposes of the adequate interest
test under paragraph (b)(1) of this section, if a section 467
rental agreement provides for variable interest, the rental
agreement is treated as providing for fixed rates of interest on
deferred or prepaid fixed rent equal to the fixed rate
substitutes (determined in the same manner as under 1.1275-5(e)
treating the agreement date as the issue date) for the variable
rates called for by the rental agreement. For purposes of this
section, a rental agreement provides for variable interest if the
rental agreement provides for stated interest that is paid or
compounded at least annually at a rate or rates that meet the
requirements of 1.1275-5(a)(3)(i)(A) or (B) and 1.1275-5(a)(4).
(c) Computation of proportional rental amount--(1) In
general. The proportional rental amount for a rental period is
the amount of fixed rent allocated to the rental period under
1.467-1(c)(2)(ii), multiplied by a fraction. The numerator of
the fraction is the sum of the present values of the amounts
payable under the terms of the section 467 rental agreement as
fixed rent and interest thereon. The denominator of the fraction
is the sum of the present values of the fixed rent allocated to
each rental period under the rental agreement.
(2) Section 467 rental agreements that provide for a
variable rate of interest. To calculate the proportional rental
amount for a section 467 rental agreement that provides for a
variable rate of interest, see 1.467-5.
(d) Present value. For purposes of determining adequate
interest under paragraph (b) of this section or the proportional
rental amount under paragraph (c) of this section, present values
are determined as of the first day a fixed rent payment is called
for by the section 467 rental agreement if the rental agreement
calls for payments of fixed rent prior to the lease term.
Otherwise, present values are determined as of the first day of
the first rental period in the lease term. The present value of
any amount is determined using a discount rate equal to 110
percent of the applicable Federal rate. For purposes of the
present value determination under paragraph (b)(1)(iv) of this
section, the fixed rent allocated to a rental period must be
discounted from the first day of the rental period. For other
conventions and rules relating to the determination of present
value, see 1.467-1(g) and (j).
(e) Applicable Federal rate--(1) In general. The
applicable Federal rate for a section 467 rental agreement is the
applicable Federal rate in effect on the agreement date. Except
as otherwise provided in this section, the applicable Federal
rate for a rental agreement means--
(i) The Federal short-term rate if the term of the rental
agreement is not over 3 years;
(ii) The Federal mid-term rate if the term of the rental
agreement is over 3 years but not over 9 years; and
(iii) The Federal long-term rate if the term of the rental
agreement is over 9 years.
(2) Source of applicable Federal rates. The Internal
Revenue Service publishes the applicable Federal rates, based on
annual, semiannual, quarterly, and monthly compounding, each
month in the Internal Revenue Bulletin (see 601.601(d) of this
chapter. However, the applicable Federal rates may be based on
any compounding assumption. To convert a rate based on one
compounding assumption to an equivalent rate based on a different
compounding assumption, see 1.1272-1(j), Example 1.
(3) 110 percent of applicable Federal rate. For purposes
of 1.467-1, this section and 1.467-3 through 1.467-8, 110
percent of the applicable Federal rate means 110 percent of the
applicable Federal rate based on semiannual compounding, or any
rate based on a different compounding assumption that is
equivalent to 110 percent of the applicable Federal rate based on
semiannual compounding.
(4) Term of the section 467 rental agreement--(i) In
general. For purposes of determining 110 percent of the
applicable Federal rate under this paragraph (e), the term of the
section 467 rental agreement includes the lease term, any period
before the lease term beginning with the first day an amount of
fixed rent is payable under the terms of the rental agreement,
and any period after the lease term ending with the last day an
amount of fixed rent or interest thereon is payable under the
rental agreement.
(ii) Section 467 rental agreements with variable interest.
If a section 467 rental agreement provides variable interest on
prepaid or deferred fixed rent, the term of the rental agreement
for purposes of calculating 110 percent of the applicable Federal
rate is determined in accordance with paragraph (e)(4)(i) of this
section by substituting for the term of the rental agreement, the
longest period between interest rate adjustment dates, or, if the
rental agreement provides an initial fixed rate of interest on
prepaid or deferred fixed rent, the period between the agreement
date and the last day the fixed rate applies, if this period is
longer. If, as described in 1.1274-4(c)(2)(ii), the rental
agreement provides for a qualified floating rate (as defined in
1.1275-5(b)) that in substance resembles a fixed rate, 110
percent of the applicable Federal rate is determined by reference
to the lease term.
(f) Examples. The following examples illustrate the
application of this section. In each of these examples it is
assumed that constant rental accrual does not apply:
Example 1. (i) C agrees to lease property from D for five
years beginning on January 1, 1998, and ending on December 31,
2002. The section 467 rental agreement provides that rent of
$100,000 accrues in each calendar year in the lease term and that
rent of $500,000 plus $120,000 of interest is payable on December
31, 2002. Assume that the parties select the calendar year as
the rental period and that 110 percent of the applicable Federal
rate based on annual compounding is 10 percent.
(ii) The rental agreement has deferred rent under 1.467-
1(c)(3)(i) because the fixed rent allocated to calendar years
1998, 1999, and 2000 is not paid until 2002. In addition,
because the rental agreement does not state an interest rate, the
rental agreement does not satisfy the requirements of paragraph
(b)(1)(ii) of this section. Thus, the adequacy of interest must
be determined under paragraph (b)(1)(iii) of this section.
(iii)(A) Because the rental agreement has deferred fixed
rent and no prepaid rent, the agreement has adequate interest
only if the present value rules provided in paragraph (b)(1)(iii)
are met. The present value of all fixed rent and interest
payable under the rental agreement is $384,971.22, determined as
follows: $384,971.22 = $620,000/(1.10)5. The present value of
all fixed rent allocated under the rental agreement (discounting
the amount of fixed rent allocated to a rental period from the
last day of the rental period) is $379,078.68, determined as
follows:
$379,078.68 = $100,000 x 1-(1.10)-5
.10
(B) Accordingly, the sum of the present values of amounts
payable exceeds the sum of the present values of fixed rent
allocated. The rental agreement provides adequate interest on
fixed rent.
(iv) For an example illustrating the computation of the
yield on the rental agreement and the allocation of the interest
and rent provided for under the rental agreement, see 1.467-
4(f), Example 2.
Example 2. (i) E and F enter into a section 467 rental
agreement for the lease of equipment beginning on January 1,
1998, and ending on December 31, 2002. The rental agreement
provides that rent of $100,000 accrues for each calendar month
during the lease term. All rent is payable on December 31, 2002,
together with interest on accrued rent at a qualified floating
rate set at a current value (as defined in 1.1275-5(a)(4)) that
is compounded at the end of each calendar month and adjusted at
the beginning of each calendar month throughout the lease term.
Therefore, the rental agreement provides for variable interest
within the meaning of paragraph (b)(2) of this section.
(ii) On the agreement date the qualified floating rate is
7.5 percent, and 110 percent of the applicable Federal rate, as
defined in paragraph (e)(3) of this section, based on monthly
compounding, is 7 percent. Under paragraph (b)(2) of this
section, the fixed rate substitute for the qualified floating
rate is 7.5 percent and the agreement is treated as providing for
interest at this fixed rate for purposes of determining whether
adequate interest is provided under paragraph (b) of this
section. Accordingly, the requirements of paragraph (b)(1)(ii)
of this section are satisfied, and the rental agreement has
adequate interest.
Example 3. (i) X and Y enter into a section 467 rental
agreement for the lease of real property beginning on January 1,
1998, and ending on December 31, 2000. The rental agreement
provides that rent of $80,000 is allocable to 1998, $100,000 is
allocable to 1999, and $120,000 is allocable to 2000. Under the
rental agreement, Y must make a $300,000 payment on December 31,
2000. Assume that both X and Y choose the calendar year as the
rental period, X and Y are calendar year taxpayers, and 110
percent of the applicable Federal rate is 8.5 percent compounded
annually. Assume further that the rental agreement fails to
provide adequate interest under paragraph (b)(1) of this section.
Therefore, under 1.467-1(d)(2)(ii), the fixed rent for each
rental period is the proportional rental amount.
(ii)(A) The proportional rental amount is computed under
paragraph (c) of this section. Because the rental agreement does
not call for any fixed rent payments prior to the lease term,
under paragraph (d) of this section, present value is determined
as of the first day of the first rental period in the lease term.
The sum of the present values of the amounts payable by the
lessee under the rental agreement is computed as follows:
$234,872.43 = $300,000
(1 + .085)3
(B) The sum of the present values of the fixed rent
allocated to each rental period (discounting the fixed rent
allocated to a rental period from the last day of such rental
period) is computed as follows:
$252,627.22 = $80,000 + $100,000 + $120,000
(1 + .085) (1 + .085)2 (1 + .085)3
(C) Thus, the fraction for determining the proportional
rental amount is .9297194 ($234,872.43/$252,627.22). The section
467 fixed rents for the taxable years within the lease term are:
Taxable year Section 467 rent
1998 $ 74,377.55 ($ 80,000 x .9297194)
1999 92,971.94 ($100,000 x .9297194)
2000 111,566.33 ($120,000 x .9297194)
1.467-3 Disqualified leasebacks and long-term agreements.
(a) General rule. Under 1.467-1(d)(2)(i), constant rental
accrual (as described under paragraph (d) of this section) must
be used to determine the fixed rent for each rental period in the
lease term if the section 467 rental agreement is a disqualified
leaseback or long-term agreement within the meaning of paragraph
(b) of this section.
(b) Disqualified leaseback or long-term agreement--(1) In
general. A leaseback (as defined in paragraph (b)(2) of this
section) or a long-term agreement (as defined in paragraph (b)(3)
of this section) is disqualified only if--
(i) The amount determined with respect to the section 467
rental agreement under 1.467-1(c)(4) (relating to the exception
for rental agreements involving total payments of $250,000 or
less) exceeds $2,000,000;
(ii) A principal purpose for providing increasing or
decreasing rent is the avoidance of Federal income tax (as
described in paragraph (c) of this section); and
(iii) The Commissioner determines that it is appropriate to
treat the section 467 rental agreement as a disqualified
leaseback or long-term agreement.
(2) Leaseback. A section 467 rental agreement is a
leaseback if the lessee (or a related person) had any interest
(other than a de minimis interest) in the property at any time
during the two-year period ending on the agreement date. For
this purpose, interests in property include options and
agreements to purchase the property (whether or not the lessee or
related person was considered the owner of the property for
Federal income tax purposes) and, in the case of subleased
property, any interest as a sublessor.
(3) Long-term agreement--(i) In general. A section 467
rental agreement is a long-term agreement if the lease term
exceeds 75 percent of the statutory recovery period for the
property.
(ii) Statutory recovery period--(A) In general. The term
statutory recovery period means--
(1) In the case of property depreciable under section 168,
the applicable period determined under section 467(e)(3)(A);
(2) In the case of land, 19 years; and
(3) In the case of any other tangible property, the period
that would apply under section 467(e)(3)(A) if the property were
property to which section 168 applied.
(B) Special rule for leases of properties having different
statutory recovery periods. In the case of a lease of two or
more related properties that have different statutory recovery
periods, the statutory recovery period for purposes of paragraph
(b)(3)(ii)(A) of this section is the weighted average, based on
the fair market values of the properties on the lease date, of
the statutory recovery periods of each of the properties.
(c) Tax avoidance as principal purpose for increasing or
decreasing rent--(1) In general. Whether tax avoidance is a
principal purpose for providing increasing or decreasing rent in
a leaseback or long-term agreement is based on all of the facts
and circumstances. However, if either the lessee or the lessor
is not subject to Federal income tax on its income or is a tax-
exempt entity (within the meaning of section 168(h)(2)), the
agreement will be closely scrutinized and clear and convincing
evidence will be required to establish that tax avoidance is not
a principal purpose for providing increasing or decreasing rent.
(2) Safe harbors. Tax avoidance is not considered to be a
principal purpose for providing increasing or decreasing rent
if--
(i) The rent allocated to each calendar year (determined
without regard to any increase or decrease attributable to a
provision described in paragraph (c)(2)(ii)(C) of this section)
does not vary from the average rent allocated to all calendar
years by more than 10 percent (for this purpose, the rent
allocated to a partial calendar year is adjusted by multiplying
the rent by the number of partial years in a full calendar year);
or
(ii) All of the increases and decreases in rent are
attributable to one or more of the following provisions--
(A) A provision requiring an increase in rent equal to a
percentage of the lessee's receipts (gross or net) if the
percentage does not vary throughout the term of the lease;
(B) A provision requiring an adjustment based on a
reasonable price index as described in 1.467-1(h);
(C) A provision requiring the lessee to pay third-party
costs as described in 1.467-1(h); or
(D) A rent holiday provision allowing reduced rent
(including no rent) for an interim period at the beginning of the
lease term, but only if the duration of the rent holiday does not
exceed the lesser of 24 months or 10 percent of the lease term
and there is a substantial business purpose for the rent holiday
provision.
(d) Calculating constant rental amount--(1) In general.
Except as provided in paragraph (d)(2) of this section, the
constant rental amount is the amount that, if paid at the end of
each rental period, would result in a present value equal to the
present value of all amounts payable under the disqualified
leaseback or long-term agreement as rent and interest. In
computing the constant rental amount, the rules for determining
present value are the same as those provided in l.467-2(d) for
computing the proportional rental amount. If constant rental
accrual is required, all rental periods (other than an initial or
final short period of not more than one month) must be equal in
length and satisfy the requirements of 1.467-1(j)(5).
(2) Initial or final short periods. If a disqualified
leaseback or long-term agreement has an initial or final short
rental period, the constant rental amount for the initial or
final short period may be determined under any reasonable method.
However, the sum of the present values of all the constant rental
amounts must equal the present values of all amounts payable
under the disqualified leaseback or long-term agreement as rent
and interest. Any adjustment necessary to eliminate the section
467 loan balance because of the method used to determine the
constant rental amount for short periods must be taken into
account as section 467 rent for the final rental period.
(3) Method to determine constant rental amount; no short
periods--(i) Step 1. Determine the present value of amounts
payable under the disqualified leaseback or long-term agreement
as rent or interest.
(ii) Step 2. Determine the present value of $1 to be
received at the end of each rental period during the lease term
as of the first day of the first rental period during the lease
term (or, if earlier, the first day a rent payment is required
under the rental agreement).
(iii) Step 3. Divide the amount determined in paragraph
(d)(3)(i) of this section (Step 1) by the number of dollars
determined in paragraph (d)(3)(ii) of this section (Step 2).
(e) Example. The following example illustrates the
application of paragraph (d) of this section:
Example. (i) X and Y enter into a disqualified leaseback
for a 5-year lease of personal property beginning on January 1,
1998, and ending on December 31, 2002. The rental agreement
provides that $0 of rent is allocated to years 1998, 1999, and
2000, and that rent of $17,500,000 is allocated to years 2001 and
2002. The rental agreement provides that the rent allocated to
each year is payable on December 31 of that year. Assume all
rental periods are the calendar year. Assume also that 110
percent of the applicable Federal rate based on annual
compounding is 12 percent.
(ii) Step 1 in calculating the constant rental amount is to
determine the present value of the two payments due under the
rental agreement as follows:
$21,051,536 = $17,500,000 + $17,500,000
(1.12)4 (1.12)5
(iii) Because no amounts of rent are payable before the
lease term, Step 2 in calculating the constant rental amount is
to determine the present value as of the first day of the lease
term of $1 to be received at the end of each rental period during
the lease term. This results in a present value of $3.6047762.
In Step 3 the amount determined in Step 1 is divided by the
number of dollars determined in Step 2. Thus, the constant
rental amount is $5,839,901 for each calendar year during the
lease term computed as follows:
$5,839,901 = $21,051,536
3.6047762
1.467-4 Section 467 loan.
(a) In general--(1) Overview. Except as provided in
paragraph (a)(2) of this section, the section 467 loan rules of
this section apply to a section 467 rental agreement if, as of
the first day of that period, there is a difference between the
amount of fixed rent payable under the rental agreement on or
before the first day and the amount of fixed rent required to be
accrued in accordance with 1.467-1(d)(2) before the first day.
Paragraph (b) of this section provides rules for computing the
principal balance of a section 467 loan at the beginning of any
rental period. The principal balance of a section 467 loan may
be positive or negative. For purposes of the Code, if the
principal balance is positive, the amount represents a loan from
the lessor to the lessee and, if the principal balance is
negative, the amount represents a loan from the lessee to the
lessor.
(2) No section 467 loan in the case of certain section 467
rental agreements. Except as provided in paragraph (a)(3) and
(4) of this section, this section does not apply to section 467
rental agreements that provide adequate interest under 1.467-
2(b)(1)(i) (agreements with no deferred or prepaid rent) or
1.467-2(b)(1)(ii) (agreements with deferred or prepaid rent that
provide adequate stated interest at a single fixed rate).
(3) Rental agreements subject to constant rental accrual.
Notwithstanding the provisions of paragraph (a)(2) of this
section, this section applies to rental agreements subject to
constant rental accrual under 1.467-3.
(4) Special rule in applying the provisions of 1.467-7(e)
or (f). Notwithstanding the provisions of paragraph (a)(2) of
this section, this section applies to rental agreements that
provide adequate interest under 1.467-2(b)(1)(i) or (ii), but
only for purposes of applying the provisions of 1.467-7(e)
(relating to dispositions of property subject to a section 467
rental agreement) or 1.467-7(f) (relating to assignments by
lessees and lessee-financed renewals) to a transaction described
therein. Further, for section 467 rental agreements that provide
adequate interest under 1.467-2(b)(1)(i) or (ii), the section
467 interest that accrues on the section 467 loan balance after
the sale, exchange, or other disposition under 1.467-7(e) or the
assignment or renewal under 1.467-7(f) is the section 467
interest that accrues under the terms of the rental agreement (if
any).
(b) Principal balance--(1) In general. Except as provided
in paragraph (b)(2) of this section or in 1.467-7(e) or (f), the
principal balance of the section 467 loan at the beginning of a
rental period equals the fixed rent accrued in preceding rental
periods--
(i) Increased by the interest on fixed rent includible in
the gross income of the lessor for preceding rental periods and
any amount payable by the lessor on or before the first day of
the rental period as interest on prepaid fixed rent; and
(ii) Decreased by the interest on prepaid fixed rent
includible in the gross income of the lessee for preceding rental
periods and any amount payable by the lessee on or before the
first day of the rental period as fixed rent or interest thereon.
(2) Section 467 rental agreements that provide for prepaid
fixed rent and adequate stated interest. If a section 467 rental
agreement calls for prepaid fixed rent and provides adequate
interest under 1.467-2(b)(1)(iv), the principal balance of the
section 467 loan at the beginning of a rental period equals the
principal balance determined under paragraph (b)(1) of this
section, plus the fixed rent accrued for that rental period.
(3) Timing of payments. For purposes of this paragraph
(b), the day on which an amount is payable is determined under
the rules of 1.467-1(j)(2).
(c) Yield--(1) In general--(i) Method of determining
yield. Except as provided in paragraph (c)(2) of this section,
the yield of a section 467 loan is the discount rate at which the
sum of the present values of all amounts payable by the lessee as
fixed rent and interest on fixed rent, plus the sum of the
present values of all amounts payable by the lessor as interest
on prepaid fixed rent, equals the sum of the present values of
the fixed rent that accrues in accordance with 1.467-1(d)(2).
The yield must be constant over the term of the section 467
rental agreement, and, when expressed as a percentage, must be
calculated to at least two decimal places.
(ii) Method of stating yield. In determining the section
467 interest for a rental period, the yield of the section 467
loan must be stated appropriately by taking into account the
length of the rental period. Section 1.1272-1(j) Example 1
provides a formula for converting a yield based on a period of
one length to an equivalent yield based on a period of a
different length.
(iii) Rounding adjustments. Any adjustment necessary to
eliminate the section 467 loan because of rounding the yield to
two or more decimal places must be taken into account as section
467 interest for the final rental period determined as provided
in paragraph (e) of this section.
(2) Yield of section 467 rental agreements for which
constant rental amount or proportional rental amount is computed.
In the case of a section 467 rental agreement to which 1.467-
1(d)(2)(i) or (ii) applies, the yield of the section 467 loan
equals 110 percent of the applicable Federal rate (based on a
compounding period equal to the rental period).
(3) Determination of present values. The rules for
determining present value in computing the yield of a section 467
loan are the same as those provided in 1.467-2(d) for computing
the proportional rental amount.
(d) Contingent payments. Except as otherwise required
under 1.467-6, contingent payments are not taken into account in
calculating either the yield or the principal balance of a
section 467 loan.
(e) Section 467 rental agreements that call for payments
before or after the lease term. If a section 467 rental
agreement calls for the payment of fixed rent or interest thereon
before the beginning of the lease term, this section must be
applied by treating the period beginning on the first day an
amount is payable and ending on the day before the beginning of
the first rental period of the lease term as one or more rental
periods. If a rental agreement calls for the payment of fixed
rent or interest thereon after the end of the lease term, this
section must be applied by treating the period beginning on the
day after the end of the last rental period of the lease term and
ending on the last day an amount of fixed rent or interest
thereon is payable as one or more rental periods. Rental period
length for the period before the lease term or after the lease
term is determined in accordance with the rules of 1.467-
1(j)(5).
(f) Examples. The following examples illustrate the
application of this section:
Example 1. (i)(A) A leases property to B for a three-year
period beginning on January 1, 1998, and ending on December 31,
2000. The section 467 rental agreement has the following rent
allocation schedule and payment schedule:
Rent Allocation Payment
1998 $400,000
1999 600,000
2000 800,000 $1,800,000
(B) The rental agreement requires a $1.8 million payment to
be made on December 31, 2000, but does not provide for interest
on deferred rent. Assume A and B choose the calendar year as the
rental period length. Assume further that 110 percent of the
applicable Federal rate based on annual compounding is 10
percent.
(ii) The rental agreement is not a disqualified leaseback
or long-term agreement because it does not provide for the
payment of more than $2,000,000 in rent (determined pursuant to
1.467-3(b)(1)(i)). Because the section 467 rental agreement
does not provide adequate interest under 1.467-2(b) and is not
subject to constant rental accrual, the fixed rent that accrues
during each rental period is the proportional rental amount as
described in 1.467-2(c). The proportional rental amounts for
each rental period are as follows:
1998 $370,370.37
1999 555,555.56
2000 740,740.74
(iii) A section 467 loan arises at the beginning of the
second rental period because the rent payable on or before that
day (zero) is less than the fixed rent accrued under 1.467-
1(d)(2) in all preceding rental periods ($370,370.37). Under
paragraph (c)(2) of this section, the yield of the loan is equal
to 110 percent of the applicable Federal rate (10 percent
compounded annually). Because no payments are treated as made on
or before the first day of the second rental period, the
principal balance of the loan at the beginning of the second
rental period is $370,370.37. The interest for the second rental
period on fixed rent is $37,037.04 (.10 x $370,370.37) and, under
1.467-1(e)(3), is treated as interest income of the lessor and
as an interest expense of the lessee.
(iv) Because no payments are made on or before the first
day of the third rental period, the principal balance of the loan
at the beginning of the third rental period is equal to the fixed
rent accrued during the first and second rental periods plus the
lessor's interest income on fixed rent for the second rental
period ($962,962.97 = $370,370.37 + $555,555.56 + $37,037.04).
The interest for the third rental period on fixed rent is
$96,296.30 (.10 x $962,962.97). Thus, the sum of the fixed rent
and interest on fixed rent for the three rental periods is equal
to the total amount paid over the lease term (first year fixed
rent accrual, $370,370.37, plus second year fixed rent and
interest accrual, $555,555.56 + $37,037.04, plus third year fixed
rent and interest accrual, $740,740.74 + $96,296.30, equals
$1,800,000). B takes the amounts of interest and rent into
account as expense and A takes such amounts into account as
income for the calendar years identified above, regardless of
their respective methods of accounting.
Example 2. (i) The facts are the same as in Example 1,
1.467-2(f).
(ii)(A) Pursuant to paragraph (c)(1) of this section, the
yield of the section 467 loan is 10.775078%, compounded annually.
The following is a schedule of the rent allocable to each rental
period during the lease term, the balance of the section 467 loan
as of the end of each rental period (determined, in the case of
the calendar year 2002, without regard to the single payment of
rent and interest in the amount of $620,000 payable on the last
day of the lease term), and the interest on the section 467 loan
allocable to each rental period:
Section 467 Section 467 Section 467
Calendar Year Interest Rent Loan Balance
1998 $ 0 $100,000.00 $100,000.00
1999 10,775.08 100,000.00 210,775.08
2000 22,711.18 100,000.00 333,486.26
2001 35,933.41 100,000.00 469,419.67
2002 50,580.33 100,000.00 620,000.00
(B) C takes the amounts of interest and rent into account
as expense and D takes such amounts into account as income for
the calendar years identified above, regardless of their
respective methods of accounting.
1.467-5 Section 467 rental agreements with variable interest.
(a) Variable interest on deferred or prepaid rent--(1) In
general. This section provides rules for computing section 467
rent and interest in the case of section 467 rental agreements
providing variable interest. For purposes of this section, a
rental agreement provides for variable interest if the rental
agreement provides for stated interest that is paid or compounded
at least annually at a rate or rates that meet the requirements
of 1.1275-5(a)(3)(i)(A) or (B) and 1.1275-5(a)(4). If a
section 467 rental agreement provides for interest that is
neither variable interest nor determined by reference to a fixed
rate, the amount of any interest will be treated as a contingent
payment subject to 1.467-6.
(2) Exceptions. This section is not applicable to section
467 rental agreements that provide adequate interest under
1.467-2(b)(1)(i) (agreements with no deferred or prepaid rent)
or 1.467-2(b)(1)(ii) (rental agreements with stated interest at
a single fixed rate). The exceptions in this paragraph (a)(2) do
not apply to rental agreements subject to constant rental accrual
under 1.467-3.
(b) Variable rate treated as fixed--(1) In general. If a
section 467 rental agreement provides variable interest--
(i) The fixed rate substitutes (determined in the same
manner as under 1.1275-5(e) treating the agreement date as the
issue date) for the variable rates of interest on prepaid or
deferred fixed rent provided by the rental agreement must be used
in computing the proportional rental amount under 1.467-2(c),
the constant rental amount under 1.467-3(d), the principal
balance of a section 467 loan under 1.467-4(b), and the yield of
a section 467 loan under 1.467-4(c); and
(ii) The interest on fixed rent for any rental period is
equal to the amount that would be determined under 1.467-1(e)(2)
if the section 467 rental agreement did not provide variable
interest, using the fixed rate substitutes determined under
paragraph (b)(1)(i) of this section in place of the variable
rates called for by the rental agreement, plus the variable
interest adjustment amount provided in paragraph (b)(2) of this
section.
(2) Variable interest adjustment amount--(i) In general.
The variable interest adjustment amount for a rental period
equals the difference between--
(A) The amount of interest that, without regard to section
467, would have accrued during the rental period under the terms
of the section 467 rental agreement; and
(B) The amount of interest that, without regard to section
467, would have accrued during the rental period under the terms
of the section 467 rental agreement using the fixed rate
substitutes determined under paragraph (b)(1)(i) of this section
in place of the variable interest rates called for by the rental
agreement.
(ii) Sign of adjustment. If the amount determined under
paragraph (b)(2)(i)(A) of this section is greater than the amount
determined under paragraph (b)(2)(i)(B) of this section, the
variable interest adjustment amount is positive. If the amount
determined under paragraph (b)(2)(i)(A) of this section is less
than the amount determined under paragraph (b)(2)(i)(B) of this
section, the variable interest adjustment amount is negative.
(3) Section 467 loan balance. The variable interest
adjustment amount is not taken into account in determining the
principal balance of a section 467 loan under 1.467-4(b).
Instead, the section 467 loan balance is computed as if all
amounts payable under the section 467 rental agreement were based
on the fixed rate substitutes determined under paragraph
(b)(1)(i) of this section.
(c) Examples. The following examples illustrate the
application of this section:
Example 1. (i) X and Y enter into a section 467 rental
agreement for the lease of personal property beginning on January
1, 1998, and ending on December 31, 2000. It allocates $100,000
of rent to 1998, $200,000 to 1999, and $100,000 to 2000, and
requires the lessee to pay all $400,000 of rent on December 31,
2000. The rental agreement requires the accrual of interest on
unpaid accrued rent at two different qualified floating rates (as
defined in 1.1275-5(b)), one for 1999 and the other for 2000,
such interest to be paid on December 31 of the year it accrues.
The rental agreement provides that the qualified floating rate is
set at a current value within the meaning of 1.1275-5(a)(4).
Assume that on the agreement date, 110 percent of the applicable
Federal rate is 10 percent, compounded annually.
(ii) The rental agreement is not a disqualified leaseback
or long-term agreement because it does not provide for the
payment of more than $2,000,000 in rent (determined pursuant to
1.467-3(b)(1)(i)). To determine if the section 467 rental
agreement provides for adequate interest under 1.467-2(b),
1.467-2(b)(2) requires the use of fixed rate substitutes (in
this example determined in the same manner as under 1.1275-
5(e)(3)(i) treating the agreement date as the issue date) in
place of the variable rates called for by the rental agreement.
Assume that on the agreement date the qualified floating rates,
and therefore the fixed rate substitutes, relating to 1999 and
2000 are 10 and 15 percent compounded annually. Taking into
account the fixed rate substitutes, the sum of the present values
of all amounts payable by the lessee as fixed rent and interest
thereon is greater than the sum of the present values of the
fixed rent allocated to each rental period. Accordingly, the
rental agreement provides adequate interest under 1.467-
2(b)(1)(iii) and the fixed rent accruing in each calendar year
during the rental agreement is the fixed rent allocated under the
rental agreement.
(iii) Because the section 467 rental agreement provides for
variable interest on unpaid accrued fixed rent at qualified
floating rates and the qualified floating rates are set at a
current value, the requirements of 1.1275-5(a)(3)(i)(A) and (4)
are met and the rental agreement provides for variable interest
within the meaning of paragraph (a)(1) of this section.
Therefore, under paragraph (b)(1)(i) of this section, the yield
of the section 467 loan is computed based on the fixed rate
substitutes. Under 1.467-4(c), the constant yield (rounded to
two decimal places) equals 13.63 percent compounded annually.
Based on the fixed rate substitutes, the fixed rent, interest on
fixed rent, and the principal balance of the section 467 loan,
for each calendar year during the lease term, are as follows:
Accrued Accrued Projected Cumulative
Rent Interest Payment Loan
1998 $100,000 $ 0 $ 0 $100,000
1999 200,000 13,630 ( 10,000) 303,630
2000 100,000 41,370 (445,000) 0
(iv) To compute the actual reported interest on fixed rent
for each calendar year, the variable interest adjustment amount,
as described in paragraph (b)(2) of this section, must be added
to the accrued interest determined in paragraph (iii) of this
Example 1. Assume that the variable rates for 1999 and 2000 are
actually 11 and 14 percent, respectively. Without regard to
section 467, the interest that would have accrued during each
calendar year under the terms of the section 467 rental
agreement, and the interest that would have accrued under the
terms of the rental agreement using the fixed rate substitutes
determined under paragraph (b)(1)(i) are as follows:
Accrued Interest Accrued Interest
Under Rental Agreement Using Fixed Rate Substitutes
1998 $ 0 $ 0
1999 11,000 10,000
2000 42,000 45,000
(v) Under paragraph (b)(2) of this section, the variable
interest adjustment amount is $1,000 ($11,000 - $10,000) for 1999
and is -$3,000 ($42,000 - $45,000) for 2000. Thus, under
paragraph (b)(1)(ii) of this section, the actual interest on
fixed rent for 1999 is $14,630 ($13,630 + $1,000) and for 2000 is
$38,370 ($41,370 - $3,000).
Example 2. (i) The facts are the same as in Example 1
except that 110 percent of the applicable Federal rate is 15
percent compounded annually and the section 467 rental agreement
does not provide adequate interest under 1.467-2(b).
Consequently, the fixed rent for each calendar year during the
lease is the proportional rental amount.
(ii) The sum of the present values of the fixed rent
provided for each calendar year during the lease term, discounted
at 15 percent compounded annually, equals $303,936.87.
(iii)(A) Paragraph (b)(1)(i) of this section requires the
proportional rental amount to be computed based on the assumption
that interest will accrue and be paid based on the fixed rate
substitutes. Thus, the sum of the present values of the
projected payments under the section 467 rental agreement equals
$300,156.16, computed as follows:
$ 10,000/(1.15)2 = $ 7,561.44
445,000/(1.15)3 = 292,594.72
$300,156.16
(B) The fraction for computing the proportional rental
amount equals .9875609 ($300,156.16/$303,936.87).
(iv) Based on the fixed rate substitutes, the fixed rent,
interest on fixed rent, and the balance of the section 467 loan
for each calendar year during the lease term are as follows:
Proportional Accrued Projected Cumulative
Rent Interest Payment Loan
1998 $ 98,756.09 $ 0.00 $ 0 $ 98,756.09
1999 197,512.18 14,813.41 ( 10,000) 301,081.68
2000 98,756.09 45,162.23 (445,000) 0.00
(v) The variable interest adjustment amount in this example
is the same as in Example 1. Under paragraph (b)(1)(ii) of this
section, the actual interest on fixed rent for 1999 is $15,813.41
($14,813.41 + $1,000) and for 2000 is $42,162.23 ($45,162.23 -
$3,000).
1.467-6 Section 467 rental agreements with contingent payments.
[Reserved]
1.467-7 Section 467 recapture and other rules relating to
dispositions.
(a) Section 467 recapture. Notwithstanding any other
provision of the Code, except as provided in paragraph (c) of
this section, a lessor disposing of property in a transaction to
which this section applies must recognize the recapture amount
(determined under paragraph (b) of this section) and treat that
amount as ordinary income. This section applies to any
disposition of property subject to a section 467 rental agreement
that--
(1) Is a leaseback (as defined in 1.467-3(b)(2)) or a
long-term agreement (as defined in 1.467-3(b)(3));
(2) Is not disqualified under 1.467-3(b)(1); and
(3) Allocates to any rental period fixed rent that, when
annualized, exceeds the annualized fixed rent allocated to any
preceding rental period.
(b) Recapture amount--(1) In general. The recapture
amount for a disposition is the lesser of--
(i) The prior understated inclusions (determined under
paragraph (b)(2) of this section); or
(ii) The section 467 gain (determined under paragraph
(b)(3) of this section).
(2) Prior understated inclusions--(i) In general. The
prior understated inclusions are the excess (if any) of--
(A) The aggregate amount of section 467 rent and section
467 interest for the period during which the lessor held the
property, determined as if the section 467 rental agreement were
a disqualified leaseback or long-term agreement; over
(B) The aggregate amount of section 467 rent and section
467 interest accrued by the lessor during that period.
(ii) Partial rental periods. For purposes of this
paragraph (b)(2), the aggregate amounts described in paragraph
(b)(2)(i)(A) and (B) of this section include a ratable portion of
the section 467 rent and section 467 interest for any partial
rental period during which the lessor held the property.
(3) Section 467 gain--(i) In general. Except as otherwise
provided in paragraph (b)(3)(ii) of this section, the section 467
gain is the excess (if any) of--
(A) The amount realized from the disposition; over
(B) The sum of the adjusted basis of the property and the
amount of any gain from the disposition that is treated as
ordinary income under any provision of subtitle A of the Code
other than section 467(c) (e.g., section 1245 or 1250).
(ii) Certain dispositions. In the case of a disposition
that is not a sale, exchange, or involuntary conversion, the
section 467 gain is the excess (if any) of the fair market value
of the property on the date of disposition over the amount
determined under paragraph (b)(3)(i)(B) of this section.
(c) Special rules--(1) Gifts. Paragraph (a) of this
section does not apply to a disposition by gift. However, see
paragraph (c)(4) of this section for dispositions by transferees.
(2) Dispositions at death. Paragraph (a) of this section
does not apply to a disposition if the basis of the property in
the hands of the transferee is determined under section 1014(a).
In the case of items constituting income in respect of a
decedent, see section 691.
(3) Certain tax-free exchanges--(i) In general. The
recapture amount in the case of a disposition to which this
paragraph (c)(3) applies is limited to the amount of gain
recognized to the transferor (determined without regard to
paragraph (a) of this section), reduced by the amount of any gain
from the disposition that is treated as ordinary income under any
provision of subtitle A of the Code other than section 467(c).
(ii) Dispositions covered. This paragraph (c)(3) applies
to a disposition of property if the basis of the property in the
hands of the transferee is determined by reference to its basis
in the hands of the transferor by reason of the application of
section 332, 351, 361, 721, or 731.
(4) Dispositions by transferee. If the recapture amount
with respect to a disposition of property (the first disposition)
is limited under paragraph (c)(1) or (3) of this section and the
transferee subsequently disposes of the property in a transaction
to which this section applies, the amount described in paragraph
(b)(2)(i)(A) of this section must be increased for purposes of
determining the recapture amount for such subsequent disposition
by the excess (if any) of--
(i) The recapture amount on the first disposition,
determined without regard to the limitations of paragraphs (c)(1)
and (3) of this section; over
(ii) The recapture amount on the first disposition
determined after application of such limitations.
(5) Like-kind exchanges and involuntary conversions. If
property is disposed of or converted and, before the application
of paragraph (a) of this section, gain is not recognized in whole
or in part under section 1031 or 1033, then the amount of section
467 gain taken into account by the lessor is limited to the sum
of--
(i) The amount of gain recognized on the disposition or
conversion of the property (determined without regard to
paragraph (a) of this section); plus
(ii) The fair market value of property acquired that is not
subject to a section 467 rental agreement and that is not taken
into account under paragraph (c)(5)(i) of this section.
(6) Installment sales. In the case of an installment sale
of property to which paragraph (a) of this section applies--
(i) The recapture amount is recognized and treated as
ordinary income in the year of the disposition; and
(ii) Any gain in excess of the recapture amount shall be
reported under the installment method of accounting if and to the
extent that method is otherwise available under section 453.
(7) Dispositions covered by sections 170(e), 341(e)(12), or
751(c). For purposes of sections 170(e), 341(e)(12), and
751(c), amounts treated as ordinary income under paragraph (a) of
this section must be treated in the same manner as amounts
treated as ordinary income under section 1245 or 1250.
(d) Examples. The following examples illustrate the
application of this section:
Example 1. (i) X and Y enter into a section 467 rental
agreement for a 5-year lease of personal property beginning on
January 1, 1997, and ending on December 31, 2001. The rental
agreement provides that $0 of rent is allocated to 1997, 1998,
and 1999, and $175,000 is allocated to each of the years 2000 and
2001. The rental agreement provides that the calendar year will
be the rental period and that the rent allocated to each calendar
year is payable on the last day of that calendar year. Assume
that both X and Y are calendar year taxpayers and that 110
percent of the applicable Federal rate is 11 percent, compounded
annually. Assume further that the rental agreement is a long-
term agreement (as defined in 1.467-3(b)(3)). The rental
agreement is not a disqualified leaseback or long-term agreement
because it does not provide for the payment of more than
$2,000,000 in rent (determined pursuant to 1.467-3(b)(1)(i)).
Therefore, the fixed rent allocated under 1.467-1(c)(2)(ii) is
zero for the first three rental periods and $175,000 for the
fourth and fifth rental periods.
(ii) On December 31, 1999, X sells the property subject to
the section 467 rental agreement to an unrelated person for
$990,000. At the time of the sale, X's adjusted basis in the
property is $550,000. Thus, X's gain on the sale of the property
is $440,000. Assume that none of this gain would be treated as
ordinary income under any provision of the Internal Revenue Code
other than section 467(c). Under paragraph (a) of this section,
X is required to take the recapture amount into account as
ordinary income. Under paragraph (b) of this section, the
recapture amount is the lesser of the prior understated
inclusions or the section 467 gain.
(iii)(A) In computing the prior understated inclusions
under paragraph (b)(2), assume that the section 467 rent and
section 467 interest (based on constant rental accrual) would be
taken into account as follows if the section 467 rental agreement
were a disqualified long-term agreement:
Section 467 Rent Section 467 Interest
1997 $59,290.59 $ 0
1998 59,290.59 6,521.96
1999 59,290.59 13,761.35
2000 59,290.59 21,797.06
2001 59,290.59 11,466.68
(B) The aggregate amount of the section 467 rent and
section 467 interest (based on constant rental accrual) for 1997,
1998, and 1999 is $198,155.08 ((3 x $59,290.59) + $6,521.96 +
$13,761.35). Since X did not take any section 467 rent or
section 467 interest into account in 1997, 1998, and 1999, the
prior understated inclusions are also $198,155.08. Since none of
the gain is treated as ordinary income under any provision of the
Code other than section 467(c), the entire amount of gain
($440,000) is section 467 gain. Accordingly, the recapture
amount (, the lesser of the prior understated inclusions or the
section 467 gain) treated as ordinary income is $198,155.08.
Example 2. (i) The facts are the same as in Example 1
except that the section 467 rental agreement specifies that rents
accrue and are paid in the following pattern:
Allocation Payment
1997 $60,000 $ 0
1998 65,000 0
1999 70,000 0
2000 75,000 175,000
2001 80,000 175,000
(ii)(A) Assume the section 467 rental agreement does not
provide for adequate interest under 1.467-2(b), and, therefore,
the fixed rent for a rental period is the proportional rental
amount. See 1.467-1(d)(2)(ii). Assume that, under 1.467-2(c),
the following amounts would be required to be taken into account:
Section 467 Rent Section 467 Interest
1997 $51,585.97 $ 0
1998 55,884.80 5,674.46
1999 60,183.63 12,445.98
2000 64,482.46 20,435.23
2001 68,781.28 10,526.19
(B) The amount of section 467 rent and section 467 interest
taken into account by A for 1997, 1998, and 1999 is $185,774.84.
Thus, the prior understated inclusions are $12,380.24 (the excess
of the aggregate amount of section 467 rent and section 467
interest, based on constant rental accrual, for these three
years, , $198,155.08, over the aggregate amount of section 467
rent and section 467 interest actually taken into account,
$185,774.84). Since this amount is less than the section 467
gain, the recapture amount treated as ordinary income is also
$12,380.24.
(e) Other rules relating to dispositions--(1) In general.
If property subject to a section 467 rental agreement is sold,
exchanged, or otherwise disposed of, the section 467 rent for a
period is taken into account by the owner of the property during
the period. The lessee, however, must continue to take section
467 rent and section 467 interest into account without regard to
the change of ownership.
(2) Treatment of section 467 loan. If there is a sale,
exchange, or other disposition of property subject to a section
467 rental agreement (the transfer), the following rules apply in
determining the amount of the section 467 loan for the period
after the transfer, the amount realized by the transferor, and
the transferee's basis in the property:
(i) The beginning balance of the transferor's section 467
loan is equal to the net present value at the time of the
transfer of all subsequent amounts payable as fixed rent and
interest on fixed rent to the transferor and all subsequent
amounts payable as interest on prepaid fixed rent by the
transferor. The transferor must continue to take into account
interest on the transferor's section 467 loan balance after the
date of the transfer.
(ii) The beginning balance of the transferee's section 467
loan is equal to the principal balance of the section 467 loan
immediately before the transfer reduced (below zero, if
appropriate) by the beginning balance of the transferor's section
467 loan. Amounts payable to the transferor are not taken into
account in adjusting the transferee's section 467 loan balance.
(iii) If the beginning balance of the transferee's section
467 loan is negative, the transferor and transferee must treat
the balance as a liability that is either assumed in connection
with the transfer of the property or secured by the property
acquired subject to the liability. If the beginning balance of
the transferee's section 467 loan is positive, the transferor and
transferee must treat the balance as an additional asset acquired
in connection with the transfer of the property. In the case of
a positive beginning balance of the transferee's section 467
loan, the transferee will have an initial cost basis in the
section 467 loan equal to the lesser of the beginning balance of
the loan or the aggregate consideration for the transfer of the
property subject to the section 467 rental agreement and the
transfer of the transferor's interest in the section 467 loan.
(3) Special rules for transfers in certain nonrecognition
transactions. [Reserved]
(f) Treatment of assignments by lessee and lessee-financed
renewals--(1) Substitute lessee use. If a lessee assigns its
interest in a section 467 rental agreement to a substitute lessee
or a period when a substitute lessee has the use of property
subject to a rental agreement is otherwise included in the lease
term under 1.467-1(h), the section 467 rent for a period is
taken into account by the person having the use of the property
during the period. In addition, the following rules apply in
determining the amount of the section 467 loan for the period
when the substitute lessee has use of the property and in
computing the taxable income of the lessee and substitute
lessee--
(i) The beginning balance of the lessee's section 467 loan
is equal to the net present value, as of the date on which the
substitute lessee first has use of the property, of all amounts
subsequently payable by the lessee as fixed rent and interest on
fixed rent and all amounts subsequently payable as interest on
prepaid fixed rent to the lessee. For purposes of this paragraph
(f), any amount otherwise payable by the lessee shall not be
treated as an amount subsequently payable by the lessee to the
extent that such payment, if made by the lessee, would give rise
to a right of contribution or other similar claim against the
substitute lessee or any other person. The lessee must continue
to take into account interest on the lessee's section 467 loan
balance after the substitute lessee first has use of the
property.
(ii) The beginning balance of the substitute lessee's
section 467 loan is equal to the principal balance of the section
467 loan immediately before the substitute lessee first has use
of the property reduced (below zero, if appropriate) by the
beginning balance of the lessee's section 467 loan. Amounts
payable by the lessee to any person other than the substitute
lessee (or a related person) or payable to the lessee by any
person other than the substitute lessee (or a related person) are
not taken into account in adjusting the substitute lessee's
section 467 loan balance.
(iii) If the beginning balance of the substitute lessee's
section 467 loan is positive, the beginning balance is treated
as--
(A) Gross income of the lessee for the taxable year in
which the substitute lessee first has use of the property; and
(B) A liability that is either assumed in connection with
the transfer of the leasehold interest to the substitute lessee
or secured by property acquired subject to the liability.
(iv) If the beginning balance of the substitute lessee's
section 467 loan is negative--
(A) The beginning balance is treated as an amount incurred
by the lessee for the taxable year in which the substitute lessee
first has use of the property; and
(B) Repayments of the beginning balance are items of gross
income of the substitute lessee in the taxable year in which the
repayment occurs (determined by applying any repayment first to
the beginning balance of the substitute lessee's section 467
loan).
(v) For purposes of paragraph (f)(1)(iv)(B) of this
section, repayments occur as the negative balance is amortized
through the net accrual of rent and negative interest.
(2) Lessor use. If a period when the lessor has the use of
property subject to a section 467 rental agreement is included in
the lease term under 1.467-1(h), the section 467 rent for the
period is not taken into account and the lessor is treated as a
substitute lessee for purposes of paragraph (f)(1) of this
section. (3) Special rules for transfers in certain nonrecognition
transactions. [Reserved]
1.467-8 Effective date.
Sections 1.467-1 through 1.467-7 are effective for--
(a) Rental agreements entered into after the date these
regulations are published as final regulations in the Federal
Register; and
(b) Disqualified leasebacks and long-term agreements
entered into after June 3, 1996.
Margaret Milner Richardson
Commissioner of Internal Revenue