Attack on tax-exempt leasing structure.

• Author: Zukerman, Jay H.
• Position: Brief Article

Prop. Regs. Sec. 1.168(i)-2 targets gets a commonly used tax-exempt leasing structure known as an "accelerator" or "replacement lease." Under the 1984 Pickle-Dole legislation, property leased to a tax-exempt entity (including foreign entities) must be depreciated over a recovery period not less than 125% of the lease term. To create the effect of shortening (or accelerating) the recovery period, transactions economically based on a longer period (e.g., 20 years) were structured with a shorter base term (e.g., 10 years), coupled with a financial obligation of the lessee at the expiration of the lease term to (1) purchase the asset at a predetermined price estimated to equal or exceed its then fair market value; (2) make a termination payment (or provide a limited residual loss guarantee); or (3) arrange for another party with acceptable credit to enter into a "replacement lease" containing certain specified minimum economic terms.

Under the proposed regulations, the term of the lease for purposes of determining the applicable recovery period includes any period of...