Internal Revenue Code:Sec. 470. Limitation on deductions allocable to property used by governments or other tax-exempt entities
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Location in Internal Revenue Code
TITLE 26 - INTERNAL REVENUE CODE
Subtitle A - Income Taxes
CHAPTER 1 - NORMAL TAXES AND SURTAXES
Subchapter E - Accounting Periods and Methods of Accounting
PART II - METHODS OF ACCOUNTING
Subpart C - Taxable Year for Which Deductions Taken
Statute
SEC. 470. LIMITATION ON DEDUCTIONS ALLOCABLE TO PROPERTY USED BY
GOVERNMENTS OR OTHER TAX-EXEMPT ENTITIES.
(a) Limitation on Losses.--Except as otherwise provided in this
section, a tax-exempt use loss for any taxable year shall not be
allowed.
(b) Disallowed Loss Carried to Next Year.--Any tax-exempt use loss
with respect to any tax-exempt use property which is disallowed under
subsection (a) for any taxable year shall be treated as a deduction with
respect to such property in the next taxable year.
(c) Definitions.--For purposes of this section--
(1) Tax-exempt use loss.--The term `tax-exempt use loss'
means, with respect to any taxable year, the amount (if any) by
which--
(A) the sum of--
(i) the aggregate deductions (other than
interest) directly allocable to a tax-exempt use
property, plus
(ii) the aggregate deductions for interest
properly allocable to such property, exceed
(B) the aggregate income from such property.
(2) Tax-exempt use property.--The term `tax-exempt use
property' has the meaning given to such term by section 168(h),
except that such section shall be applied--
(A) without regard to paragraphs (1)(C) and (3)
thereof, and
(B) as if property described in--
(i) section 167(f)(1)(B),
(ii) section 167(f)(2), and
(iii) section 197 intangible,
were tangible property.
Such term shall not include property which would (but for this
sentence) be tax-exempt use property solely by reason of section
168(h)(6) if any credit is allowable under section 42 or 47 with
respect to such property.
(d) Exception for Certain Leases.--This section shall not apply to
any lease of property which meets the requirements of all of the
following paragraphs:
(1) Availability of funds.--
(A) In general.--A lease of property meets the
requirements of this paragraph if (at any time during
the lease term) not more than an allowable amount of
funds are--
(i) subject to any arrangement referred to
in subparagraph (B), or
(ii) set aside or expected to be set aside,
to or for the benefit of the lessor or any lender, or to
or for the benefit of the lessee to satisfy the lessee's
obligations or options under the lease. For purposes of
clause (ii), funds shall be treated as set aside or
expected to be set aside only if a reasonable person
would conclude, based on the facts and circumstances,
that such funds are set aside or expected to be set
aside.
(B) Arrangements.--The arrangements referred to in
this subparagraph include a defeasance arrangement, a
loan by the lessee to the lessor or any lender, a
deposit arrangement, a letter of credit collateralized
with cash or cash equivalents, a payment undertaking
agreement, prepaid rent (within the meaning of the
regulations under section 467), a sinking fund
arrangement, a guaranteed investment contract, financial
guaranty insurance, and any similar arrangement (whether
or not such arrangement provides credit support).
(C) Allowable amount.--
(i) In general.--Except as otherwise
provided in this subparagraph, the term `allowable
amount' means an amount equal to 20 percent of the
lessor's adjusted basis in the property at the
time the lease is entered into.
(ii) Higher amount permitted in certain
cases.--To the extent provided in regulations, a
higher percentage shall be permitted under clause
(i) where necessary because of the credit-
worthiness of the lessee. In no event may such
regulations permit a percentage of more than 50
percent.
(iii) Option to purchase.--If under the
lease the lessee has the option to purchase the
property for a fixed price or for other than the
fair market value of the property (determined at
the time of exercise), the allowable amount at the
time such option may be exercised may not exceed
50 percent of the price at which such option may
be exercised.
(iv) No allowable amount for certain
arrangements.--The allowable amount shall be zero
with respect to any arrangement which involves--
(I) a loan from the lessee to the
lessor or a lender,
(II) any deposit received, letter
of credit issued, or payment undertaking
agreement entered into by a lender
otherwise involved in the transaction,
or
(III) in the case of a transaction
which involves a lender, any credit
support made available to the lessor in
which any such lender does not have a
claim that is senior to the lessor.
For purposes of subclause (I), the term `loan'
shall not include any amount treated as a loan
under section 467 with respect to a section 467
rental agreement.
(2) Lessor must make substantial equity investment.--
(A) In general.--A lease of property meets the
requirements of this paragraph if--
(i) the lessor--
(I) has at the time the lease is
entered into an unconditional at-risk
equity investment (as determined by the
Secretary) in the property of at least
20 percent of the lessor's adjusted
basis in the property as of that time,
and
(II) maintains such investment
throughout the term of the lease, and
(ii) the fair market value of the property
at the end of the lease term is reasonably
expected to be equal to at least 20 percent of
such basis.
(B) Risk of loss.--For purposes of clause (ii),
the fair market value at the end of the lease term shall
be reduced to the extent that a person other than the
lessor bears a risk of loss in the value of the
property.
(C) Paragraph not to apply to short-term leases.--
This paragraph shall not apply to any lease with a lease
term of 5 years or less.
(3) Lessee may not bear more than minimal risk of loss.--
(A) In general.--A lease of property meets the
requirements of this paragraph if there is no
arrangement under which the lessee bears--
(i) any portion of the loss that would occur
if the fair market value of the leased property
were 25 percent less than its reasonably expected
fair market value at the time the lease is
terminated, or
(ii) more than 50 percent of the loss that
would occur if the fair market value of the leased
property at the time the lease is terminated were
zero.
(B) Exception.--The Secretary may by regulations
provide that the requirements of this paragraph are not
met where the lessee bears more than a minimal risk of
loss.
(C) Paragraph not to apply to short-term leases.--
This paragraph shall not apply to any lease with a lease
term of 5 years or less.
(4) Property with more than 7-year class life.--In the
case of a lease--
(A) of property with a class life (as defined in
section 168(i)(1)) of more than 7 years, other than
fixed-wing aircraft and vessels, and
(B) under which the lessee has the option to
purchase the property,
the lease meets the requirements of this paragraph only if the
purchase price under the option equals the fair market value of
the property (determined at the time of exercise).
(e) Special Rules.--
(1) Treatment of former tax-exempt use property.--
(A) In general.--In the case of any former tax-
exempt use property--
(i) any deduction allowable under subsection
(b) with respect to such property for any taxable
year shall be allowed only to the extent of any
net income (without regard to such deduction) from
such property for such taxable year, and
(ii) any portion of such unused deduction
remaining after application of clause (i) shall be
treated as a deduction allowable under subsection
(b) with respect to such property in the next
taxable year.
(B) Former tax-exempt use property.--For purposes
of this subsection, the term `former tax-exempt use
property' means any property which--
(i) is not tax-exempt use property for the
taxable year, but
(ii) was tax-exempt use property for any
prior taxable year.
(2) Disposition of entire interest in property.--If during
the taxable year a taxpayer disposes of the taxpayer's entire
interest in tax-exempt use property (or former tax-exempt use
property), rules similar to the rules of section 469(g) shall
apply for purposes of this section.
(3) Coordination with <<NOTE: Applicability.>> section
469.--This section shall be applied before the application of
section 469.
(4) Coordination with sections 1031 and 1033.--
(A) In general.--Sections 1031(a) and 1033(a)
shall not apply if--
(i) the exchanged or converted property is
tax-exempt use property subject to a lease which
was entered into before March 13, 2004, and which
would not have met the requirements of subsection
(d) had such requirements been in effect when the
lease was entered into, or
(ii) the replacement property is tax-exempt
use property subject to a lease which does not
meet the requirements of subsection (d).
(B) Adjusted basis.--In the case of property
acquired by the lessor in a transaction to which section
1031 or 1033 applies, the adjusted basis of such
property for purposes of this section shall be equal to
the lesser of--
(i) the fair market value of the property as
of the beginning of the lease term, or
(ii) the amount which would be the lessor's
adjusted basis if such sections did not apply to
such transaction.
(f) Other Definitions.--For purposes of this section--
(1) Related parties.--The terms `lessor', `lessee', and
`lender' each include any related party (within the meaning of
section 197(f)(9)(C)(i)).
(2) Lease term.--The term `lease term' has the meaning
given to such term by section 168(i)(3).
(3) Lender.--The term `lender' means, with respect to any
lease, a person that makes a loan to the lessor which is secured
(or economically similar to being secured) by the lease or the
leased property.
(4) Loan.--The term `loan' includes any similar
arrangement.
(g) Regulations.--The Secretary shall prescribe such regulations
as may be necessary or appropriate to carry out the purposes of this
section, including regulations which--
(1) allow in appropriate cases the aggregation of property
subject to the same lease, and
(2) provide for the determination of the allocation of
interest expense for purposes of this section.''.
Sources
EFFECTIVE DATE.
2005 - P.L. 109-135, Section 403
(ff) Amendment Related to Section 849 of the Act.--Subsection (a) of
section 849 of the American Jobs Creation Act of 2004 is <<NOTE: 26 USC
470 note.>> amended by inserting ``, and in the case of property treated
as tax-exempt use property other than by reason of a lease, to property
acquired after March 12, 2004'' before the period at the end.
Public Law 108-357, Sec. 848, establishes this new section.
Public Law 108-357, Sec. 849, provides:
(a) In General.--Except as provided in this section, the amendments
made by this part shall apply to leases entered into after
March 12, 2004, and in the case of property treated as tax-exempt use
property other than by reason of a lease, to property acquired after
March 12, 2004.
(b) Exception.--
(1) In general.--The amendments made by this part shall not
apply to qualified transportation property.
(2) Qualified transportation property.--For purposes of
paragraph (1), the term ``qualified transportation property''
means domestic property subject to a lease with respect to which
a formal application--
(A) was submitted for approval to the Federal
Transit Administration (an agency of the Department of
Transportation) after June 30, 2003, and before March 13, 2004,
(B) is approved by the Federal Transit
Administration before January 1, 2006, and
(C) includes a description of such property and the
value of such property.
(3) Exchanges and <<NOTE: Applicability.>> conversion of
tax-exempt use property.--Section 470(e)(4) of the Internal
Revenue Code of 1986, as added by section 848, shall apply to
property exchanged or converted after the date of the enactment
of this Act.
(4) Intangibles and <<NOTE: Applicability.>> indian tribal
governments.--The amendments made subsections (b)(2), (b)(3),
and (e) of section 847, and the treatment of property described
in clauses (ii) and (iii) of section 470(c)(2)(B) of the
Internal Revenue Code of 1986 (as added by section 848) as
tangible property, shall apply to leases entered into after
October 3, 2004.
Amendment of Section
AMENDMENT OF SECTION
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