Internal Revenue Code:Sec. 470. Limitation on deductions allocable to property used by governments or other tax-exempt entities

From TaxAlmanac, A Free Online Resource for Tax Professionals
Note: You are using this website at your own risk, subject to our Disclaimer and Website Use and Contribution Terms.

From TaxAlmanac

Jump to: navigation, search

Contents


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.--
                    (A) In <<NOTE: Applicability.>> general.--The term 
                `tax-exempt use property' has the meaning given to such 
                term by section 168(h), except that such section shall 
                be applied--
                          (i) without regard to paragraphs (1)(C) and 
                      (3) thereof, and
                          (ii) as if section 197 intangible property 
                      (as defined in section 197), and property 
                      described in paragraph (1)(B) or (2) of section 
                      167(f), were tangible property.
                    (B) Exception for partnerships.--Such term shall 
                not include any property which would (but for this 
                subparagraph) be tax-exempt use property solely by 
                reason of section 168(h)(6).
                    (C) Cross reference.--For treatment of 
                partnerships as leases to which section 168(h) applies, 
                see section 7701(e).''.
    (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 all times 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

(c) Amendments Related to Section 848 of the Act.--
            (1) Paragraph (2) of section 470(c) is amended to read as 
        follows:
            ``(2) Tax-exempt use property.--
                    ``(A) In <<NOTE: Applicability.>> general.--The term 
                `tax-exempt use property' has the meaning given to such 
                term by section 168(h), except that such section shall 
                be applied--
                          ``(i) without regard to paragraphs (1)(C) and 
                      (3) thereof, and
                          ``(ii) as if section 197 intangible property 
                      (as defined in section 197), and property 
                      described in paragraph (1)(B) or (2) of section 
                      167(f), were tangible property.
                    ``(B) Exception for partnerships.--Such term shall 
                not include any property which would (but for this 
                subparagraph) be tax-exempt use property solely by 
                reason of section 168(h)(6).
                    ``(C) Cross reference.--For treatment of 
                partnerships as leases to which section 168(h) applies, 
                see section 7701(e).''.
            (2) Subparagraph (A) of section 470(d)(1) is amended by 
        striking ``(at any time during the lease term)'' and inserting 
        ``(at all times during the lease term)''.

References in Text

                             REFERENCES IN TEXT
 

Miscellaneous

                
 

References

                   SECTION REFERRED TO IN OTHER SECTIONS
      

Personal tools