Daily Rules, Proposed Rules, and Notices of the Federal Government
This document contains amendments to 26 CFR Part 1 under section 467 of the Internal Revenue Code (Code). Section 467 was added to the Code by section 92(a) of the Tax Reform Act of 1984 (Public Law 98-369; 98 Stat. 609).
On May 18, 1999, a notice of proposed rulemaking (REG-103694-99, 1999-24, I.R.B. 49) under section 467 was published in the
In addition, the IRS and Treasury Department have identified three provisions in the section 467 regulations (TD 8820), published on May 18, 1999, at 64 FR 26845, that require clarification. Accordingly, these final regulations also provide clarifying amendments to the section 467 regulations.
Section 467 includes an anti-abuse rule applicable to certain section 467 rental agreements. Under this rule, a constant rental amount must be taken into account by a lessor and lessee for each rental period during the lease term. 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 agreement.
Constant rental accrual applies only with respect to leasebacks and long-term agreements that provide for increasing or decreasing rent and only if the Commissioner determines that the agreement is disqualified because tax avoidance is a principal purpose for providing increasing or decreasing rent. In addition, however, the regulations provide that a rental agreement will not be disqualified and, consequently, will not be subject to constant rental accrual unless it requires more than $2,000,000 in rental payments and other consideration.
These final regulations remove the $2,000,000 exception from constant rental accrual for section 467 rental agreements entered into on or after July 19, 1999. Consequently, for section 467 rental agreements entered into on or after July 19, 1999, the Commissioner may determine that the agreement is a disqualified leaseback or long-term agreement subject to constant rental accrual, even if the agreement requires $2,000,000 or less in rental payments and other consideration.
Section 1.467-1(h)(6) defines lease term to mean “the period during which the lessee has use of the property subject to the rental agreement, including any option to renew or extend the term of the agreement
Section 1.467-1(j)(2)(ii) provides that, for purposes of determining present value and yield under the regulations, an amount is payable on the last day for timely payment (the last day for timely payment rule). The last day for timely payment is the last day such amount may be paid without incurring interest, computed at an arm's-length rate, a substantial penalty, or other substantial detriment (such as giving the lessor the right to terminate the agreement, bring an action to enforce payment, or exercise other similar remedies under the terms of the agreement or applicable law).
The IRS and Treasury Department believe that the last day for timely payment rule, applicable to the computation of present value and yield, should also apply to other cases in which the date on which an amount is payable is relevant for purposes of section 467. Accordingly, the section 467 regulations have been amended to provide that, for purposes of applying all of the section 467 rules, not just those dealing with present value and yield, an amount is payable on the last day for timely payment.
Under the section 467 regulations, the fixed rent for each rental period is the proportional rental amount if the section 467 rental agreement is not a disqualified leaseback or long-term agreement and if the agreement does not provide adequate interest on fixed rent. The regulations set forth rules for determining whether an agreement has adequate interest on fixed rent. These regulations clarify how these rules apply in the case of agreements with both deferred and prepaid rent.
The removal of the exception from constant rental accrual for rental agreements involving payments of $2,000,000 or less is applicable for section 467 rental agreements entered into on or after July 19, 1999. The other amendments in these regulations are applicable to rental agreements entered into after March 6, 2001. However, taxpayers may choose to apply these amendments to rental agreements entered into on or before March 6, 2001.
It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and because these regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Internal Revenue Code, the notice of proposed rulemaking preceding these regulations was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.
The principal author of the regulations is Forest Boone, Office of Associate Chief Counsel (Income Tax and Accounting). However, other personnel from the IRS and Treasury Department participated in the development of the regulations.
Income taxes, Reporting and recordkeeping requirements.
26 U.S.C. 7805 * * *
(b) * * *
(3) Agreements with both deferred and prepaid rent.
(h) * * *
(j) * * *
(2) * * *
(b) * * *
(b) * * * (1) * * *
(iii) For section 467 rental agreements entered into before July 19, 1999, the amount determined with respect to the 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.