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    Created by Michael Wessels
    1. U.S. Code
    2. Title 26
    3. Subtitle A
    4. CHAPTER 1
    5. Subchapter E
    6. PART II
    7. Subpart C

    § 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—

    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 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 , 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 .

    (C) Cross reference

    For treatment of partnerships as leases to which applies, see .

    (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,

    (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

    (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.

    (2) Lessor must make substantial equity investment

    (A) In general

    A lease of property meets the requirements of this paragraph if—

    (i) the lessor—

    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 subparagraph (A)(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 ) 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 shall apply for purposes of this section.

    (3) Coordination with 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

    (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 ).

    (2) Lease term

    The term “lease term” has the meaning given to such term by .

    (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.