Final section 467 regulations present problems and opportunities.
Tax Executive › Vol. 51 Nbr. 5, September 1999
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Summary
IRC section 467
The author discusses IRS final regulations under IRC section 467 concerning treatment of rent from tangible property leases with fluctuating, deferred, or prepaid rents. The regulations address accounting methods and mandate a method in tax avoidance situations.See the full content of this document
Extract
Final section 467 regulations present problems and opportunities.
The Internal Revenue Service recently promulgated final regulations under section 467,(1)(*) which addresses leases of tangible property where the rental agreement has (1) increasing or decreasing rents, or (2) deferred or prepaid rent. Section 467 generally requires a lessor and lessee of tangible property under a section 467 rental agreement to treat rents consistently and to use the accrual method of accounting (and time value of money principles) regardless of their overall method of accounting. In addition, where certain leases are structured with a tax avoidance purpose, section 467 requires the lessor and lessee of tangible property to account for rent using a constant rental accrual method.(2)
Many companies routinely rent tangible property (both as lessor and lessee), and frequently these rental agreements do not provide for level rent payments. As a result, corporate tax departments must be aware of the situations where section 467 will apply. Indeed, every rental agreement should likely be reviewed in order to determine whether unanticipated tax results will arise under section 467. In addition, since section 467 triggers recognition of income and deductions at a time unrelated to when rent is paid, the final regulations under section 467 may also provide planning opportunities. For example, payments that previously might have been treated as rent could be recharacterized as loans, producing far different tax consequences to both lessor and lessee. Any regulation that artificially alters the timing of income and deductions raises such tax planning opportunities. Overview Application of the section 467 regulations requires a series of determinations. First, each rental agreement must be examined to determine whether or not it is a "section 467 rental agreement." Generally, a section 467 rental agreement is a "rental agreement" that has either "increasing or decreasing rents" or "deferred or prepaid rents."(3) A "rental agreement" is defined as any agreement, whether written or oral, that provides for the use of tangible property and is treated as a lease for federal tax purposes.(4) If a section 467 rental agreement has increasing or decreasing rents, the amount of rent and interest to be taken into account by the lessor and the lessee must be determined. Specifically, the lessor and lessee must each take into account for any taxable year the sum of (1) the section 467 rent for the taxable year and (2) the section 467 interest ...See the full content of this document
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