§ 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—
(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—
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—
(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—
(B)
Risk of loss
For purposes of clause (ii),[1] 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.
(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—
(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
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—
(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
(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)).
(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] So in original. Probably should be “subparagraph (A)(ii)”.