Rev. Proc. 76-30

Section 1. Purpose.

This Revenue Procedure concerns requests for advance rulings on leveraged lease transactions as described in Rev. Proc. 75-21, 1975-1 C.B. 715, and Rev. Proc. 75-28, 1975-1 C.B. 752. The purpose of this Revenue Procedure is to set forth the decision of the Service not to issue advance rulings that certain transactions purporting to be leases of property are, in fact, leases for Federal income tax purposes when the property is "limited use property."

Sec. 2. Background.

The Service previously announced in section 5.02 of Rev. Proc. 75-21 that it had not decided whether rulings would be issued in cases involving the leasing of property not expected to be useful to or useable by the lessor at the end of the lease term except for purposes of continued leasing or transfer to a member of the lessee group. Such property is referred to herein as "limited use property."

Sec. 3. Decision.

Rev. Proc. 75-21 sets forth guidelines relating to advance rulings on leveraged lease transactions. Section 4(1)(C) of those guidelines requires the lessor to represent and demonstrate certain facts relating to the estimated fair market value and estimated remaining useful life of the property at the end of the lease term. This requirement is intended, in part, to assure that the purported lessor has not transferred the use of the property to the purported lessee for substantially its entire useful life. In the case of limited use property, at the end of the lease term there will probably be no potential lessees or buyers other than members of the lessee group. As a result, the lessor of limited use property will probably sell or rent the property to a member of the lessee group, thus enabling the lessee group to enjoy the benefits of the use or ownership of the property for substantially its entire useful life. See Rev. Rul. 55-541, 1955-2 C.B. 19, for an example of a transaction in which property was determined to be leased for substantially its entire useful life and the conclusion that such a transaction transfers equitable ownership. Accordingly, the Service will not issue advance rulings whether certain transactions purporting to be leases of property are, in fact, leases for Federal income tax purposes when the property is limited use property.

Sec. 4. Procedure

Pursuant to Rev. Proc. 75-28 taxpayers requesting an advance ruling in a leveraged lease transaction must furnish to the Service certain information and representations. If the information required to be furnished by section 4.09 of Rev. Proc. 75-28 fails to establish that the property is not limited use property, the Service will decline to issue an advance ruling on the transaction. Such information must establish to the satisfaction of the Service that the use of the property at the end of the lease term by the lessor or some person, other than a member of the lessee group, who could lease or purchase the property from the lessor, is commercially feasible to the lessor or to both respectively. The Service's determination of commercial feasibility will be based on the standards that would be applied by reasonably prudent businessmen on the basis of present knowledge and generally accepted engineering standards.

Sec. 5. Examples.

The following examples illustrate the types of property the Service considers to be limited use property, and the types of property the Service does not consider to be limited use property.

(1) X builds a masonry smokestack attached to a masonry warehouse building owned by Y, and leases the smokestack to Y for use as an addition to the heating system of the warehouse. The lease term is 15 years; the smokestack has a useful life of 25 years, and the warehouse has a remaining useful life of 25 years. It would not be commercially feasible to disassemble the smokestack at the end of the lease term and reconstruct it at a new location. The smokestack is considered to be limited use property.

(2) X builds a complete chemical production facility on land owned by Y and leases the facility to Y, a manufacturer of chemicals. The lease term is 24 years, and the facility has a useful life of 30 years. The land is leased to X pursuant to a ground lease for a term of 30 years. The technical "know-how" and trade secrets Y possesses are necessary elements in the commercial operation of the facility. At the time the lease is entered into no person who is not a member of the lessee group possesses the technical "know-how" and trade secrets necessary for the commercial operation of the facility. The taxpayers submit to the Service the written opinion of a qualified expert stating it is probable that by the expiration of the lease term of the facility third parties who are potential purchasers or lessees of the facility will have independently developed such "know-how" and trade secrets. The facility is considered to be limited use property. In reaching this conclusion, the Service will not take into account such expert opinion because such opinions are too speculative for advance ruling purposes.

(3) The facts are the same as in the examples set forth in subsection (2) except X has an option, exercisable at the end of the lease term of the facility, to purchase from Y the "know-how" and trade secrets necessary for the commercial operation of the facility, and it would be commercially feasible at the end of such lease term for X to exercise the option and operate the facility itself. The facility is not considered to be limited use property.

(4) The facts are the same as in the example set forth in subsection (2) except it would be commercially feasible for the lessor at the end of the lease term to make certain structural modifications of the facility that would make the facility capable of being used by persons not possessing any special technical "know-how" or trade secrets. Furthermore, if such modifications were made, it would be commercially feasible, at the end of the lease term, for a person who is not a member of the lessee group to purchase or lease the facility from X. The facility is not considered to be limited use property.

(5) X builds an electrical generating plant on land owned by Y and leases the plant to Y. The lease term is 40 years, and the plant has an estimated useful life of 50 years. The land is leased to X pursuant to a ground lease for a term of 50 years. The plant is adjacent to a fuel source that it is estimated will last for at least 50 years. Access to this fuel source is necessary for the commercial operation of the plant, and Y has recently obtained the contractual right to acquire all fuel produced from the source for 50 years. Y will use the plant to produce and generate electrical power for sale to a city located 500 miles away. The plant is synchronized into a power grid that makes the sale of electrical power to a number of potential markets commercially feasible. It would not be commercially feasible to disassemble the plant and reconstruct it at a new location. The electrical generating plant is considered to be limited use property because access to this fuel source held exclusively by Y is necessary for the commercial operation of the plant.

(6) The facts are the same as in the example set forth in subsection (5) except X has an option, exercisable at the end of the lease term of the plant, to acquire from Y the contractual right to acquire all fuel produced from the fuel source for the 10-year period commencing at the end of such lease term. It would be commercially feasible at the end of such lease term for X to exercise this option. Furthermore, it would be commercially feasible, at the end of such lease term, for a person who is not a member of the lessee group to purchase the contractual right to the fuel from X for an amount equal to the option price and purchase or lease the plant from X. The plant is not considered to be limited use property.

Sec. 6. Effect on other documents.

Rev. Proc. 75-21 is modified.

Sec. 7. Inquiries.

Inquiries in regard to this Revenue Procedure should refer to its number and be addressed to the Commissioner of Internal Revenue, Attention T:C:C, 1111 Constitution Avenue, N.W., Washington, D.C. 20224.

¹ Also released as News Release IR-1660, dated August 19, 1976.