[Federal Register Volume 64, Number 95 (Tuesday, May 18, 1999)]
[Proposed Rules]
[Pages 26924-26925]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-11892]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-103694-99]
RIN 1545-AW75


Section 467 Rental Agreements Involving Payments of $2,000,000 or 
Less

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations concerning section 
467 rental agreements. The regulations remove the constant rental 
accrual exception for rental agreements involving payments of 
$2,000,000 or less. The regulations affect taxpayers that are parties 
to a section 467 rental agreement entered into on or after July 19, 
1999.

DATES: Written or electronically generated comments and requests for a 
public hearing must be received by August 16, 1999.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-103694-99), room 
5226, Internal Revenue Service, POB 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand delivered Monday through 
Friday between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG-
103694-99), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC. Alternatively, taxpayers may submit 
comments electronically via the Internet by selecting the ``Tax Regs'' 
option on the IRS Home Page, or by submitting comments directly to 
http://www.irs.ustreas.gov/tax__regs/regslist.html (the IRS Internet 
address).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Forest Boone, (202) 622-4960; concerning submissions of comments, 
Michael L. Slaughter, (202) 622-7190 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document contains proposed amendments to section 467 of the 
Income Tax Regulations (26 CFR Part 1). Section 467 was added to the 
Internal Revenue Code by section 92(a) of the Tax Reform Act of 1984 
(Pub. L. 98-369 (98 Stat. 609)). On June 3, 1996, the IRS and Treasury 
Department issued a notice of proposed rulemaking (61 FR 27834 [IA-292-
84, 1996-2 C.B. 462]) relating to section 467. Comments responding to 
the notice were received, and a public hearing was held on September 
25, 1996. After considering the comments received and the statements 
made at the public hearing, final regulations under section 467 have 
been completed and also appear elsewhere in this issue of the Federal 
Register. This regulation proposes to amend the section 467 regulations 
and, for purposes of the application of constant rental accrual, treat 
rental agreements involving payments of $2,000,000 or less in the same 
manner as those agreements involving payments of more than $2,000,000.

Explanation of Provisions

    Under the section 467 final regulations, section 467 applies only 
in the case of rental agreements with increasing or decreasing rent or 
deferred or prepaid rent. However, section 467 is not applicable in the 
case of rental agreements involving payments and other consideration of 
$250,000 or less. See section 467(d)(2).
    The section 467 final regulations provide that if section 467 is 
applicable, the amount of fixed rent that must be taken into account by 
a lessor and lessee for a rental period is either the amount of fixed 
rent allocated to the period under the agreement, the proportional 
rental amount, or the constant rental amount (constant rental accrual). 
Constant rental accrual is to be used only where the section 467 rental 
agreement is a disqualified leaseback or long-term agreement. Under the 
section 467 final regulations, a rental agreement will not be a 
disqualified leaseback or long-term agreement, and, consequently, will 
not be subject to constant rental accrual, if it requires $2,000,000 or 
less in rental payments and other consideration.
    The IRS and Treasury Department have reconsidered the $2,000,000 
constant rental accrual exception and have determined that it should be 
eliminated from the section 467 final regulations. The original purpose 
of the $2,000,000 exception was to simplify the section 467 rules for 
small businesses. Upon further reflection, however, the IRS and 
Treasury Department believe that the $2,000,000 exception 
inappropriately permits certain rental agreements to avoid the 
application of constant rental accrual, and that the inappropriate 
avoidance of constant rental accrual outweighs the need for 
simplification. Further, section 467(d)(2) provides an exception from 
section 467 for rental agreements with payments and other consideration 
of $250,000 or less. However, because the $2,000,000 constant rental 
accrual

[[Page 26925]]

exception was included in the proposed regulations, the $2,000,000 
exception will continue to apply to agreements entered into on or 
before July 19, 1999.

Special Analyses

    It has been determined that these proposed regulations are not a 
significant regulatory action as defined in EO 12866. Therefore, a 
regulatory assessment is not required. It also has 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 the 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), this notice of proposed rulemaking will be submitted 
to the Chief Counsel for Advocacy of the Small Business Administration 
for comment on their impact on small business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and 8 
copies) and electronic comments that are submitted timely to the IRS. 
The IRS and Treasury Department request comments on the clarity of the 
proposed rules and how they can be made easier to understand. All 
comments will be available for public inspection and copying. A public 
hearing will be scheduled if requested in writing by any person that 
timely submits written comments. If a public hearing is scheduled, 
notice of the date, time, and place for the public hearing will be 
published in the Federal Register.
    Drafting Information: The principal author of the regulations is 
Forest Boone, Office of Assistant Chief Counsel (Income Tax and 
Accounting). However, other personnel from the IRS and Treasury 
Department participated in the development of the regulations.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par 2. In Sec. 1.467-3, paragraph (b)(1) is revised to read as 
follows:


Sec. 1.467-3  Disqualified leasebacks and long-term agreements.

* * * * *
    (b) Disqualified leaseback or long-term agreement--(1) In general. 
A leaseback (as defined in paragraph (b)(2) of this section) or a long-
term agreement (as defined in paragraph (b)(3) of this section) is 
disqualified only if--
    (i) A principal purpose for providing increasing or decreasing rent 
is the avoidance of Federal income tax (as described in paragraph (c) 
of this section); and
    (ii) The Commissioner determines that, because of the tax avoidance 
purpose, the section 467 rental agreement should be treated as a 
disqualified leaseback or long-term agreement.
* * * * *
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
[FR Doc. 99-11892 Filed 5-17-99; 8:45 am]
BILLING CODE 4830-01-P