[Federal Register Volume 68, Number 217 (Monday, November 10, 2003)]
[Proposed Rules]
[Page 63744]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-28203]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-209817-96]
RIN 1545-AU19


Treatment of Obligation-Shifting Transactions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Withdrawal of notice of proposed rulemaking.

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SUMMARY: This document withdraws a proposed regulation relating to the 
treatment of certain multiple-party financing transactions in which one 
party realizes income from leases or other similar agreements and 
another party claims deductions related to that income.

FOR FURTHER INFORMATION CONTACT: Pamela Lew, (202) 622-3950, (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    In Notice 95-53 (1995-2 C.B. 334) (modified and superseded by 
Notice 2003-55) (2003-34 I.R.B. 395), the IRS and Treasury Department 
stated that regulations under section 7701(l) would be issued to 
recharacterize lease strips to prevent tax avoidance. On December 27, 
1996, a notice of proposed rulemaking (REG-209817-96) relating to the 
treatment of certain obligation-shifting transactions was published in 
the Federal Register (61 FR 68175). An obligation-shifting transaction 
is a transaction in which the transferee (the assuming party) assumes 
obligations or acquires property subject to obligations under an 
existing lease or similar agreement and the transferor (the property 
provider) or any other party has already received or retains the right 
to receive amounts that are allocable to periods after the transfer.
    The proposed regulations recharacterize obligation-shifting 
transactions in a manner intended to reflect the economic substance of 
the transactions and to clearly reflect the income of the parties to 
the transaction. Under the recharacterization, the property provider 
and the assuming party must report the income from the underlying 
property allocable to their respective periods of ownership. This 
result is achieved by imputing a series of transactions to both the 
assuming party and the property provider that results in a rent-
leveling process based on the constant rental accrual method described 
in Sec.  1.467-3(d). The assuming party is required to recognize rental 
income for the period in which it owns the property or leasehold 
interest. The property provider must adjust its income for any 
differences between amounts it recognized and amounts it would have 
recognized if it had reported income on a level-rent basis for the 
periods that it owned the property or leasehold interest. To account 
for the difference between rental income the assuming party is required 
to recognize and rental income the assuming party actually receives, 
the proposed regulations treat the assuming party as issuing an 
interest-bearing note to the property provider as additional 
consideration for the obligation-shifting transaction. Both parties 
must account for the resulting interest income and expense 
appropriately. To account for any differences in timing or amount 
between payments the property provider actually receives after the 
transaction and payments treated as being made to the property provider 
under the note from the assuming party, the property provider is 
treated as an obligor or obligee under a second loan, for which the 
property provider must account accordingly.
    After careful consideration, the IRS and Treasury Department have 
concluded that the complexity presented by these proposed regulations 
is not necessary to prevent tax avoidance in these transactions. Since 
the publication of the proposed regulations, the Court of Appeals for 
the District of Columbia Circuit has held that the partnership used in 
a lease strip was not a valid partnership because the participants did 
not join together for a non-tax business purpose. Andantech L.L.C. v. 
Commissioner, Nos. 02-1213; 02-1215, (D.C. Cir. June 17, 2003), 2003 
U.S. App. LEXIS 11908, aff'g in part and remanding for reconsideration 
of other issues T.C. Memo 2002-97 (2002). Also, in Nicole Rose v. 
Commissioner, 320 F.3d 282 (2d Cir. 2002) aff'g per curiam 117 T.C. 328 
(2001), the United States Court of Appeals for the Second Circuit 
upheld the Tax Court's determination that a lease transfer did not have 
economic substance.
    In the opinion of the IRS and Treasury Department, the claimed tax 
treatment for lease strips improperly separates income from related 
deductions, and lease strips do not produce the tax consequences 
desired by the participants. See Notice 2003-55 (2003-34 I.R.B. 395).

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Withdrawal of Notice of Proposed Rulemaking

    Accordingly, under the authority of 26 U.S.C. 7805, the notice of 
proposed rulemaking (REG-209817-96) that was published in the Federal 
Register on December 27, 1996 (61 FR 68175) is withdrawn.

Dale F. Hart,
Acting Deputy Commissioner for Services and Enforcement.
[FR Doc. 03-28203 Filed 11-7-03; 8:45 am]
BILLING CODE 4830-01-P