The IRS said in its business plan last year that it would update guidelines it has had since 1975 on what it will tolerate in lease transactions and still rule that the transaction is a “true lease.” There has been a resurgence of interest in lease financing for power plants recently as taxpayers look for ways to finance assets off balance sheet and also to get more value for tax benefits that they cannot use efficiently. An example of such a transaction is where a power company sells a power plant to a company that can use the tax depreciation and leases it back. The transaction must be a “true lease” in order for the lessor to claim the tax benefits.

The new guidelines should be released soon. The leasing industry has been worried — with the IRS on the warpath recently against exotic cross-border lease structures — that any IRS action in this area would be bad news.

The new guidelines are similar to the old ones. They remain guidelines for advance rulings only — not a statement of substantive law and not to be used in audits. The only changes are in the area of what improvements a lessee can make to the property and what assets the IRS views as “limited use property” that cannot be leased.

The IRS asked the leasing industry in late February to stop sending in tax-shelter registration forms for lease transactions that follow “generally-accepted case law principles.” It is drowning in paper.