Congress passed a huge JOBS bill last October that, among other things, put a halt to cross-border leasing transactions called SILOs where a US institutional equity would buy equipment from a foreign user of the equipment and lease it back. The foreign user put most of the purchase price into a bank account, called a defeasance account, with instructions to the bank to pay rent when due and to pay the purchase option price at the end of the lease term if the foreign user decided to buy back the equipment. (In some deals, the foreign user would substitute financial instruments for the defeasance bank account.) Such deals were also done in the US between institutional equity and municipalities and other tax-exempt users of equipment.
Congress put a halt to the transactions last October, retroactively to March 13, 2004, by directing that the depreciation and interest deductions claimed by the institutional equity can only be used to offset rental income from the lease. The deductions cannot be used to shelter other income.
The trouble is that Congress defined the deductions that are subject to this limit as any deductions tied to “tax-exempt use property.” Partnerships with both US taxpayers and foreign or tax-exempt entities as partners have “tax-exempt use property,” unless they have a straight-up deal in which one fixed percentage is used for sharing all partnership items for the life of the deal — or at least for as long as the foreign or tax-exempt entities are partners.
Ironically, leasing groups that were fighting the SILO restrictions last year complained that the provision was too broad. Various groups have asked the US Treasury for an exemption for partnerships unless the partnerships are involved in SILO-type transactions. Accountants complained to the IRS that they could not figure out how to apply the rules in time to prepare Form K-1’s that had to be distributed to partners in time to file 2004 tax returns.
Rather than try to sort everything out, the IRS said on March 10 that it would not apply the new rules to partnerships before the 2005 tax year. It asked for comments on a number of technical issues in the meantime. The IRS announcement is Notice 2005-29.