AN “OWNERSHIP FSC” transaction is under audit

AN “OWNERSHIP FSC” transaction is under audit

December 01, 2001
AN “OWNERSHIP FSC” transaction is under audit.

The IRS released a “field service advice” in late November in which it told the agent handling the audit to disallow the tax benefits claimed by the lessor.

An ownership FSC is a form of cross-border lease where an aircraft or other equipment is leased by a US lessor to a foreign lessee. The transaction is structured to take advantage of US foreign sales corporation rules that allow the US lessor to avoid having to report up to 30% of the rents as income. In the meantime, the lessor also has tax depreciation and interest deductions to claim from the transaction.

Roy Meilman, a leasing expert at Chadbourne, said “there are the usual deletions and the facts are a bit garbled, but it seems fair to say that the transaction structure under audit was substantially more elaborate than in a standard OFSC transaction.” For one thing, the transaction involved defeasance arrangements, which are atypical in a FSC lease. The IRS focused on a right the lessee had to buy the airplane at the end of the lease for a fixed price. It concluded that the transaction had been structured to make exercise of the purchase option a foregone conclusion by the lessee so that the lessee should be viewed as owning the equipment for tax purposes from inception. The IRS position is explained in FSA 200145002.

Keith Martin