Segment 467 Rental Agreements January 21 2011 ABA Tax Section Capital Recovery and Leasing

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2. . . Disclaimer. ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN..

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Segment 467 Rental Agreements January 21 2011 ABA Tax Section – Capital Recovery and Leasing

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Disclaimer ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF ( i ) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

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Section 467 Statutory Structure Section 467 rental assentions characterized as : Agreements, composed or oral, which accommodate the utilization of substantial property and are dealt with as leases for Federal wage impose purposes that have: Aggregate lease in abundance of $250,000, AND EITHER Deferred or prepaid leases, OR Increasing or diminishing rents Note that any rental understanding that requires (or may require) unforeseen installments are by and large esteemed to have expanding or diminishing rents (subject to specific exemptions)

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Section 467 Three Accrual Methods Basic Method – Just Follow the Lease Provisions Proportional rental gathering Constant rental accumulation

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Section 467 Method #1 Follow Lease Provisions Follow rent arrangements if: Lease is neither a precluded leaseback nor an excluded long haul rent assention, and Lease accommodates "sufficient enthusiasm on settled lease" Lease accommodates "satisfactory enthusiasm on settled lease" if: Lease has no conceded or prepaid lease, or Lease has conceded or prepaid lease and accommodates enthusiasm on conceded or prepaid lease at single settled rate, no lower than 110% of AFR, and paid or aggravated in any event every year, with conceded or prepaid lease balanced at any rate yearly to reflect adjust sum

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Section 467 Method #1 Follow Lease Provisions Payment timetables are by and large designations of lease for segment 467 purposes Use lease installment plan if no different lease portion plan For instance – lease occasion in installment plan and no different lease distribution plan Zero lease allotted to lease occasion period Generally does not bring about rental consent to neglect to assign lease

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Section 467 Proportional Rental Accrual Apply corresponding rental collection if: Lease does not accommodate "satisfactory enthusiasm on settled lease" (i.e. paid ahead of time of conceded lease and no satisfactory intrigue required), and Lease is not a precluded leaseback or excluded long haul rent assention Portion of every rental installment will be recharacterized as intrigue Interest for all reasons for the code (e.g., latent misfortune rules, confines on intrigue derivations, withholding charge and so on.)

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Section 467 What is Prepaid or Deferred Rent? Rent will have segment designating rent charge for every year AND another segment determining when lease is payable Rent is paid ahead of time if combined lease payable through close of any year surpasses aggregate lease assigned to all periods through the end of succeeding year Rent is conceded if total lease dispensed to all periods through close of any year surpasses total lease payable as of end of succeeding year Effectively, lease might be conceded or paid ahead of time for one year without rent being a Section 467 rental assention

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Deferred Rent versus Prepaid Rent

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Prepaid Rent Example – Proportional Rent Calculation One Payment in Year 1 = $1,800,000 Allocated $510,000 yr1; 600,000 yr2; 690,000 yr3 PV of Payment @10% = $1,800,000 PV @ 10% of designations = $1, 477,911 Divide PV of installments by PV of distributions = 1.217935

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Prepaid Rent Example – Total Section 467 Rent and Interest

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Deferred Rent Example – Proportional Rent Calculation One Payment in Year 3 = $1,800,000 Allocated $510,000 yr1; 600,000 yr2; 690,000 yr3 PV of Payment @10% = $1,352,366 PV @ 10% of portions = $1, 477,911 Divide PV of installments by PV of assignments = 0.915053

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Deferred Rent Example – Total Section 467 Rent and Interest

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Disqualified Leasebacks and Long-term Lease Agreements Leaseback If inhabitant had an enthusiasm inside 2 years of renting from landowner Long-Term Lease Agreement Lease term surpasses 75% of statutory recuperation time of property; e.g., Specified statutory recuperation period, not depreciable existence of advantage For genuine property, statutory recuperation period is 19 years Leaseback or Long-Term Lease Agreement is excluded if : A vital reason for giving expanding or diminishing rents is the evasion of Federal wage assessment, and IRS chooses to regard understanding as precluded

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Deferred Rent Example – Constant Rental Calculation One Payment in Year 3 = $1,800,000 PV of Payment @10% = $1,352,366 PV @ 10% of $1 thought to be payable on the most recent day of every gathering period = $2.486852 Divide PV of installments by PV of $1 = Constant Rental Factor of $543,806

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Deferred Rent Example – Total Section 467 Rent and Interest

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"A" (not THE) Principal Purpose to Avoid Tax Constant rental collection does not make a difference unless rental assention is excluded To be excluded, assention must have a foremost motivation behind expense shirking How is the essential reason test connected? Understanding will be "nearly examined" if sensible to expect "noteworthy" distinction between negligible assessment rate of lessor and tenant sooner or later amid rent term. More noteworthy than 10% is huge, considering NOLs, credit remainders, AMT and association portions.

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Safe Harbors to Avoid Constant Rental Accrual Treatment Increasing or diminishing rent is not thought to be propelled by expense shirking where, entomb alia: Rent dispensed for every year is inside 10% of normal yearly lease Where the rental understanding is a long haul assention and no less than 90% of property subject to understanding is genuine property, 15% variety permitted If 10% test applies, dispose of free lease period < 3 months in making computation if concession is at begin of rent If 15% test applies, wipe out free lease period up to 24 months or 10% of the rent term if financially sensible Increase or decline in lease owing to a solitary lease occasion for one continuous period if lease occasion is for 3 months or less at start of rent term, or does not surpass 24 months and is economically sensible in region of utilization of property

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Safe Harbors to Avoid Constant Rental Accrual Treatment Safe Harbors (proceeded with): Increase or abatement in lease owing to a predetermined unforeseen lease arrangement, including: A qualified rate rents arrangement (lease equivalent to settled rate of tenant's business receipts or deals) A conformity in view of a sensible cost file An arrangement obliging resident to pay expenses to an outsider An arrangement requiring installment recently installment charges A duty repayment arrangement A variable loan fee arrangement

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Section 467 and Lease Modifications If a rent is "considerably adjusted," it is dealt with as another assention made on the date of alteration New assurance must be made in the matter of whether rent is a Section 467 rental understanding, and whether corresponding rental collection or steady rental gathering apply Safe harbors – not a generous adjustment if: Change in lease exclusively aftereffect of lessor renegotiating obligation brought about to secure property, Change in lease in any rental period does not fluctuate by over 1% from unique lease in that period, or Change in lease because of tenant's commitments to pay outsider expenses and certain different sorts of unexpected installments Change in lessor or renter for the most part not a significant change

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Section 467 Recapture If a lessor exchange property subject to a leaseback or long haul assention (not precluded) and the rent has some measure of back-stacked lease," the lessor must recover as standard wage a measure of pick up on the deal equivalent to the pay it would have gotten if the rent had been liable to consistent rental accumulation over the wage it really detailed

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Section 467 Method Changes Automatic assent for the most part accessible for change to utilize lease portion strategy App. Sec. 20.01 of Rev. Proc. 2008-52, as adjusted by Sec. 2.24 of Rev. Proc. 2009-39 (programmed change # 136) Not relevant to citizens required to utilize steady rental accumulation technique or relative rental collection strategy Must append to Form 3115 duplicate of one of area 467 rental understandings to be secured by change (or if nothing else lease assignment pages) No review assurance if IRS decides segment 467 rental assention is excluded leaseback or long haul assention

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Section 467 Method Changes Automatic assent (cont.) Generally observe when citizens have been accidentally taking after book Taxpayer perceives conceded lease on straight-line premise over term of rental understanding despite the fact that required to utilize lease allotment technique under segment 467 All different changes by and large non-programmed Rev. Proc. 97-27 Section 481(a) conformity spread period Unfavorable (positive) alteration – 4 years Favorable (negative) modification – 1 year

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Contact Information Kevin Juran – KPMG LLP, 212 872-5826, kjuran@kpmg.com Natalie Tucker – RSM McGladrey Inc., 904 680-7209, natalie.tucker@mcladrey.com Glenn Johnson – Ernst & Young LLP, 202 327-6687, glenn.johnson@ey.com Katherine Breaks – KPMG LLP, 202 533-4578, kbreaks@kpmg.com

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