Section 467 Rental Agreements Involving
Payments of $2,000,000 or Less

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Part 1 [REG-103694-99] RIN 1545-AW75

TITLE: Section 467 Rental Agreements Involving Payments of
$2,000,000 or Less

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains proposed regulations concerning
section 467 rental agreements. The regulations remove the constant
rental accrual exception for rental agreements involving payments of
$2,000,000 or less. The regulations affect taxpayers that are
parties to a section 467 rental agreement entered into on or after
July 19, 1999.

DATES: Written or electronically generated comments and requests for
a public hearing must be received by August 16, 1999.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-103694-99), room
5226, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand delivered Monday
through Friday between the hours of 8 a.m. and 5 p.m. to:
CC:DOM:CORP:R (REG-103694-99), Courier's Desk, Internal Revenue
Service, 1111 Constitution Avenue., NW., Washington, DC.

Alternatively, taxpayers may submit comments electronically via the
Internet by selecting the "Tax Regs" option on the IRS Home Page, or
by submitting comments directly to
http://www.irs.ustreas.gov/tax_regs/regslist.html (the IRS Internet
address).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed
regulations, Forest Boone, (202) 622-4960; concerning submissions of
comments, Michael L. Slaughter, (202) 622-7190 (not toll-free
numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposed amendments to section 467 of the
Income Tax Regulations (26 CFR Part 1). Section 467 was added to the
Internal Revenue Code by section 92(a) of the Tax Reform Act of 1984
(Public Law 98-369 (98 Stat. 609)). On June 3, 1996, the IRS and
Treasury Department issued a notice of proposed rulemaking (61 FR
27834 [IA-292-84, 1996-2 C.B. 462]) relating to section 467.
Comments responding to the notice were received, and a public
hearing was held on September 25, 1996.

After considering the comments received and the statements made at
the public hearing, final regulations under section 467 have been
completed and also appear elsewhere in this issue of the Federal
Register. This regulation proposes to amend the section 467
regulations and, for purposes of the application of constant rental
accrual, treat rental agreements involving payments of $2,000,000 or
less in the same manner as those agreements involving payments of
more than $2,000,000.

Explanation of Provisions

Under the section 467 final regulations, section 467 applies only in
the case of rental agreements with increasing or decreasing rent or
deferred or prepaid rent. However, section 467 is not applicable in
the case of rental agreements involving payments and other
consideration of $250,000 or less. See section 467(d)(2).

The section 467 final regulations provide that if section 467 is
applicable, the amount of fixed rent that must be taken into account
by a lessor and lessee for a rental period is either the amount of
fixed rent allocated to the period under the agreement, the
proportional rental amount, or the constant rental amount (constant
rental accrual). Constant rental accrual is to be used only where
the section 467 rental agreement is a disqualified leaseback or
long-term agreement. Under the section 467 final regulations, a
rental agreement will not be a disqualified leaseback or long-term
agreement, and, consequently, will not be subject to constant rental
accrual, if it requires $2,000,000 or less in rental payments and
other consideration.

The IRS and Treasury Department have reconsidered the $2,000,000
constant rental accrual exception and have determined that it should
be eliminated from the section 467 final regulations. The original
purpose of the $2,000,000 exception was to simplify the section 467
rules for small businesses. Upon further reflection, however, the
IRS and Treasury Department believe that the $2,000,000 exception
inappropriately permits certain rental agreements to avoid the
application of constant rental accrual, and that the inappropriate
avoidance of constant rental accrual outweighs the need for
simplification. Further, section 467(d)(2) provides an exception
from section 467 for rental agreements with payments and other
consideration of $250,000 or less. However, because the $2,000,000
constant rental accrual exception was included in the proposed
regulations, the $2,000,000 exception will continue to apply to
agreements entered into on or before July 19, 1999.

Special Analyses

It has been determined that these proposed regulations are not a
significant regulatory action as defined in EO 12866.

Therefore, a regulatory assessment is not required. It also has been
determined that section 553(b) of the Administrative Procedure Act
(5 U.S.C. chapter 5) does not apply to these regulations, and
because the regulations do not impose a collection of information on
small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6)
does not apply. Pursuant to section 7805(f), this notice of proposed
rulemaking will be submitted to the Chief Counsel for Advocacy of
the Small Business Administration for comment on their impact on
small business.

Comments and Public Hearing

Before these proposed regulations are adopted as final regulations,
consideration will be given to any written (a signed original and 8
copies) and electronic comments that are submitted timely to the
IRS. The IRS and Treasury Department request comments on the clarity
of the proposed rules and how they can be made easier to understand.
All comments will be available for public inspection and copying. A
public hearing will be scheduled if requested in writing by any
person that timely submits written comments. If a public hearing is
scheduled, notice of the date, time, and place for the public
hearing will be published in the Federal Register.

Drafting Information

The principal author of the regulations is Forest Boone, Office of
Assistant Chief Counsel (Income Tax and Accounting).

However, other personnel from the IRS and Treasury Department
participated in the development of the regulations.

List of Subjects in 26 CFR Part 1 Income taxes, Reporting and
recordkeeping requirements.

Proposed Amendments to the Regulations Accordingly, 26 CFR part 1 is
proposed to be amended as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read in
part as follows:

Authority: 26 U.S.C. 7805 * * * Par 2. In �1.467-3, paragraph (b)(1)
is revised to read as follows:

�1.467-3 Disqualified leasebacks and long-term agreements.

* * * * *

(b) Disqualified leaseback or long-term agreement--(1) In general. A
leaseback (as defined in paragraph (b)(2) of this section) or a
long-term agreement (as defined in paragraph (b)(3) of this section)
is disqualified only if--

(i) A principal purpose for providing increasing or decreasing rent
is the avoidance of Federal income tax (as described in paragraph
(c) of this section); and

(ii) The Commissioner determines that, because of the tax avoidance
purpose, the section 467 rental agreement should be treated as a
disqualified leaseback or long-term agreement.

* * * * *

Robert E. Wenzel
Deputy Commissioner of Internal Revenue

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