I got excited, or at least a little encouraged, earlier last month when I read a headline that the IRS had granted some transition relief for sale-in, lease-out (SILO) transactions. The IRS cracked down on these so-called SILO transactions in the 2004 Jobs Act (through IRC § 470) by suspending tax-exempt use losses. Under § 470, losses arising from leases of tax-exempt use property only can be used against current income from those leases.
As I had referred to in an earlier post, this legislation has affected US lessors’ ability to compete for transactions such as the sale and subsequent leaseback of Chicago’s Skyway toll road. It also has had a negative impact on the healthcare leasing industry in the form of pricing adjustments and additional tax scrutiny of otherwise normal transactions. Furthermore, these adjustments have been inconsistently applied between lessors, which has created disruption and confusion in the market.
You can see why the news of some potential relief from these restrictions caught my attention. Unfortunately, any celebration was unwarranted. Although the IRS had granted relief from the application of these rules, it was not for equipment lessors. Instead, it has gone to some partnerships and other pass-thru entities, some of which may not be tax-exempt entities.
In broad terms, property is tax-exempt use property if it is leased to a tax-exempt entity. Under § 168, if property is owned by a partnership that has both tax-exempt and non-tax-exempt partners, even if not otherwise tax-exempt use property, it becomes so to a certain extent. Generally, an amount equal to the tax-exempt entity's proportionate share of the property is treated as tax-exempt use property. This allocation makes the entity subject to the loss suspension rules of § 470.
Accordingly, in Notice 2006-02, the IRS took action to alleviate this result. In this notice, the IRS said it would not apply § 470 to disallow losses associated with property that is treated as tax-exempt use property solely because of the partnership and pass-thru entity rules. Common sense prevails although not where I had hoped.
Well, anyway, not only was I disappointed, but I also had to read the Notice.
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