Abstract One method employed by businesses to increase the availability of depreciation deductions and investment tax credits is through the use of leveraged leases. In these transactions, tax benefits are transferred from taxpayers who do not have sufficient tax liabilities to those who do. Because these benefits are very mobile, the Internal Revenue Service historically has examined the substance rather than the form of leasing transactions to determine whether they were actually conditional sales transactions. Congress recently enacted safe-harbor rules defining when a lease exists between two or more parties in order to reduce the uncertainty which went with these types of transactions, and to encourage leveraged leasing transactions. However, these rules only apply to transactions where the lessor is a corporation. As a consequence, individuals, partnerships. Subchapter S corporations, and personal holding companies can not avail themselves of these safe-harbor rules but instead must follow a long line of judicial and administrative guidelines. This article reviews and analyzes these judicial decisions and administrative rulings to identify factors that noncorporate lessors can utilize to avoid having lease transactions reclassified as a sale. These factors are summarized in a table and the tax consequences of qualifying or not qualifying under the government's administrative procedures that act as guidelines for letter rulings is delineated.
Englebrecht et al. (Fri,) studied this question.