Rev. Proc. 75-28

Section 1. Purpose

This Revenue Procedure concerns requests for advance rulings on leveraged lease transactions within the meaning of Rev. Proc. 75-21, page 715, this Bulletin. Rev. Proc. 75-21 sets forth guidelines to be used for advance ruling purposes in determining whether such a transaction is, in fact, a lease for Federal income tax purposes. The purpose of this Revenue Procedure is to set forth the information and representations required to be furnished by the taxpayers in a request for such a ruling. The specific terms used in this Revenue Procedure are defined in Rev. Proc. 75-21.

Sec. 2. Background

.01 The Internal Revenue Service receives many requests for rulings on leveraged leases. Frequently the information that is necessary for consideration of the issues presented is not included in the initial ruling requests and, since substantive processing of such cases cannot begin until the required information is obtained, this results in unnecessary delays in the issuance of rulings. The checklist set forth in this Revenue Procedure is designed to ensure the inclusion and order of presentation of necessary information in the initial ruling request. However, since the information necessary for the issuance of a ruling with regard to any particular transaction depends upon all the facts and circumstances of that case, information in addition to that outlined in the checklist may be required with respect to that transaction.

.02 In view of the complexity of a typical leveraged lease transaction and the voluminous nature of the related documentation, the Service cannot accept the responsibility for raising or considering issues arising out of such provisions that are not specifically brought to its attention. See sections 6 and 13 of Rev. Proc. 72-3, 1972-1, C.B. 698.

Sec. 3. General Requirements

.01 The lessor and the lessee and any other party with an interest in the leasing transaction for which a specific ruling is requested must join in the ruling request.

.02 The ruling request must include a summary statement of the facts as described in section 6.03 of Rev. Proc. 72-3, 1972-1 C.B. 698, relating to the "two-part" ruling request procedure.

.03 In addition to the information and documents required by section 6 of Rev. Proc. 72-3, the ruling request must include detailed information required by section 4 of this Revenue Procedure. If the information requested is not applicable to the parties or to the transaction, an express statement to that effect is required. The response to each item of information requested must include a reference to the page number of any relevant document containing the information that supports the response. Furthermore, portions of the relevant documents supporting a particular response should be underscored or otherwise highlighted and cross-referenced to the appropriate subsection of section 4 of this Revenue Procedure. All parties joining in the request for ruling are jointly responsible for responses to each item of information requested by section 4 of this Revenue Procedure, with the exception of section 4.02 for which only the lessor is responsible.

.04 The lessor must also submit copies of any offering circular, prospectus, economic analysis, or other document used to induce the lessor's investment in the leased Property (the "Property"). These documents must include an analysis of the projected cash flow to the lessor from the lease transaction including the projected benefits from the tax attributes thereof.

Sec. 4. Specific Information Required

.01 In general

1 Describe in detail the type and quantity of the Property.

2 Describe all parties to the leveraged lease transaction, their respective interests in such transaction, and the relationships that exist between or among such parties.

3 Submit a diagram of the transaction showing (1) the parties to the transaction, (2) the succession of ownership to the Property, and (3) the source, amounts, and flow of the funds used to acquire the Property (total acquisition cost within the meaning of section 1012 of the Internal Revenue Code of 1954).

4 Indicate whether the Property is to be temporarily or permanently affixed to or installed on or in land, buildings, or other property. If so, indicate who will own such land, buildings, or other property.

5 Indicate whether the Property is new, reconstructed, used, or rebuilt. (See sections 1.48-2 and 1.48-3 of the regulations; Rev. Rul. 68-111, 1968-1 C.B. 29; and Rev. Rul. 70-135, 1970-1 C.B. 10.)

6 Indicate when, where and how the Property will be, or has been, first placed in service or use.

.02 Minimum Unconditional "At Risk Investment

The lessor must:

1 Indicate the total acquisition cost (within the meaning of section 1012 of the Code) of the Property.

2 Indicate when and in what amounts the lessor did or will make its Equity Investment or incur personal liability for such Equity Investment.

3 Indicate the conditions under which the lessor would be entitled to a return of any portion of its Equity Investment or would be released from any personal liability for such Equity Investment.

4 Submit a representation of the net worth of the lessor and financial data to support the representation, including, for example, audited balance sheets or unaudited balance sheets with a representation that the latter are prepared in accordance with generally accepted accounting principles.

5 Submit an analysis demonstrating that the lessor's Equity Investment will remain equal to at least 20 percent of the cost of the Property at all times throughout the lease term. This analysis must demonstrate that throughout the lease term the items designated as (a), (b), (c), and (d) below solve the formula "(a) - (b) never exceeds (c) + (d)."

(a) The projected cumulative payments required to be paid by the lessee to or for the lessor.

(b) The projected cumulative disbursements required to be paid by or for the lessor in connection with the ownership of the Property, excluding the lessor's initial Equity Investment, but including any direct costs to finance the Equity Investment.

(c) The excess of lessor's initial Equity Investment over 20 percent of the cost of the Property.

(d) A cumulative pro rata portion of the projected profits from the transaction (exclusive of tax benefits). Profit for this purpose is the excess of the sum of (i) the amounts required to be paid by the lessee to or for the lessor over the lease term plus (ii) the value of the residual investment referred to in section 4(1)(C) of Rev. Proc. 75-21, over the aggregate disbursements required to be paid by or for the lessor in connection with the ownership of the Property, including the lessor's initial Equity Investment and any direct costs to finance the Equity Investment.

6 Furnish an opinion, from a qualified expert who has professional knowledge of the type of property subject to the lease, regarding:

(a) the fair market value of the Property at the end of the lease term, determined in accordance with section 4(1)(C) of Rev. Proc. 75-21, and the manner in which such fair market value was determined;

(b) the cost to the lessor, if any, of the removal and delivery of possession of the Property to the lessor at the end of the lease term; and

(c) the remaining useful life of the Property at the end of the lease term, and the manner in which such useful life was determined.

.03 Lease Term and Renewal Options

Indicate the period for which the Property will be leased initially, whether there are any provisions for the renewal or extension of such period, and, if so, on what terms.

.04 Purchase and Sale Rights

1 Indicate whether any member of the Lessee Group or any other party has a contractual obligation or right to purchase all or any part of the Property at any time, and, if so, when, under what conditions, and at what price.

2 Indicate whether the lessor or any other party has a contractual right to cause any party to purchase the Property, and if so, when and under what conditions.

3 Indicate whether the lessor, a shareholder of the lessor, or a party related to the lessor (within the meaning of section 318 of the Code), or any other party who has joined in the request for a ruling has any present intention to acquire a contractual right to cause any party to purchase or sell the Property, and, if so, when and under what conditions.

4 Indicate whether the lessor may abandon the Property to any party at any time, and if so, when, to whom, and under what conditions.

.05 No Investment by Lessee

1 Indicate whether any member of the Lessee Group may be required to furnish any part of the cost of the Property or the cost of improvements, modifications, or additions to the Property, and if so, when and under what conditions.

2 If improvements, modifications or additions are made or are to be made to the Property, indicate who will own such improvements, modifications, or additions.

3 Indicate whether such improvements, modifications, or additions may be removed from the Property without causing material damage to the Property.

4 Indicate whether the transaction contains any cost overrun provisions and who must pay the cost overrun.

5 Indicate whether the lease provides for an adjustment to rents to compensate the lessor for any additional cost incurred because of cost overruns, improvements, modifications, or additions to the Property.

6 Identify all other parties who provided or will provide funds necessary to purchase any improvements, modifications, or additions to the Property, and the amounts of any resulting indebtedness.

.06 No Lessee Loans or Guarantees

1 Indicate whether any member of the Lessee Group will guarantee any indebtedness incurred in connection with the acquisition of the Property by the lessor and, if so, under what terms and conditions.

2 Indicate whether any member of the Lessee Group directly or indirectly made or will make any other guarantees as a part or result of the lease transaction. If so, describe such guarantees.

.07 Profit Requirement

1 Submit an analysis demonstrating that the lessor will receive a profit from the transaction exclusive of benefits from the tax attributes thereof. This analysis should demonstrate that the items identified as (a), (b), and (c) below will solve the formula "(a) + (b) exceed (c)."

(a) The projected aggregate payments required to be paid by the lessee to or for the lessor over the lease term.

(b) The value of the residual investment described in section 4(1)(C) of Rev. Proc. 75-21.

(c) The projected sum of the aggregate disbursements required to be paid by or for the lessor in connection with the ownership of the Property, including the lessor's initial Equity Investment, and any direct costs to finance the Equity Investment.

2 Submit an analysis demonstrating that the lessor will have a projected positive cash flow from the lease transaction. This analysis must contain the following information in order to demonstrate that the items identified as (a) and (b) will solve the formula "(a) exceeds (b) by a reasonable minimum amount."

(a) The projected aggregate payments required to be paid by the lessee to or for the lessor over the lease term.

(b) The projected aggregate disbursements required to be paid by or for the lessor in connection with the ownership of the Property, excluding the lessor's initial Equity Investment, but including any direct costs to finance the Equity Investment.

.08 Other Considerations: Uneven Rent

1 Submit an analysis demonstrating that the annual rent to be paid always will be within a range of 10 percent above or below the average annual rent computed by dividing the total annual rents payable over the lease term by the number of years in such term.

2 If the test indicated in section 4.081 cannot be met, prepare an analysis that demonstrates whether the annual rents come within the limits set forth in (a) and (b) below.

(a) During the initial portion of the lease term (a period of at least two-thirds of the lease term) the annual rent always will be within a range of 10 percent above or below the amount determined to be the average annual rent for such initial portion of the lease term. The average annual rent for such initial portion is calculated by dividing the total annual rent payable over such initial portion by the number of years in such initial portion.

(b) The annual rent for any year of the lease term following such initial portion is no greater than the highest annual rent for any year during such initial portion and no less than one-half of the average annual rent during such initial portion.

3 If neither the test in section 4.081 nor 4.082 above can be met, then a ruling whether any portion of the uneven rent payments is prepaid or deferred rent must be requested and a complete explanation submitted as to why the rent payments are uneven.

.09 Other Considerations: Limited Use Property

1 Indicate whether the Property is expected to be useful or usable by the lessor at the end of the lease term and capable of continued leasing or transfer to any party. If such a representation is made, demonstrate its commercial feasibility.

2 Indicate whether the Property would be useful or usable at the end of the lease term by a party other than a member of the Lessee Group, and if so, describe such use.

3 Indicate whether the Property needs to be dismantled, disconnected, or removed from any site on which it was placed or installed in order for possession thereof to be returned to the lessor at the end of the lease term. If so:

(a) Indicate whether and how such dismantling, disconnection, or removal will affect the value of the Property for the purpose for which it was originally intended to be used, and

(b) Demonstrate the commercial feasibility of reassembling, reconnecting, or reinstalling the Property at another location.

.10 Other

1 Set forth the details of the repayment of the portion of the total acquisition cost borrowed by the lessor (debt service), including an analysis of the anticipated repayment of principal and interest on such debt by the lessor.

2 List and explain all provisions of the lease transaction relating to indemnities, termination, obsolescence, casualty, stipulated casualty value, and insurance.

3 State that if the Service rules that the lessor is the owner of the Property for Federal income tax purposes at the time that the Property is first placed in service or use, the lessee will not claim that it is such an owner at such time.

4 State whether the lessor will or will not elect under section 48(d) of the Code to treat the lessee as owner of the Property for purposes of the investment tax credit.

Sec. 5. Other Instructions

Documents have been submitted with the request for an advance ruling may, as indicated below, be amended by the parties, prior to the date on which the Property is first placed in service or use. A complete explanation of the changes must be submitted together with specific references to both the original and amended documents. If, as a result of the amended documents, the responses required by section 4 of this Revenue Procedure are modified, the revised responses must be brought to the attention of the Service in such a fashion as to be readily understandable. In situations where the transaction is materially revised by the amendments, the original request for advance ruling, together with all submissions including the amended documents, will be considered by the Service to be a new request for advance ruling received on the date that it receives the amended documents. The Service ordinarily will not rule on the consequences of a proposed amendment that purports to relate back to the time when the Property was first placed in service or use, or purports to affect the issue of the ownership of the Property at that time.

Sec. 6. Effective Date

The provisions of this Revenue Procedure are effective May 6, 1975.

Sec. 7. Effect on Other Documents

Rev. Proc. 72-3 is modified to the extent provided in section 3.02 of this Revenue Procedure.

Sec. 8. Inquiries

Inquiries regarding this Revenue Procedure should refer to its number and be addressed to the Commissioner of Internal Revenue, 1111 Constitution Avenue, N.W., Washington, D.C. 20224, Attention: T:C:C.

¹ Also released as TIR-1371, dated May 5, 1975.