DECLARATION OF TRUST


THIS DECLARATION OF TRUST,  made October 31, 1995 (this  "Declaration"),  by and
among  AMERICAN  INCOME  3  LIMITED   PARTNERSHIP,   a   Massachusetts   limited
partnership,  as grantor  (the  "Grantor"  or the  "Partnership"),  AFG  LEASING
ASSOCIATES, a Massachusetts partnership,  as trustee (in such capacity, together
with its  successors as Trustee  hereunder,  the  "Trustee") and the general and
limited partners of the Grantor as beneficiaries (the "Beneficiaries").


                              Preliminary Statement

The Partnership is being  terminated in accordance with the Amended and Restated
Agreement and Certificate of Limited  Partnership of the Partnership dated as of
December 28,  1983,  as amended from time to time through the date hereof (as so
amended, the "Partnership Agreement").  Capitalized terms used and not otherwise
defined  herein  have the  respective  meanings  set  forth  in the  Partnership
Agreement.

In accordance with the Partnership Agreement,  the Grantor intends to deposit in
a non-interest  bearing custodian account (the "Account") funds (the "Funds") in
an amount  sufficient  in the judgment of the Trustee,  to satisfy any remaining
liabilities of the Partnership (the  "Liabilities") and thereafter to distribute
the  balance  of the  Funds in the  Account,  if any (the "Net  Funds"),  to the
Beneficiaries.

NOW, THEREFORE, in consideration of the premises and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:

1.       Establishment of Trust; Name

         A trust is  hereby  established  to be known as the  American  Income 3
Limited Partnership Liquidating Trust (the "Trust").

2.       Beneficiaries

         The  Beneficiaries of the Trust are the general and limited partners of
the Grantor and their respective  percentage  interests in the Funds and the Net
Funds  (the  "Respective  Interests")  are  their  respective  Interests  in the
termination  distributions  of the  Partnership,  as provided in the Partnership
Agreement.

3.       Trust Property

    (a) The Grantor  hereby  assigns,  transfers and conveys to the Trustee,  in
trust, all right, title and interest of the Grantor in and to the Funds.
    (b) The Trustee shall hold the Funds in order to pay for any  Liabilities in
accordance  with  Article VI of the  Partnership  Agreement  and  thereafter  to
distribute  the  Net  Funds  to  the  Beneficiaries  in  accordance  with  their
Respective Interests.
    (c) The Trustee shall not otherwise deal with the Funds unless directed by a
majority-in-interest of the Beneficiaries.


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4.       Acts of Trustees

    (a)Except as expressly  provided herein,  the Trustee shall have no power to
deal in or with the Funds.
    (b) Notwithstanding any provisions contained herein, the Trustee shall never
be required to take any action which will, in its opinion, cause it to incur any
personal liability unless first indemnified to its satisfaction.  The Funds will
be  available  for  purposes of  indemnification.  Any Person  dealing  with the
Trustee shall be fully protected in accordance with the provisions of Section 7.

5.       Termination of Trust

         This Trust shall terminate within a reasonable period of time after all
Liabilities  of the  Partnership  have been satisfied in full in the judgment of
the  Trustee  but in any  event no later  than  December  31,  2002.  Upon  such
termination,  the Trustee shall transfer and convey the balance of the Net Funds
in the Account to the Beneficiaries in proportion to their Respective Interests.

6.       Resignation and Succession

    (a)  The  Trustee  may  resign at any time,  and any  Trustee  may be 
removed  at any time by the  majority-in-interest  of the Beneficiaries.
    (b) The  cessation  of service by any Trustee  (whether  resulting  from the
death,  incapacity,  resignation or removal of such Trustee for any other cause)
shall be evidenced by a certificate  thereof signed by the Beneficiaries and the
appointment of a succeeding  Trustee shall be evidenced by a certificate  signed
by the succeeding Trustee. The Beneficiaries shall have the power to appoint one
or more successor Trustees hereunder.
    (c) Upon the  appointment  or  succession of any  succeeding  Trustee to the
position of Trustee hereunder, title to the Funds and all portions thereof shall
thereupon  be vested in said  succeeding  Trustee  without the  necessity of any
conveyance or instrument.  Each succeeding Trustee shall have all of the rights,
powers, authority, and privileges as if named as the original Trustee hereunder;
and no Trustee, original or succeeding, shall be required to furnish a bond or a
surety on a bond.

7.       Compensation; Liability and Authority

    (a)No compensation will be paid to any Trustee hereunder.
    (b) No Trustee  hereunder  shall be liable for any error of judgment nor for
any  loss  arising  out of any act or  omission  in good  faith,  but  shall  be
responsible  only for his own willful breach of trust. No license of court shall
be requisite to the validity of any transaction entered into by the Trustee.
    (c) Every  agreement or other  instrument  executed by the Trustee  shall be
conclusive  evidence  in favor of  every  person  relying  thereon  or  claiming
thereunder  that,  at the time of the delivery  thereof,  this Trust was in full
force and effect and that the execution and delivery thereof was duly authorized
hereunder.  Any person dealing with the Trustee may always rely, without further
inquiry,  on a  certificate  signed  by  the  Trustee  hereof,  as to who is the
Trustee, or as to the authority of the Trustee to act, or as to the existence or
non-existence of any fact or facts which constitute conditions precedent to acts
by the  Trustee,  or which are in any other way  germane to the  affairs of this
Trust.

8.       Amendment

         This  Declaration  may be amended from time to time by an instrument in
writing, signed by all of the then Beneficiaries and by the then Trustee hereof.


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9.       Execution

         The  execution  of a  counterpart  of  this  Declaration  or any  other
instrument referred to herein by any one or more of the parties thereto shall be
binding upon the signatories  thereto whether or not other parties have executed
the same  counterpart,  provided  each party  thereto has  executed at least one
counterpart of such instrument.

10.      Liquidating Trust

         The Grantor,  the Trustee and the Beneficiaries  intend that this Trust
shall be liquidating trust under the Code and Regulation  Section  301.7701-4(d)
thereunder  which has been formed with the  objective of  liquidating  the Trust
property.  The Grantor,  the Trustee and  Beneficiaries  do not intend that this
Trust shall carry on a profit-making business.
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         EXECUTED UNDER SEAL, as of the date first above written.

GRANTOR           TRUSTEE

AFG LEASING ASSOCIATES                                                        AFG LEASING ASSOCIATES

By:  AFG Leasing Incorporated,                                               By:  AFG Leasing Incorporated,
     a general partner                                                            a general partner


By:                                                                          By:
     Geoffrey A. MacDonald                                                        Geoffrey A. MacDonald

BENEFICIARIES

Each of those persons listed as General and Limited Partners in Schedule A to the Partnership
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By:

     AFG  Leasing  Incorporated,  as  general  partner  of and for  AFG  Leasing
     Associates,  for  itself  and  as  an  attorney-in-fact  for  each  of  the
     above-named Limited Partners