H. R. 4520—186
‘‘(b) DISALLOWED LOSS CARRIED
TO NEXT YEAR.—Any tax-
exempt use loss with respect to any tax-exempt use property which
is disallowed under subsection (a) for any taxable year shall be
treated as a deduction with respect to such property in the next
taxable year.
‘‘(c) DEFINITIONS.—For purposes of this section—
‘‘(1) TAX-EXEMPT USE LOSS.—The term ‘tax-exempt use loss’
means, with respect to any taxable year, the amount (if any)
by which—
‘‘(A) the sum of—
‘‘(i) the aggregate deductions (other than interest)
directly allocable to a tax-exempt use property, plus
‘‘(ii) the aggregate deductions for interest properly
allocable to such property, exceed
‘‘(B) the aggregate income from such property.
‘‘(2) TAX-EXEMPT USE PROPERTY.—The term ‘tax-exempt use
property’ has the meaning given to such term by section 168(h),
except that such section shall be applied—
‘‘(A) without regard to paragraphs (1)(C) and (3)
thereof, and
‘‘(B) as if property described in—
‘‘(i) section 167(f)(1)(B),
‘‘(ii) section 167(f)(2), and
‘‘(iii) section 197 intangible,
were tangible property.
Such term shall not include property which would (but for
this sentence) be tax-exempt use property solely by reason
of section 168(h)(6) if any credit is allowable under section
42 or 47 with respect to such property.
‘‘(d) EXCEPTION FOR CERTAIN LEASES.—This section shall not
apply to any lease of property which meets the requirements of
all of the following paragraphs:
‘‘(1) AVAILABILITY OF FUNDS.—
‘‘(A) IN
GENERAL.—A lease of property meets the
requirements of this paragraph if (at any time during the
lease term) not more than an allowable amount of funds
are—
‘‘(i) subject to any arrangement referred to in
subparagraph (B), or
‘‘(ii) set aside or expected to be set aside,
to or for the benefit of the lessor or any lender, or to
or for the benefit of the lessee to satisfy the lessee’s obliga-
tions or options under the lease. For purposes of clause
(ii), funds shall be treated as set aside or expected to
be set aside only if a reasonable person would conclude,
based on the facts and circumstances, that such funds
are set aside or expected to be set aside.
‘‘(B) ARRANGEMENTS.—The arrangements referred to
in this subparagraph include a defeasance arrangement,
a loan by the lessee to the lessor or any lender, a deposit
arrangement, a letter of credit collateralized with cash
or cash equivalents, a payment undertaking agreement,
prepaid rent (within the meaning of the regulations under
section 467), a sinking fund arrangement, a guaranteed
investment contract, financial guaranty insurance, and any
similar arrangement (whether or not such arrangement
provides credit support).
H. R. 4520—187
‘‘(C) ALLOWABLE AMOUNT.—
‘‘(i) IN
GENERAL.—Except as otherwise provided
in this subparagraph, the term ‘allowable amount’
means an amount equal to 20 percent of the lessor’s
adjusted basis in the property at the time the lease
is entered into.
‘‘(ii) HIGHER
AMOUNT
PERMITTED
IN
CERTAIN
CASES.—To the extent provided in regulations, a higher
percentage shall be permitted under clause (i) where
necessary because of the credit-worthiness of the les-
see. In no event may such regulations permit a percent-
age of more than 50 percent.
‘‘(iii) OPTION
TO
PURCHASE.—If under the lease
the lessee has the option to purchase the property
for a fixed price or for other than the fair market
value of the property (determined at the time of exer-
cise), the allowable amount at the time such option
may be exercised may not exceed 50 percent of the
price at which such option may be exercised.
‘‘(iv) 
NO
ALLOWABLE
AMOUNT
FOR
CERTAIN
ARRANGEMENTS.—The allowable amount shall be zero
with respect to any arrangement which involves—
‘‘(I) a loan from the lessee to the lessor or
a lender,
‘‘(II) any deposit received, letter of credit
issued, or payment undertaking agreement entered
into by a lender otherwise involved in the trans-
action, or
‘‘(III) in the case of a transaction which
involves a lender, any credit support made avail-
able to the lessor in which any such lender does
not have a claim that is senior to the lessor.
For purposes of subclause (I), the term ‘loan’ shall
not include any amount treated as a loan under section
467 with respect to a section 467 rental agreement.
‘‘(2) LESSOR
MUST
MAKE
SUBSTANTIAL
EQUITY
INVEST-
MENT.—
‘‘(A) IN
GENERAL.—A lease of property meets the
requirements of this paragraph if—
‘‘(i) the lessor—
‘‘(I) has at the time the lease is entered into
an unconditional at-risk equity investment (as
determined by the Secretary) in the property of
at least 20 percent of the lessor’s adjusted basis
in the property as of that time, and
‘‘(II) maintains such investment throughout
the term of the lease, and
‘‘(ii) the fair market value of the property at the
end of the lease term is reasonably expected to be
equal to at least 20 percent of such basis.
‘‘(B) RISK OF LOSS.—For purposes of clause (ii), the
fair market value at the end of the lease term shall be
reduced to the extent that a person other than the lessor
bears a risk of loss in the value of the property.
‘‘(C) PARAGRAPH
NOT
TO
APPLY
TO
SHORT-TERM
LEASES.—This paragraph shall not apply to any lease with
a lease term of 5 years or less.
H. R. 4520—188
‘‘(3) LESSEE MAY NOT BEAR MORE THAN MINIMAL RISK OF
LOSS.—
‘‘(A) IN
GENERAL.—A lease of property meets the
requirements of this paragraph if there is no arrangement
under which the lessee bears—
‘‘(i) any portion of the loss that would occur if
the fair market value of the leased property were 25
percent less than its reasonably expected fair market
value at the time the lease is terminated, or
‘‘(ii) more than 50 percent of the loss that would
occur if the fair market value of the leased property
at the time the lease is terminated were zero.
‘‘(B) EXCEPTION.—The Secretary may by regulations
provide that the requirements of this paragraph are not
met where the lessee bears more than a minimal risk
of loss.
‘‘(C) PARAGRAPH
NOT
TO
APPLY
TO
SHORT-TERM
LEASES.—This paragraph shall not apply to any lease with
a lease term of 5 years or less.
‘‘(4) PROPERTY WITH MORE THAN 7-YEAR CLASS LIFE.—In
the case of a lease—
‘‘(A) of property with a class life (as defined in section
168(i)(1)) of more than 7 years, other than fixed-wing air-
craft and vessels, and
‘‘(B) under which the lessee has the option to purchase
the property,
the lease meets the requirements of this paragraph only if
the purchase price under the option equals the fair market
value of the property (determined at the time of exercise).
‘‘(e) SPECIAL RULES.—
‘‘(1) TREATMENT OF FORMER TAX-EXEMPT USE PROPERTY.—
‘‘(A) IN GENERAL.—In the case of any former tax-exempt
use property—
‘‘(i) any deduction allowable under subsection (b)
with respect to such property for any taxable year
shall be allowed only to the extent of any net income
(without regard to such deduction) from such property
for such taxable year, and
‘‘(ii) any portion of such unused deduction
remaining after application of clause (i) shall be treated
as a deduction allowable under subsection (b) with
respect to such property in the next taxable year.
‘‘(B) FORMER TAX-EXEMPT USE PROPERTY.—For purposes
of this subsection, the term ‘former tax-exempt use prop-
erty’ means any property which—
‘‘(i) is not tax-exempt use property for the taxable
year, but
‘‘(ii) was tax-exempt use property for any prior
taxable year.
‘‘(2) DISPOSITION
OF
ENTIRE
INTEREST
IN
PROPERTY.—If
during the taxable year a taxpayer disposes of the taxpayer’s
entire interest in tax-exempt use property (or former tax-
exempt use property), rules similar to the rules of section
469(g) shall apply for purposes of this section.
‘‘(3) COORDINATION WITH SECTION 469.—This section shall
be applied before the application of section 469.
‘‘(4) COORDINATION WITH SECTIONS 1031 AND 1033.—
H. R. 4520—189
‘‘(A) IN GENERAL.—Sections 1031(a) and 1033(a) shall
not apply if—
‘‘(i) the exchanged or converted property is tax-
exempt use property subject to a lease which was
entered into before March 13, 2004, and which would
not have met the requirements of subsection (d) had
such requirements been in effect when the lease was
entered into, or
‘‘(ii) the replacement property is tax-exempt use
property subject to a lease which does not meet the
requirements of subsection (d).
‘‘(B) ADJUSTED BASIS.—In the case of property acquired
by the lessor in a transaction to which section 1031 or
1033 applies, the adjusted basis of such property for pur-
poses of this section shall be equal to the lesser of—
‘‘(i) the fair market value of the property as of
the beginning of the lease term, or
‘‘(ii) the amount which would be the lessor’s
adjusted basis if such sections did not apply to such
transaction.
‘‘(f) OTHER DEFINITIONS.—For purposes of this section—
‘‘(1) RELATED
PARTIES.—The terms ‘lessor’, ‘lessee’, and
‘lender’ each include any related party (within the meaning
of section 197(f)(9)(C)(i)).
‘‘(2) LEASE TERM.—The term ‘lease term’ has the meaning
given to such term by section 168(i)(3).
‘‘(3) LENDER.—The term ‘lender’ means, with respect to
any lease, a person that makes a loan to the lessor which
is secured (or economically similar to being secured) by the
lease or the leased property.
‘‘(4) LOAN.—The term ‘loan’ includes any similar arrange-
ment.
‘‘(g) REGULATIONS.—The Secretary shall prescribe such regula-
tions as may be necessary or appropriate to carry out the purposes
of this section, including regulations which—
‘‘(1) allow in appropriate cases the aggregation of property
subject to the same lease, and
‘‘(2) provide for the determination of the allocation of
interest expense for purposes of this section.’’.
(b) CONFORMING AMENDMENT.—The table of sections for sub-
part C of part II of subchapter E of chapter 1 is amended by
adding at the end the following new item:
‘‘Sec. 470. Limitation on deductions allocable to property used by govern-
ments or other tax-exempt entities.’’.
SEC. 849. EFFECTIVE DATE.
(a) IN GENERAL.—Except as provided in this section, the amend-
ments made by this part shall apply to leases entered into after
March 12, 2004.
(b) EXCEPTION.—
(1) IN GENERAL.—The amendments made by this part shall
not apply to qualified transportation property.
(2) QUALIFIED TRANSPORTATION PROPERTY.—For purposes
of paragraph (1), the term ‘‘qualified transportation property’’
means domestic property subject to a lease with respect to
which a formal application—