26 U.S.C. § 467: Certain payments for the use of property or services

the amount of the rent which accrues during such taxable year as determined under subsection (b), and interest for the year on the amounts which were taken into account under this subsection for prior taxable years and which are unpaid. by allocating rents in accordance with the agreement, and by taking into account any rent to be paid after the close of the period in an amount determined under regulations which shall be based on present value concepts. In the case of any section 467 rental agreement to which this paragraph applies, the portion of the rent which accrues during any taxable year shall be that portion of the constant rental amount with respect to such agreement which is allocable to such taxable year. such agreement is a disqualified leaseback or long-term agreement, or such agreement does not provide for the allocation referred to in paragraph (1)(A). such agreement is part of a leaseback transaction or such agreement is for a term in excess of 75 percent of the statutory recovery period for the property, and a principal purpose for providing increasing rents under the agreement is the avoidance of tax imposed by this subtitle. changes in amounts paid determined by reference to price indices, rents based on a fixed percentage of lessee receipts or similar amounts, reasonable rent holidays, or changes in amounts paid to unrelated 3rd parties. the lessor under any section 467 rental agreement disposes of any property subject to such agreement during the term of such agreement, and such agreement is a leaseback or long-term agreement to which paragraph (2) of subsection (b) did not apply, the prior understated inclusions, or the excess of the amount realized (or in the case of a disposition other than a sale, exchange, or involuntary conversion, the fair market value of the property) over the adjusted basis of such property. the amount which would have been taken into account by the lessor under subsection (a) for periods before the disposition if subsection (b)(2) had applied to the agreement, over the amount taken into account under subsection (a) by the lessor for periods before the disposition. For purposes of this subsection, the term “leaseback or long-term agreement” means any agreement described in subsection (b)(4)(A). exceptions similar to the exceptions applicable under section 1245 or 1250 (whichever is appropriate) shall apply for purposes of this subsection, any transferee in a disposition excepted by reason of subparagraph (A) who has a transferred basis in the property shall be treated in the same manner as the transferor, and for purposes of sections 170(e) and 751(c), amounts treated as ordinary income under this section shall be treated in the same manner as amounts treated as ordinary income under section 1245 or 1250. there is at least one amount allocable to the use of property during a calendar year which is to be paid after the close of the calendar year following the calendar year in which such use occurs, or there are increases in the amount to be paid as rent under the agreement. the aggregate amount of payments received as consideration for such use of property, and the aggregate value of any other consideration to be received for such use of property. The term “constant rental amount” means, with respect to any section 467 rental agreement, the amount which, if paid as of the close of each lease period under the agreement, would result in an aggregate present value equal to the present value of the aggregate payments required under the agreement. A transaction is a leaseback transaction if it involves a leaseback to any person who had an interest in such property at any time within 2 years before such leaseback (or to a related person). In the case of: The statutory recovery period is: 3-year property 3 years 5-year property 5 years 7-year property 7 years 10-year property 10 years 15-year and 20-year property 15 years Residential rental property and nonresidential real property 19 years Any railroad grading or tunnel bore 50 years. In the case of property to which section 168 does not apply, subparagraph (A) shall be applied as if section 168 applies to such property. For purposes of computing present value and interest under subsection (a)(2), the rate used shall be equal to 110 percent of the applicable Federal rate determined under section 1274(d) (compounded semiannually) which is in effect at the time the agreement is entered into with respect to debt instruments having a maturity equal to the term of the agreement. The term “related person” has the meaning given to such term by section 465(b)(3)(C). Except as provided in regulations prescribed by the Secretary, there shall not be taken into account in computing the term of any agreement for purposes of this section any extension which is solely at the option of the lessee. Under regulations prescribed by the Secretary, rules comparable to the rules of this section shall also apply in the case of any agreement where the amount paid under the agreement for the use of property decreases during the term of the agreement. Under regulations prescribed by the Secretary, rules comparable to the rules of subsection (a)(2) shall also apply in the case of payments for services which meet requirements comparable to the requirements of subsection (d). The preceding sentence shall not apply to any amount to which section 404 or 404A (or any other provision specified in regulations) applies. The Secretary shall prescribe such regulations as may be appropriate to carry out the purposes of this section, including regulations providing for the application of this section in the case of contingent payments. Except as otherwise provided in this subsection, the amendments made by this section [enacting this section] shall apply with respect to agreements entered into after June 8, 1984 . to any agreement entered into pursuant to a written agreement which was binding on June 8, 1984 , and at all times thereafter, there was in effect a firm plan, evidenced by a board of directors’ resolution, memorandum of agreement, or letter of intent on March 15, 1984 , to enter into such an agreement, and construction of the property was commenced (but such property was not placed in service) on or before March 15, 1984 , and the lessee of such property adopted a firm plan to lease the property, evidenced by a resolution of the Finance Committee of the Board of Directors of such lessee, on February 10, 1984 , the annual discount rate is 12.6 percent, the initial payment of rent occurs 12 months after the commencement of the lease, and subsequent payments of rents occur on the anniversary date of the initial payment, and the first 5 years of the lease, at least 9 percent of the rents payable by the lessee under the agreement are paid, and the second 5 years of the lease, at least 16.25 percent of the rents payable by the lessee under the agreement are paid. the amount of rents actually paid under the agreement during the taxable year, or the amount of rents determined in accordance with the schedule under subparagraph (B) for such taxable year. The schedule under this subparagraph is as follows: “Portion of lease term: Cumulative percentage of total rent deemed paid: 1st ⅕ 10 2nd ⅕ 25 3rd ⅕ 45 4th ⅕ 70 Last ⅕ 100. the rent allocable to each taxable year within any portion of a lease term described in such schedule shall be a level pro rata amount properly allocable to such taxable year, and any agreement relating to property which is to be placed in service in 2 or more stages shall be treated as 2 or more separate agreements. This paragraph shall not apply to any agreement if the sum of the present values of all payments under the agreement is greater than the sum of the present value of all the payments deemed to be paid or received under the schedule under subparagraph (B). For purposes of computing any present value under this subparagraph, the annual discount rate shall be equal to 12 percent, compounded semiannually.”