# § 467. Certain payments for the use of property or services
**(a)** **Accrual method on present value basis** In the case of the lessor or lessee under any section 467 rental agreement, there shall be taken into account for purposes of this title for any taxable year the sum of—
**(1)** the amount of the rent which accrues during such taxable year as determined under subsection (b), and
**(2)** interest for the year on the amounts which were taken into account under this subsection for prior taxable years and which are unpaid.
**(b)** **Accrual of rental payments**
**(1)** **Allocation follows agreement** Except as provided in paragraph (2), the determination of the amount of the rent under any section 467 rental agreement which accrues during any taxable year shall be made—
**(A)** by allocating rents in accordance with the agreement, and
**(B)** 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.
**(2)** **Constant rental accrual in case of certain tax avoidance transactions, etc.** 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.
**(3)** **Agreements to which paragraph (2) applies** Paragraph (2) applies to any rental payment agreement if—
**(A)** such agreement is a disqualified leaseback or long-term agreement, or
**(B)** such agreement does not provide for the allocation referred to in paragraph (1)(A).
**(4)** **Disqualified leaseback or long-term agreement** For purposes of this subsection, the term “disqualified leaseback or long-term agreement” means any section 467 rental agreement if—
**(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
**(B)** a principal purpose for providing increasing rents under the agreement is the avoidance of tax imposed by this subtitle.
**(5)** **Exceptions to disqualification in certain cases** The Secretary shall prescribe regulations setting forth circumstances under which agreements will not be treated as disqualified leaseback or long-term agreements, including circumstances relating to—
**(A)** changes in amounts paid determined by reference to price indices,
**(B)** rents based on a fixed percentage of lessee receipts or similar amounts,
**(C)** reasonable rent holidays, or
**(D)** changes in amounts paid to unrelated 3rd parties.
**(c)** **Recapture of prior understated inclusions under leaseback or long-term agreements**
**(1)** **In general** If—
the recapture amount shall be treated as ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle.
**(A)** the lessor under any section 467 rental agreement disposes of any property subject to such agreement during the term of such agreement, and
**(B)** such agreement is a leaseback or long-term agreement to which paragraph (2) of subsection (b) did not apply,
**(2)** **Recapture amount** For purposes of paragraph (1), the term “recapture amount” means the lesser of—
The amount determined under subparagraph (B) shall be reduced by the amount of any gain treated as ordinary income on the disposition under any other provision of this subtitle.
**(A)** the prior understated inclusions, or
**(B)** 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.
**(3)** **Prior understated inclusions** For purposes of this subsection, the term “prior understated inclusion” means the excess (if any) of—
**(A)** 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
**(B)** the amount taken into account under subsection (a) by the lessor for periods before the disposition.
**(4)** **Leaseback or long-term agreement** For purposes of this subsection, the term “leaseback or long-term agreement” means any agreement described in subsection (b)(4)(A).
**(5)** **Special rules** Under regulations prescribed by the Secretary—
**(A)** exceptions similar to the exceptions applicable under section 1245 or 1250 (whichever is appropriate) shall apply for purposes of this subsection,
**(B)** 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
**(C)** 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.
**(d)** **Section 467 rental agreements**
**(1)** **In general** Except as otherwise provided in this subsection, the term “section 467 rental agreements” means any rental agreement for the use of tangible property under which—
**(A)** 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
**(B)** there are increases in the amount to be paid as rent under the agreement.
**(2)** **Section not to apply to agreements involving payments of $250,000 or less** This section shall not apply to any amount to be paid for the use of property if the sum of the following amounts does not exceed $250,000—
For purposes of the preceding sentence, rules similar to the rules of clauses (ii) and (iii) of section 1274(c)(4)(C) shall apply.
**(A)** the aggregate amount of payments received as consideration for such use of property, and
**(B)** the aggregate value of any other consideration to be received for such use of property.
**(e)** **Definitions** For purposes of this section—
**(1)** **Constant rental amount** 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.
**(2)** **Leaseback transaction** 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).
**(3)** **Statutory recovery period**
**(A)** **In general**
| In the case of: | The statutory recoveryperiod 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. |
**(B)** **Special rule for property not depreciable under section 168** 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.
**(4)** **Discount and interest rate** 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.
**(5)** **Related person** The term “related person” has the meaning given to such term by section 465(b)(3)(C).
**(6)** **Certain options of lessee to renew not taken into account** 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.
**(f)** **Comparable rules where agreement for decreasing payments** 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.
**(g)** **Comparable rules for services** 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.
**(h)** **Regulations** 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.
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**Source Credit**: (Added Pub. L. 98–369, div. A, title I, § 92(a), July 18, 1984, 98 Stat. 609; amended Pub. L. 99–514, title II, § 201(d)(8), title V, § 511(d)(2)(A), title VI, § 631(e)(10), title XVIII, §§ 1807(b), 1879(f)(1), Oct. 22, 1986, 100 Stat. 2141, 2248, 2274, 2816, 2906; Pub. L. 100–647, title I, §§ 1002(i)(2)(H), 1005(c)(10), Nov. 10, 1988, 102 Stat. 3371, 3392; Pub. L. 108–27, title III, § 302(e)(4)(B)(ii), May 28, 2003, 117 Stat. 764.)
## Editorial Notes
### Amendments
2003—Subsec. (c)(5)(C). struck out “, 341(e)(12),” after “170(e)”.
1988—Subsec. (c)(5)(C). , made technical correction to directory language of . See 1986 Amendment note below.
Subsec. (e)(3)(A). , at end of table inserted item relating to any railroad grading or tunnel bore.
1986—Subsec. (b)(4)(A). , substituted “statutory recovery period” for “statutory recover period”.
Subsec. (c)(4). , substituted “subsection (b)(4)(A)” for “subsection (b)(3)(A)”.
Subsec. (c)(5)(C). , struck out “453B(d)(2),” after “341(e)(12),”.
, as amended by , struck out “163(d),” after “sections”.
Subsec. (d)(2). , substituted “section 1274(c)(4)(C)” for “section 1274(c)(2)(C)”.
Subsec. (e)(3)(A). , in amending subpar. (A) generally, included in table 7-year property, 15-year and 20-year property, and residential rental property and nonresidential real property having recovery periods of 7, 15, and 19 years, respectively, and struck out from table low-income housing, 15-year public utility property, and 19-year real property having recovery periods of 15, 15, and 19 years, respectively.
, substituted “19-year real property” and “19 years” for “18-year real property” and “18 years”, respectively.
Subsec. (e)(3)(B). , in amending subpar. (B) generally, substituted in heading “not depreciable under section 168” for “which is not recovery property” and in text “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 “In the case of any property, which is not recovery property, subparagraph (A) shall be applied as if such property were recovery property.”
Subsec. (e)(5). , substituted “section 465(b)(3)(C)” for “section 168(e)(4)(D)”.
, substituted “section 168(e)(4)(D)” for “section 168(d)(4)(D)”.
Subsec. (g). , inserted at end “The preceding sentence shall not apply to any amount to which section 404 or 404A (or any other provision specified in regulations) applies.”
## Statutory Notes and Related Subsidiaries
### Effective Date of 2003 Amendment
Amendment by applicable, except as otherwise provided, to taxable years beginning after , see , set out as an Effective and Termination Dates of 2003 Amendment note under .
### Effective Date of 1988 Amendment
Amendment by effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, , to which such amendment relates, see , set out as a note under .
### Effective Date of 1986 Amendment
Amendment by applicable to property placed in service after , in taxable years ending after such date, with exceptions, see sections 203 and 204 of , set out as a note under .
Amendment by not applicable to any property placed in service before , if such property placed in service as part of specified rehabilitations, and not applicable to certain additional rehabilitations, see section 251(d)(2), (3) of , set out as a note under .
Amendment by applicable to taxable years beginning after , see , set out as a note under .
Amendment by applicable to any distribution in complete liquidation, and any sale or exchange, made by a corporation after , unless such corporation is completely liquidated before , any transaction described in for which the acquisition date occurs after , and any distribution, not in complete liquidation, made after , with exceptions and special and transitional rules, see , set out as an Effective Date note under .
Amendment by effective, except as otherwise provided, as if included in the provisions of the Tax Reform Act of 1984, , to which such amendment relates, see , set out as a note under .
> “The amendments made by paragraph (1) [amending this section] shall take effect as if included in the amendments made by
>
> .”
, , , provided that:
### Effective Date
> **“(1)** **In general.—** 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.
>
> **“(2)** **Exceptions.—** The amendments made by this section shall not apply—
>
> **“(A)** to any agreement entered into pursuant to a written agreement which was binding on June 8, 1984, and at all times thereafter,
>
> **“(B)** subject to the provisions of paragraph (3), to any agreement to lease property if—
>
> **“(i)** 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
>
> **“(ii)** construction of the property was commenced (but such property was not placed in service) on or before March 15, 1984, and
>
> **“(C)** to any agreement to lease property if—
>
> **“(i)** 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,
>
> **“(ii)** the sum of the present values of the rents payable by the lessee under the lease at the inception thereof equals at least $91,223,034, assuming for purposes of this clause—
>
> **“(I)** the annual discount rate is 12.6 percent,
>
> **“(II)** the initial payment of rent occurs 12 months after the commencement of the lease, and
>
> **“(III)** subsequent payments of rents occur on the anniversary date of the initial payment, and
>
> **“(iii)** during—
>
> Paragraph (3)(B)(ii)(II) shall apply for purposes of clauses (ii) and (iii) of subparagraph (C), as if, as of the beginning of the last stage, the separate agreements were treated as 1 single agreement relating to all property covered by the agreements, including any property placed in service before the property to which the agreement for the last stage relates. If the lessor under the agreement described in subparagraph (C) leases the property from another person, this exception shall also apply to any agreement between the lessor and such person which is integrally related to, and entered into at the same time as, such agreement, and which calls for comparable payments of rent over the primary term of the agreement.
>
> **“(I)** the first 5 years of the lease, at least 9 percent of the rents payable by the lessee under the agreement are paid, and
>
> **“(II)** the second 5 years of the lease, at least 16.25 percent of the rents payable by the lessee under the agreement are paid.
>
> **“(3)** **Schedule of deemed rental payments.—**
>
> **“(A)** **In general.—** In any case to which paragraph (2)(B) applies, for purposes of the Internal Revenue Code of 1986 [formerly I.R.C. 1954], the lessor shall be treated as having received or accrued (and the lessee shall be treated as having paid or incurred) rents equal to the greater of—
>
> **“(i)** the amount of rents actually paid under the agreement during the taxable year, or
>
> **“(ii)** the amount of rents determined in accordance with the schedule under subparagraph (B) for such taxable year.
>
> **“(B)** **Schedule.—**
>
> **“(i)** **In general.—** 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. |
>
> **“(ii)** **Operating rules.—** For purposes of this schedule—
>
> **“(I)** 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
>
> **“(II)** 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.
>
> **“(C)** **Paragraph not to apply.—** 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.”
, , , as amended by , , , provided that:
### Plan Amendments Not Required Until January 1, 1989
For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§ 1101–1147 and 1171–1177] or title XVIII [§§ 1800–1899A] of require an amendment to any plan, such plan amendment shall not be required to be made before the first plan year beginning on or after , see , as amended, set out as a note under .