26 U.S. Code § 470 - Limitation on deductions allocable to property used by governments or other tax-exempt entities
Except as otherwise provided in this section, a tax-exempt use loss for any taxable year shall not be allowed.
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.
Such term shall not include any property which would (but for this subparagraph) be tax-exempt use property solely by reason of section 168(h)(6).
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).
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.
To the extent provided in regulations, a higher percentage shall be permitted under clause (i) where necessary because of the credit-worthiness of the lessee. In no event may such regulations permit a percentage of more than 50 percent.
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 exercise), 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.
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.
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.
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.
This section shall be applied before the application of section 469.
The terms “lessor”, “lessee”, and “lender” each include any related party (within the meaning of section 197(f)(9)(C)(i)).
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.
 So in original. Probably should be “subparagraph (A)(ii)”.
2007—Subsec. (c)(2). Pub. L. 110–172, § 7(c)(1), reenacted heading without change and amended text generally. Prior to amendment, text read as follows: “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.”
Subsec. (d)(1)(A). Pub. L. 110–172, § 7(c)(2), in introductory provisions, substituted “(at all times during the lease term)” for “(at any time during the lease term)”.
Amendment by Pub. L. 110–172 effective as if included in the provision of the American Jobs Creation Act of 2004, Pub. L. 108–357, to which such amendment relates, see section 7(e) of Pub. L. 110–172, set out as a note under section 1092 of this title.
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