Attorney Suggests Revision of Proposed Leasing Legislation

Dear Ms. Olson:

[1] We noted with considerable interest that Treasury intends to propose legislation to further restrict tax benefits accruing to the owners of property leased to tax-exempt entities, where there is no economic substance to the leasing transaction.

[2] In this regard, one issue concerns us. A number of taxpayers are in the process of constructing or extensively renovating facilities, such as hospitals, student unions and dormitories, for lease to tax-exempt entities. These taxpayers are structuring such transactions to comply with "true-lease" requirements, and will be subject to significant business risks. Moreover, such facilities already will be depreciated using the longer periods mandated by the alternative depreciation system, as required under Internal Revenue Code Sections 168(g) and (h).

[3] The construction of these facilities is purposive economic activity of a type which should not be prohibited. These transactions do not involve "defeased" debt structures or any of the other traditional indicia of "SILO" or "LILO" transactions. Therefore, we would appreciate making clear in the drafting of the proposed legislation that such real economic activity will not be penalized, even when leased to a tax-exempt entity.

[4] We would be pleased to discuss this matter with you further. Please feel free to contact me at (212) 626-4470.