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

(a) Accrual method on present value basis: A landlord (lessor) or tenant (lessee) under a "section 467 rental agreement" must count, for tax purposes each year, two amounts added together: (1) the rent that accrues that year, figured under subsection (b); and (2) interest on any amount counted in an earlier year that is still unpaid. (b) Accrual of rental payments: (1) Normally, the rent that accrues in a year is figured by (A) allocating rent the way the lease agreement says, and (B) accounting for any rent to be paid after the lease period ends, using regulations based on present-value math (today's value of future payments). (2) But for certain tax-avoidance deals, the rent that accrues each year instead equals that year's share of the "constant rental amount" — an evened-out rent figure defined in subsection (e). (3) This constant-amount rule applies if (A) the agreement is a "disqualified leaseback or long-term agreement," or (B) the agreement simply doesn't allocate rent the normal way. (4) A "disqualified leaseback or long-term agreement" is one that (A) is part of a leaseback, or lasts more than 75 percent of the property's statutory recovery period (defined in (e)(3)), and (B) has increasing rents mainly to avoid tax. (5) The Secretary must write regulations describing situations that are not disqualified — for example, rent tied to price indices, rent based on a fixed share of the tenant's receipts, reasonable rent-free periods, or payment changes to unrelated third parties. (c) Recapture of prior understated inclusions under leaseback or long-term agreements: (1) If a landlord sells or otherwise disposes of leased property during a leaseback or long-term agreement that wasn't subject to the constant-rental rule in (b)(2), the landlord must treat a "recapture amount" as ordinary income, no matter what other tax rules might say. (2) That recapture amount is the smaller of (A) the "prior understated inclusions," or (B) the amount received for the property (or its fair market value, if not sold) minus its adjusted basis — reduced by any gain already counted as ordinary income elsewhere. (3) "Prior understated inclusions" means the extra amount the landlord would have reported under subsection (a) before the sale, if the constant-rental rule had applied, compared to what the landlord actually reported. (4) "Leaseback or long-term agreement" here means any agreement described in (b)(4)(A). (5) The Secretary must write regulations applying exceptions like those under sections 1245 and 1250 (rules for recapturing depreciation), extending recapture treatment to certain buyers who inherit the seller's basis, and coordinating with sections 170(e) and 751(c). (d) Section 467 rental agreements: (1) Generally, a "section 467 rental agreement" is any agreement to use tangible property where either (A) at least one payment for a year's use is due after the end of the following calendar year, or (B) the rent increases over time. (2) This section doesn't apply if the total payments and other consideration for the property's use are $250,000 or less, using rules similar to those in section 1274(c)(4)(C). (e) Definitions: (1) "Constant rental amount" means the level, unchanging rent that — if paid at the end of each lease period — would equal the present value of all the rent actually required under the agreement. (2) A "leaseback transaction" is one where the property is leased back to someone (or a related person) who had an interest in it within the past two years. (3)(A) "Statutory recovery period" is set by property type: 3-year property gets 3 years; 5-year property gets 5 years; 7-year property gets 7 years; 10-year property gets 10 years; 15- and 20-year property gets 15 years; residential rental and nonresidential real property gets 19 years; and railroad grading or tunnel bores get 50 years. (B) For property not depreciated under section 168, this rule applies as if section 168 did apply. (4) The discount and interest rate used for present-value and interest calculations is 110 percent of the applicable federal rate under section 1274(d), compounded twice a year, in effect when the agreement is signed, matching the agreement's term. (5) "Related person" has the meaning given in section 465(b)(3)(C). (6) Unless regulations say otherwise, a lease-renewal option that only the tenant can exercise is not counted when figuring the agreement's term. (f) Comparable rules where agreement for decreasing payments: The Secretary must write regulations applying rules like this section's to agreements where payments decrease over time instead of increase. (g) Comparable rules for services: The Secretary must also write regulations applying rules like subsection (a)(2) — the interest-on-unpaid-amounts rule — to payments for services that meet requirements like those in subsection (d). This does not apply to amounts already covered by section 404, 404A, or another section named in regulations. (h) Regulations: The Secretary must write whatever regulations are needed to carry out this section, including rules for handling contingent (uncertain or variable) payments.