[Code of Federal Regulations]
[Title 26, Volume 14]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR5c.168(f)(8)-3]

[Page 86]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 5c_TEMPORARY INCOME TAX REGULATIONS UNDER THE ECONOMIC RECOVERY TAX ACT OF 1981--Table of Contents
 
Sec.  5c.168(f)(8)-3  Requirements for lessor.

    (a) Qualified lessor. In order for an agreement to be treated as a 
lease under section 168(f)(8), the party characterized in the agreement 
as the lessor must be a qualified lessor. The term ``qualified lessor'' 
means--
    (1) A corporation which is neither an electing small business 
corporation under section 1371(b) nor a personal holding company under 
section 542(a), or
    (2) A partnership all of whose partners are corporations described 
in subparagraph (1), or
    (3) A grantor trust whose grantor and beneficiaries are all 
corporations described in paragraph (a)(1) or partnerships described in 
paragraph (a)(2).
    (b) Effect of disqualification of lessor. If at any time during the 
term of the agreement the lessor ceases to be a qualified lessor, the 
agreement will lose its characterization as a lease under section 
168(f)(8) as of the date of the event causing such disqualification. If 
any partner of a partnership described in paragraph (a)(2) ceases to be 
a corporation described in paragraph (a)(1), the partnership entity 
shall cease to be a qualified lessor. Similarly, if any beneficiary of a 
trust described in paragraph (a)(3) ceases to be a corporation described 
in paragraph (a)(1), the trust shall cease to be a qualified lessor. See 
Sec.  5c.168(f)(8)-8 for the Federal income tax consequences of such a 
disqualification.
    (c) One tax owner per property. Only one person may be a qualified 
lessor under section 168(f)(8) with respect to leased property. Thus, 
property that is subject to a lease under section 168(f)(8) may not be 
subleased under a lease for which a section 168(f)(8) election is made. 
In addition, if a lessor sells or assigns in a taxable transaction its 
interest in a section 168(f)(8) lease or in the underlying property, the 
lease shall cease to qualify under section 168(f)(8) and no other lease 
may be executed under section 168(f)(8) with respect to the property. 
The preceding sentence applies to a sale or assignment of its interest 
by a partner of a lessor that is a partnership described in paragraph 
(a)(2) of this section or by a beneficiary of a lessor that is a trust 
described in paragraph (a)(3) of this section. See Sec.  5c.168(f)(8)-8 
for the Federal income tax consequences where a lease ceases to qualify 
under section 168(f)(8). However, lease brokers, agents, etc., may, for 
example, prepare executory contracts with the lessee whereby the 
broker's assignee may execute a lease as lessor, and, if the 
requirements of section 168(f)(8) and Sec. Sec.  5c.168(f)(8)-1 through 
5c.168(f)(8)-11 are met, the lease will qualify under section 168(f)(8).
    (d) Examples. The application of paragraph (c) may be illustrated by 
the following examples:

    Example (1). X Corp. (as lessee) sells certain new equipment to Y 
Corp. (as lessor) and leases it back under a section 168(f)(8) lease. 
Within 3 months after the property was placed in service, Y assigns its 
interest in the lease to Z. Upon the transfer to Z, the lease will no 
longer qualify for treatment under section 168(f)(8). The property may 
not thereafter be the subject of a section 168(f)(8) lease.
    Example (2). X Corp., which wishes to acquire certain equipment for 
use in its business and to transfer ownership of the property for 
Federal income tax law purposes, purchases the equipment and enters into 
an executory contract with LB, a lease broker, under which X agrees to 
execute a section 168(f)(8) lease as lessee with a third party lessor. 
At a later date (but within the prescribed 3-month period), LB arranges 
for X and T Corp. (which wishes to secure Federal income tax law 
ownership) to execute a lease agreement in accordance with Sec.  
5c.168(f)(8)-2. The lease will qualify for treatment under section 
168(f)(8).

[T.D. 7791, 46 FR 51907, Oct. 23, 1981, as amended by T.D. 7795, 46 FR 
56149, Nov. 13, 1981]