Rev. Rul. 86-87
1986-2 C.B. 45, 1986-28 I.R.B. 7.
Internal Revenue Service
Revenue Ruling
INVESTMENT CREDIT; LEASED AUTOMOBILES
Published: July 14, 1986
Section 280F.- Limitation of Investment Tax Credit and Depreciation for Luxury Automobiles; Limitation Where Certain Property Used for Personal Purposes, 26 CFR 1.280F-5T: Leased property
Investment credit; leased automobiles. Rules are provided for a lessee of a passenger automobile who, for purposes of claiming an investment tax credit; is treated as having acquired the automobile.
This revenue ruling provides rules under section 280F of the Internal Revenue Code for a lessee of a passenger automobile who, for purposes of claiming an investment tax credit, is treated as having acquired the automobile. Taxpayers may rely on these rules until the Temporary Income Tax Regulations under section 280F, published in the Federal Register on October 24, 1984, and amended on November 6, 1985, are further amended to incorporate the provisions of this revenue ruling.
BACKGROUND
As added by section 179 of the Tax Reform Act of 1984 ('the 1984 Act'), 1984-
3 (Vol.1) C.B. 221, and amended by section 4 of the Repeal of the Contemporaneous Recordkeeping Requirements (the '1985 Act'), 1985-2 C.B. 350, section 280F of the Code limits the amount of investment tax credit and annual depreciation deductions allowed for a passenger automobile placed in service or leased after June 18, 1984. Section 280F also provides for the Internal Revenue Service to prescribe tables that impose on lessees of passenger automobiles limitations 'substantially equivalent' to the limitations imposed on similarly situated owners of passenger automobiles.
On October 19, 1984, pursuant to this requirement, the Service issued section
1.280F-5T of the temporary regulations. Section 1.280F-5T(d)(1) of the temporary regulations requires a lessee of a passenger automobile to include in gross income an amount based on the fair market value of the automobile and the lessee's amount of business use. By offsetting the lessee's deduction for lease payments, this inclusion approximates the present value of the limitations imposed on the investment tax credit and annual depreciation deductions of a similarly situated owner.
The 1985 Act further limited the amount of investment tax credit and annual depreciation deductions allowable for passenger automobiles placed in service after April 2, 1985. The limitations on lessees, therefore, were correspondingly made more stringent by amendments to the temporary regulations under section 280F published in the Federal Register on November 6, 1985. The new limitations, which are contained in section 1.280F-5T(e), are applicable to passenger automobiles leased after April 2, 1985.
Neither the limitations issued in October 1984 nor the limitations issued in November 1985 account for situations in which a lessor elects under section
48(d) to treat the lessee as having acquired the automobile, thus allowing the lessee to claim the investment credit. The limitations applicable under section
280F to lessees of passenger automobiles to whom lessors pass through the investment credit are set forth in this revenue ruling.
For purposes of this revenue ruling, the terms 'lease term' and 'fair market value' shall have the meanings provided by section 1.280F-5T(h) of the temporary regulations.
HOLDINGS
Section 1.
This section applies to any taxpayer-
(a) Who leased a passenger automobile after June 18, 1984, but before April
3, 1985, unless (1) a binding contract to lease the passenger automobile was in effect on June 18, 1984, and at all times thereafter, and (2) the lessee first used the automobile before January 1, 1985, and
(b) Who claims the investment tax credit with respect to that automobile.
Instead of the amount determined under section 1.280F-5T(d)(1)(i), the inclusion amount for each of the first three taxable years during which the automobile is leased is 3.5 percent of the excess of the automobile's fair market value over $16,500, multiplied by the percentage of business use for the taxable year and prorated for the number of days of the lease term included in the taxable year. The inclusion amounts for years subsequent to the third taxable year during which such automobile is leased are determined under subdivisions (ii), (iii), and (iv), and the flush provisions of section 1.280F-
5T(d)(l).
Section 2.
(a) This section applies to any taxpayer-
(1) Who leases a passenger automobile after April 2, 1985, unless (i) a binding contract to lease the passenger automobile was entered into no later than April 2, 1985, and was in effect at all times thereafter, and (ii) the lessee first used the automobile before August 1, 1985, and
(2) Who claims the investment tax credit with respect to that automobile.
(b) The inclusion amount for each of the first three taxable years during which the automobile is leased is based on the fair market value of the automobile, the lessee's amount of business use, and the quarter of the taxable year during which the automobile is first used under the lease. For any passenger automobile that has a fair market value not greater than $50,000, this inclusion amount is determined by using the table below instead of the table provided in section 1.280F-5T(e)(2) of the temporary regulations. The inclusion amount is computed as follows:
(1) For the appropriate range of fair market values, select the dollar amount from the column for the quarter of the taxable year in which the automobile is first used under the lease,
(2) Prorate the dollar amount for the number of days of the lease term included in the taxable year, and
(3) Multiply the prorated dollar amount by the percentage of business use for the taxable year.
INCLUSION AMOUNTS: YEARS 1 - 3
Fair Market Taxable year quarter
Value Fourth Third Second First
------------------------------------------------------------
Greater But not
than greater than
$11,250 $11,500 $ 0 $ 0 $ 0 $ 0
11,500 11,750 0 0 0 0
11,750 12,000 0 0 0 0
12,000 12,259 0 0 0 0
12,250 12,500 0 0 0 0
12,500 12,750 0 0 0 0
12,750 13,000 0 0 0 0
13,000 13,250 0 0 0 0
13,250 13,500 9 8 7 6
13,500 13,750 21 18 16 15
13,750 14,000 33 29 26 24
14,000 14,250 45 40 36 32
14,250 14,500 57 51 45 41
14,500 14,750 69 61 55 50
14,750 15,000 81 72 65 59
15,000 15,250 94 83 74 68
15,250 15,500 106 94 84 76
15,500 15,750 118 105 94 85
15,750 16,000 130 115 103 94
16,000 16,250 142 126 113 103
16,250 16,500 154 137 123 111
16,500 16,750 166 148 132 120
16,750 17,000 179 158 142 129
17,000 17,500 197 175 156 142
17,500 18,000 221 196 176 160
18,000 18,500 245 218 195 177
18,500 19,000 270 239 214 195
19,000 19,500 294 261 234 212
19,500 20,000 318 282 253 230
20,000 20,500 343 304 272 247
20,500 21,000 367 325 291 265
21,000 21,500 391 347 311 283
21,500 22,000 416 369 330 300
22,000 23,000 452 401 359 326
23,000 24,000 501 444 398 362
24,000 25,000 549 487 436 397
25,000 26,000 598 530 475 432
26,000 27,000 646 573 513 467
27,000 28,000 695 616 552 502
28,000 29,000 744 659 591 537
29,000 30,000 792 703 629 572
30,000 31,000 841 746 668 607
31,000 32,000 889 789 706 642
32,000 33,000 938 832 745 677
33,000 34,000 987 875 784 713
34,000 35,000 1035 918 822 748
35,000 36,000 1084 961 861 783
36,000 37,000 1132 1004 899 818
37,000 38,000 1181 1047 938 853
38,000 39,000 1230 1090 977 888
39,000 40,000 1278 1134 1015 923
40,000 41,000 1327 1177 1054 958
41,000 42,000 1375 1220 1092 993
42,000 43,000 1424 1263 1131 1028
43,000 44,000 1473 1306 1170 1064
44,000 45,000 1521 1349 1208 1099
45,000 46,000 1570 1392 1247 1134
46,000 47,000 1618 1435 1285 1169
47,000 48,000 1667 1478 1324 1204
48,000 49,000 1716 1521 1363 1239
49,000 50,000 1764 1565 1401 1274
(c) For any passenger automobile which has a fair market value greater than
$18,000, but not greater than $50,000, and for which the lessee claims the investment credit, the inclusion amounts for the fourth, fifth, and sixth taxable years during which the automobile is leased are determined under section 1.280F-5T(e)(3) of the temporary regulations.
(d) For any passenger automobile which has a fair market value greater than
$50,000 and for which the lessee claims the investment credit, the inclusion amount for the first three taxable years during which the automobile is leased is determined according to the formulas below instead of those provided in section 1.280F- 5T(e)(4)(ii)(A) through (D) of the temporary regulations.
(1) The inclusion amount is computed as follows:
(i) Determine the dollar amount by using the appropriate formula below,
(ii) Prorate the dollar amount for the number of days of the lease term included in the taxable year, and
(iii) Multiply this dollar amount by the percentage of business use for the taxable year.
(2) The dollar amount is computed as follows:
(i) If the automobile is first used under the lease in the fourth quarter of a taxable year, the dollar amount for each of the first three taxable years during which the automobile is leased is 5 percent of the excess of the automobile's fair market value over $13,200.
(ii) If the automobile is first used under the lease in the third quarter of a taxable year, the dollar amount for each of the first three taxable years during which the automobile is leased is 4.5 percent of the excess of the automobile's fair market value over $13,200.
(iii) If the automobile is first used under the lease in the second quarter of a taxable year, the dollar amount for each of the first three taxable years during which the automobile is leased is 4 percent of the excess of the automobile's fair market value over $13,200.
(iv) If the automobile is first used under the lease in the first quarter of a taxable year, the dollar amount for each of the first three taxable years during which the automobile is leased is 3.5 percent of the excess of the automobile's fair market value over $13,200.
(e) For any passenger automobile which has a fair market value greater than
$50,000 and for which the lessee claims the investment credit, the inclusion amounts for the fourth, fifth, and sixth taxable years during which the automobile is leased are determined under section 1.280F-5T(e)(4)(ii)(E), (F), and (G), respectively, of the temporary regulations.
(f) (1) For any passenger automobile which has a fair market value less than or equal to $32,400 and for which the lessee claims the investment credit, the inclusion amount for the seventh and subsequent taxable years during which the automobile is leased is zero.
(2) For any passenger automobile which has a fair market value greater than
$32,400 and for which the lessee claims the investment credit, the inclusion amount for the seventh and subsequent taxable years during which the automobile is leased is determined under section 1.280F-5T(e)(5)(ii) of the temporary regulations.
Rev. Rul. 86-87, 1986-2 C.B. 45, 1986-28 I.R.B. 7.