The federal Economic Recovery Tax Act of 1981 (P.L. 97-34) amended the Internal Revenue Code ("Code") to liberalize the rules restricting transfer of ownership of depreciable property for federal tax purposes. Section 168(f)(8) of the Code, added by Public Law 97-34, permits taxpayers who may not be able to fully absorb accelerated cost recovery allowances and investment tax credits to "sell" such tax benefits by entering into "safe harbor" leasing agreements as "lessees."
In the typical safe harbor transaction, the purchaser/lessor transfers cash to the seller/lessee as a down payment on the purchase price of the property that is the subject of the lease; no other cash changes hands because the lessee's "rental payments" are exactly offset by "installment payments" of the balance due on the purchase price.
For an agreement to qualify for safe harbor treatment, all of the parties must characterize it as a lease and elect to have Section 168(f)(8) apply; the taxpayer purchasing the tax benefits must be a qualified lessor with a minimum at-risk investment of not less than 10 per cent of the adjusted basis of the leased property at the time it is first placed in service and at all times during the term of the lease; and the lease term must be within a specified range determined by reference to the property's recovery class period, its useful life, and its asset depreciation range midpoint.
Under Section 168(f)(8) and the temporary U.S. Treasury Regulations interpreting it (U.S. Treas. Reg. 5 . 168(f)(8)-1 et seq.), a transaction may qualify as a safe harbor lease even if it is treated by the parties as a lease for federal tax law purposes only; the regulations expressly provide that the seller/lessee may be the owner of the property for state or local law purpose.
I. Since the starting point for determining the Massachusetts net income of a corporation is gross income as defined under the Code, less deduction allowable under the Code (G.L. c. 63, s. 30(5)), the federal cost recovery and interest expense deductions and the federal rental income of a purchaser/lessor attributable to a safe harbor agreement will be reflected in its Massachusetts net income. Likewise, the federal deduction for rent paid and the federal interest income of a seller/lessee will be reflected in its Massachusetts net income.
II. Where the purchaser/lessor under a safe harbor agreement does not take title to, or possession of, the leased property, the safe harbor agreement will have the following Massachusetts tax consequences:
A. Corporate Excise
1. A foreign corporation whose only contact with Massachusetts is the purchase and leaseback, under a safe harbor agreement, of property located in Massachusetts, will not be subject to the Massachusetts corporate excise.
2. Where property subject to a safe harbor agreement is situated in Massachusetts, but not subject to local taxation nor taxable under Chapter 63, Section 67 (relating to certain vessels), the seller/lessee, and not the purchaser/lessor, will include the value of the property in the tangible property measure of its corporate excise liability. The value of the property will be its federal adjusted basis in the hands of the purchaser/lessor. The seller/lessee must maintain records sufficient to verify that the value of the property included in the value of its tangible property on its Massachusetts return is the same as the basis of the property in the hands of the purchaser/lessor.
3. In applying the Massachusetts income apportionment formula:
(a) The seller/lessee of property subject to safe harbor agreement, and not the purchaser/lessor, will include the value of the property in the denominator of its property factor (and in the numerator, if the property is situated in Massachusetts). The value of the property will be its federal adjusted basis in the hands of the purchaser/lessor. The seller/lessee must maintain records sufficient to verify that the value of the property included in its property factor on its Massachusetts return is the same as the basis of the property in the hands of the purchaser/lessor.
(b) A purchaser/lessor under a safe harbor agreement will not include the rental income attributable to the agreement in the numerator or the denominator of its sales factor; the seller/lessee will not include the down payment or the installment payments attributable to the agreement in the numerator or the denominator of its sales factor.
4. The investment credit set forth in Chapter 63, Section 31A may be taken by a seller/lessee with respect to property otherwise qualifying for the credit, notwithstanding the fact that the property is subject to a safe harbor agreement. A safe harbor agreement will not be regarded as a disposition of qualifying property within the meaning of Section 31A.
B. Sales and Use Taxes
A safe harbor agreement under which neither title to nor possession of property is transferred will not be subject to the Massachusetts sales or use tax.
III. Where the purchaser/lessor takes title to property under a safe harbor agreement, the transaction will be treated for all Massachusetts tax purposes as a true sale to the purchaser/lessor and leaseback or installment sale to the seller/lessee.
IV. Whether a purchaser/lessor takes title to property will be determined on a case-by-case basis according to the principles of Massachusetts law governing passage of title generally. The burden is on the parties to the agreement to demonstrate that the seller/lessee has retained title.
Joyce Hampers
Commissioner of Revenue

September 16, 1982

TIR 82-2