The Pickle lease seems to have survived attempts by US tax officials to kill it. Lawyers have found at least two ways around Internal Revenue Service proposed regulations that were widely seen as the death knell for this cross-border tax lease.

Pickle leases have involved a cat and mouse game with tax collectors ever since they evolved a decade ago. Back then, to skirt tightened depreciation rules, financiers split an original lease of typically 24 years into a head lease of 12 to 14 years, followed by a replacement lease for the balance of the 24 years. The head lease allowed lessees to deduct all depreciation during the shorter term rather than the full 24 years.

Last April the IRS proposed regulations requiring the 125 per cent depreciation to be effected over the combined head and replacement lease term. In a combined 24 year lease the change increases the depreciation period to 30 years, making Pickles more expensive than straight debt.

The latest solutions both involve existing tax code sections. One is to schedule rent payments unevenly so that the lessee can claim payment deductions comparable to the old depreciation. This requires close observance of a code section that limits this type of practice.

A separate and more popular approach is for the lessee to prepay all rents and then amortise its leasehold position under another tax code section that allows amortisation of intangibles.

Describing both approaches at the recent AirFinance Journal legal conference, New York tax lawyer Richard Crowley said both yield better net present values than old Pickle leases.

David Knibb

Source: Airline Business