Valuation of Safe Harbor Tax Benefit Transfer Leases

Journal of Finance, Vol. 38, No. 2, pp. 595-606, May 1983

13 Pages Posted: 19 Feb 2008 Last revised: 8 Oct 2013

See all articles by Frank J. Fabozzi

Frank J. Fabozzi

EDHEC Business School

Uzi Yaari

Rutgers University; School of Business-Camden

Abstract

The Economic Recovery Tax Act of 1981 (ERTA) was designed to stimulate capital investment through liberalization of depreciation allowances and investment tax credit for property acquired and placed in service after December 31, 1980. To offer equal incentives to companies that could not benefit from these changes, the ERTA made it easier to sell those tax benefits. The vehicle created by Congress for selling the unused portion of tax benefits is known as the safe harbor lease. At the extreme, an unprofitable company can purchase and own an asset, while selling outright for cash the tax benefits typically associated with ownership. Under this arrangement, referred to as Tax-Benefit Transfer (TBT) lease, the firm buying the tax benefits is recognized as lessor and owner of the assets for tax purpose only. Although the Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982 repealed safe harbor leases after December 31, 1983, the conferees included special transitional rules to allow safe harbor leasing beyond that date for certain troubled industries. This paper derives a valuation formula for pricing the TBT lease as viewed by the lessor. Further analysis examines the partial and joint effects on price of two decision variables - the interest rate charged on the attached phantom loan and the term of the lease - and contrasts the pricing model of the new type of lease with that of a conventional financial lease.

Keywords: financial leases, lease valuation, corporate taxation

JEL Classification: G31, G32, G38, H21, H25

Suggested Citation

Fabozzi, Frank J. and Yaari, Uzi, Valuation of Safe Harbor Tax Benefit Transfer Leases. Journal of Finance, Vol. 38, No. 2, pp. 595-606, May 1983, Available at SSRN: https://ssrn.com/abstract=1094512

Frank J. Fabozzi

EDHEC Business School ( email )

France
215 598-8924 (Phone)

Uzi Yaari (Contact Author)

Rutgers University ( email )

School of Business
Camden, NJ 08102
United States
610-664-2086 (Phone)

HOME PAGE: http://camden-sbc.rutgers.edu/FacultyStaff/Directory/yaari.htm

School of Business-Camden ( email )

Rutgers University
227 Penn Street
Camden, NJ 08102
United States
610-664-2086 (Phone)
610-664-2198 (Fax)

HOME PAGE: http://camden-sbc.rutgers.edu/FacultyStaff/Directory/yaari.htm

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