U.S. Tax Lease (True Lease)

What it is

A U.S. tax lease (also called a 'true lease' in tax parlance, to distinguish it from a lease that's economically a financed sale) is the domestic version of the same tax-leveraged-lease concept behind the JOLCO and French lease primers on this platform — an equity investor forms an owner trust or partnership, buys the aircraft using a mix of equity and non-recourse senior debt (the 'leverage'), claims depreciation on it under U.S. tax rules, and leases it to the airline. Part of the resulting tax benefit gets passed through to the airline as a lease rate cheaper than a straight loan or a lease with no tax subsidy behind it — the same commercial logic driving every structure in this family, just under the IRS's own rules instead of Japan's or France's.

This was the original version of the trade: U.S. domestic leveraged leases were a large, active part of aircraft financing through the 1970s and into the 1980s, well before JOLCOs existed in anything like their modern form.

The true lease vs. conditional sale distinction

The entire structure depends on the IRS actually respecting the arrangement as a lease for tax purposes, rather than recharacterizing it as a conditional sale (i.e., a financed purchase by the airline, dressed up in lease paperwork) — in which case the airline, not the investor, would be treated as the tax owner entitled to the depreciation, defeating the entire point of the structure for the investor side. The IRS's own guidance for leveraged leases (most durably, Revenue Procedure 2001-28 and 2001-29) sets out the conditions a deal needs to meet to be respected as a true lease: the lessor must maintain a minimum unconditional 'at risk' equity investment in the aircraft (historically around 20% of cost) throughout the lease term, any purchase option the airline holds must be at fair market value at the time it's exercised (not a bargain price fixed in advance — a bargain purchase option is one of the clearest single signals of a disguised sale), the airline can't have a contractual right to put the aircraft back to the lessor, and the aircraft needs a meaningful remaining useful life and fair market value at lease-end that doesn't all belong economically to the airline already.

This is exactly the line separating this primer from the Financial Lease primer on this platform: a financial lease is, by definition, a deal that fails these tests (or their accounting-standard equivalents) and gets treated as ownership from day one. A tax lease only works, as a tax matter, if it stays on the true-lease side of that same line.

Why the U.S. market shrank

The Tax Reform Act of 1986 is the pivotal event: it repealed the investment tax credit and lengthened depreciation schedules (introducing MACRS in place of the more aggressive ACRS regime), both of which had been central to making U.S. leveraged leases attractive to investors. The domestic market didn't disappear entirely, but it shrank from a mainstream financing tool to a smaller, more specialized one — which is precisely the gap that foreign tax-lease structures (French leases, and later JOLCOs) stepped into, offering airlines a similar tax-subsidized lease rate sourced from a jurisdiction whose own tax rules still made the economics work for investors there.

Risks and considerations

• Tax-law risk is the whole structure: a change to U.S. depreciation rules, at-risk requirements, or passive-activity-loss limitations (the 1986 Act changed all three) can shrink or eliminate the benefit for new deals, exactly as it did historically.
• IRS recharacterization risk runs the other direction too — a deal that drifts too close to a conditional sale in its actual terms (an unusually low fixed purchase price, an unusually short lease relative to the aircraft's life) risks having its tax treatment challenged after the fact, which is why the true-lease tests in Rev. Proc. 2001-28/29 get drafted around carefully rather than treated as a formality.
• Investor appetite is tax-position-dependent: the structure only works if there's a pool of investors with enough taxable income to actually use the depreciation shield efficiently — a weak market for that kind of tax capacity (as followed 1986) starves the structure of deals regardless of airline demand for cheap lease financing.