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equipment and the related deductions were bifurcated and
allocated to different entities. Virtually all of the remaining
rental income under the existing end-user leases with K-Mart,
Shared, and other end users was stripped out and allocated to the
Iowa Tribe (a tax-indifferent party not subject to Federal income
tax). A wraparound equipment lease position (encompassing the
existing end-user leases and the residual lease periods) and an
equipment purchase installment note and/or payment rights thereto
(previously issued in “taxable sale”-leaseback transactions
either to the Iowa Tribe’s partnership or another partnership in
which the Iowa Tribe’s partnership held an interest) were
transferred to the respective lease strip deal’s ultimate
beneficiary/customer in a purported section 351 transaction. The
principal and interest payments due under the equipment purchase
installment note equaled, coincided with, and fully offset the
rental payments due under the wraparound lease.
As structured, the two lease strip deals were intended to
generate substantial potential tax benefits for each deal’s
ultimate beneficiary/customer in amounts grossly disproportionate
to the beneficiary’s economic investment in that deal. For
instance, the first lease strip deal’s ultimate beneficiary/
customer would claim equipment rental deductions over the
wraparound lease’s entire life, even though (1) substantially all
of the related rental income from the equipment had been stripped
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Last modified: May 25, 2011