Equipment TRAC leases retain lease treatment through securitization

Plain-English summary

A vehicle manufacturer group's finance subsidiary planned to securitize equipment loans and leases, including leases with terminal rental adjustment clauses (TRACs). The IRS ruled that each qualifying TRAC lease remained a qualified motor vehicle operating agreement after transfer into the securitization structure, provided the issuer borrowed only on a recourse basis and expected lease and disposition proceeds to cover lender obligations. Section 7701(h) therefore required lease status to be tested without treating the TRAC itself as giving the lessee ownership. The titling trust was a business trust, but it, the intermediate company, and the securitization issuer were single-owner domestic eligible entities disregarded from the finance subsidiary. As a result, transfers of the designated assets among those disregarded entities produced no gain, loss, or income. The IRS did not decide whether the agreements were true leases without the TRAC rule and did not cover nonrecourse borrowing or insufficient expected cash flows.

Ruling snapshot

• Question: Would the TRAC leases retain their section 7701(h) treatment, and would the disregarded-entity securitization transfers be tax-neutral?
• Outcome: approved
• Key authorities: IRC § 7701(h); Treas. Reg. §§ 301.7701-3 and 301.7701-4

Full text (IRS public release)

Internal Revenue Service                                        Department of the Treasury
                                                                Washington, DC 20224

Number: 201727002                                               Third Party Communication: None
Release Date: 7/7/2017                                          Date of Communication: Not Applicable
Index Number: 7701.25-04
                                                                Person To Contact:
--------------------------------------------------------        ------------------------------, ID ------------------
------------------                                              ----------------------------------------------------
------------------------------------------                      Telephone Number:
-------------------------------------                           ----------------------
                                                                Refer Reply To:
                                                                CC:ITA:B07
                                                                PLR-131253-16
                                                                Date:
                                                                March 31, 2017



LEGEND

Parent                     =        ------------------------
                                    -------------------------

Taxpayer                   =        ------------------
                           -------------------------

Trust                      =        ------------------------

Company                    =        ---------------------------------------------------------

State A                    =        --------------

Date a                     =        --------------------

Date b                     =        ------------------

Date c                     =        ------------------------



Dear -------------:

       This letter responds to your letter dated September 26, 2016, requesting a
private letter ruling under § 7701(h) of the Internal Revenue Code and § 301.7701-3 of
the Income Tax Regulations.
PLR-131253-16                                2

                                         FACTS

       Parent is a State A corporation. Parent is the common parent of an affiliated
group of corporations (the “Affiliated Group”), which files a consolidated federal income
tax return on a calendar year basis.

      Taxpayer is a State A limited liability company that has elected to be treated as a
corporation for Federal tax purposes. Taxpayer, a wholly-owned subsidiary of Parent, is
a member of the Affiliated Group.

       Trust is a State A Statutory Trust. Taxpayer is the grantor, beneficiary, and
administrator of, and will own 100 percent of the interests in, Trust. For federal income
tax purposes, Taxpayer treats Trust as a disregarded entity, the assets of which are
owned by Taxpayer. The primary purpose of Trust is to acquire and hold legal title to
leased equipment.

      Company is a State A limited liability company and wholly owned subsidiary of
Taxpayer. For federal income tax purposes, the Affiliated Group treats Company as a
disregarded entity.

       Each entity listed above uses the calendar year accounting period and an accrual
method of accounting for maintaining its accounting books and records and filing its
federal income tax return.

       Parent and its affiliates are a leading manufacturing group of motor vehicles
(“Equipment”).

       Taxpayer, together with certain of its subsidiaries, conducts a financial service
business, including commercial lending and leasing services, to support the distribution
of Parent’s products. As part of Taxpayer’s commercial lending and leasing activities,
Taxpayer provides financing for various categories of Equipment, provides loan and
lease financing to various operators and end users of new and used Equipment, and
services Equipment loans and leases. Taxpayer services substantially all of the
Equipment loans (“Loans”) it originates, including Equipment Loans that have been
securitized. Taxpayer’s retail servicing portfolio includes Equipment Loans and Leases
(defined below) that Taxpayer services, which generally are originated and held by
Trust.

        Taxpayer also has an internal credit department that evaluates and underwrites
retail credit applications submitted by dealers or by Taxpayer’s salespersons.
Additionally, Taxpayer gathers information regarding credit scores, payment history,
time in business, and purposes of the loan or lease. As a servicer, Taxpayer’s
responsibilities include collections, asset recovery, asset remarketing, collateral
administration, and insurance tracking. Taxpayer recovers, secures and transfers
PLR-131253-16                                3

repossessed Equipment for resale, and disposes of repossessed units as well as units
coming off of lease through an internal marketing department.

       Taxpayer funds its commercial lending and leasing activities from multiple
sources, including equity, operating capital, private sale syndications of its financial
assets, and debt financings on a fully-recourse basis. Taxpayer also engages in
refinancing transactions in the form of securitization transactions whereby certain of its
financial assets are transferred to a bankruptcy-remote special purpose entity and
pledged to secure debt instruments issued by the special purpose entity.

      Each customer that leases Equipment from Taxpayer (Lessee”) executes a
master lease agreement (“Lease Agreement”) or a standalone Terminal Rental
Adjustment Clause Lease (“TRAC Lease,” described below), which sets forth the
general terms and conditions of the lease. Trust is designated as the lessor. The
customer also executes a one or more lease schedules (“Schedule”), which
incorporates the terms and conditions of the Agreement and sets forth the specific
terms and conditions of the lease, including the equipment subject to the lease
schedule, the lease term, and rent charges.

      Each customer that leases Equipment but doesn’t enter into a master lease
agreement instead enters into a standalone TRAC Lease with Trust (“Lessor”). Each
TRAC Lease sets forth the specific terms and conditions of the lease, including the
equipment subject to the lease, the lease term, and rent charges.

       Most leases originated in connection with Taxpayer’s financial services business,
including some leases under a master lease agreement, are TRAC Leases and
incorporate a terminal rental adjustment clause (or “TRAC”). Except in the case of a
Split TRAC Lease, TRAC Leases require that the Lessor pay the Lessee upon
termination of the lease and disposition of the leased Equipment as a rental adjustment
the amount, if any, by which the net proceeds from the disposition of the Equipment
exceed the projected termination value of the Equipment at lease end (“TRAC Amount”)
as set forth in the TRAC Lease. If the net proceeds are less than the TRAC Amount,
the Lessee must pay the Lessor, as a rental adjustment, the amount of the deficiency.
Furthermore, when entering into a TRAC Lease, each Lessee agrees that the TRAC
Amount is not intended to give the Lessee any equity or ownership interest in the
Equipment but instead is intended to provide the Lessee a financial incentive to
maintain the Equipment in the condition required by the TRAC Lease throughout the
lease term.

       Some TRAC Leases contain provisions that allocate a sharing between the
Lessor and the Lessee of all or a portion of the amount due to the other party resulting
from the difference between the net proceeds and the TRAC Amount (a “Split TRAC
Lease”).
PLR-131253-16                                 4

        In each TRAC Lease, the Lessee signs and provides to the Lessor a written
statement that (i) contains a Lessee certification, under penalties of perjury, that the
Lessee intends that Equipment leased under any Lease Agreement to which § 7701(h)
applies will be used more than 50% in the trade or business of Lessee, and (ii) states
that Lessee has been advised that the Lessee will not be treated as the owner of the
property subject to the agreement for federal income tax purposes (a “Lessee TRAC
Certification”).

        When a customer seeks to lease Equipment, Taxpayer (on behalf of Trust) will
acquire the selected Equipment from the dealer or manufacturer. Acquired Equipment
is held by Trust. Taxpayer makes the payment directly to the manufacturer or dealer
and creates an intercompany receivable to Taxpayer from Trust. Taxpayer, on behalf of
Trust, finances all purchases of Equipment with equity, operating capital, private sale
syndications of its financial assets, or fully-recourse loans from an affiliate of Taxpayer.
In the future, Taxpayer may borrow on a fully-recourse basis from third parties.

        At the end of the lease term, the Lessee either will exercise any available
purchase option under the lease or return the Equipment to the Lessor. In the case of a
TRAC Lease, upon termination of the TRAC Lease and disposition of the Equipment,
either (i) Lessor will pay to the Lessee the excess of the sales proceeds over the TRAC
Amount, or (ii) the Lessee will pay to the Lessor the excess of the TRAC Amount over
the sales proceeds. If the TRAC Lease is a Split TRAC Lease and the Lessee does not
exercise the purchase option, the parties will allocate the difference between the net
sales proceeds and the TRAC Amount as provided in the Split TRAC Lease.

Proposed Transaction

       As it currently does with its Loans, Taxpayer intends to use Lease receivables
generated in its finance business to raise funds. To that end, taxpayer proposes to
engage in securitization transactions whereby Taxpayer or an affiliate will transfer rights
to designated pools of loans and leases to a bankruptcy-remote special purpose entity,
which will issue debt instruments secured by those rights, including the future cash
flows on those designated pools of receivables (a “Securitization Transaction”).

         Taxpayer will identify Loans and Leases originated by its financial service
business that are eligible to be pooled, transferred to one or more affiliated special
purpose entities, and pledged for the benefit of noteholders in connection with a
Securitization Transaction. Once identified, the taxpayer will designate the Loans and
Leases, including the associated leased Equipment, and the related cash flows
(“Designated Assets”), to be included in a particular Securitization Transaction. The
eligibility for the Designated Assets to be included in a particular Securitization
Transaction will be based, in part, on customer concentration, credit ratings, asset type,
asset location, and the term of the Loan or Lease. It is possible that not all of the
identified Leases will be TRAC Leases.
PLR-131253-16                                   5


        Taxpayer will transfer, or will cause to one or more of its affiliates to transfer, all
of the right, title, and interest in the Designated Assets to Company for cash. To
accomplish this transfer, Trust will issue special units of beneficial interest (“SUBI”) to
Company. The SUBIs will represent full beneficial ownership in the identified Leases.
In exchange, Taxpayer will receive cash that it will use to repay some or all of the
intercompany receivables generated when the Equipment was acquired. The
Designated Assets will be transferred to Company pursuant to a Sale Agreement.

       Company will transfer the Designated Assets acquired in the transfer described
above to a wholly owned, special purpose subsidiary (“Issuer”) pursuant to a purchase
and sale agreement in exchange for cash proceeds from debt instruments issued by
Issuer.

        Issuer will be newly-created, special purpose State A limited liability company.
Upon and as a result of Issuer’s formation by Company, all equity interests in the Issuer
will be owned by the Company. For commercial law purposes, Issuer is intended to be
bankruptcy remote from Taxpayer, so that a future bankruptcy of Taxpayer or other
members of the Affiliated Group would not result in the bankruptcy of Issuer.

       Issuer will be the borrower in the Securitization Transaction. Issuer will issue
debt instruments that will be fully recourse to Issuer, and the holders of the debt
instruments will have full recourse against all of the assets of Issuer.

       Issuer’s activities generally will be limited to: 1) executing and performing its
obligations and exercising its rights under the terms of the Securitization Transaction
documents and engaging in related transactions; 2) acquiring, transferring, financing,
pledging, and otherwise dealing with certificates representing beneficial interests in the
SUBIs; 3) dealing with transactions involving the Equipment and related Leases that will
be designated to the SUBI; 4) acquiring, transferring, financing, pledging, and otherwise
dealing with the pool of Leases; 5) negotiating, executing, or performing the obligations
under any agreement relating to the foregoing activities; and 6) engaging in any lawful
act or activity and to exercise any powers permitted to limited liability companies
organized under State A law that are related or incidental to and necessary, convenient,
or advisable for the accomplishment of the foregoing purposes.

        The assets of issuer will include: 1) a SUBI certificate evidencing a 100 percent
beneficial interest in a portfolio of Leases including TRAC Leases of titled Equipment in
Trust, including payments made under such TRAC Leases, which also include
payments under the TRACs up to the related TRAC Amounts; 2) Loans; 3) bank
accounts established for the Issuer; 4) a reserve account and deposits therein; and 5)
rights to proceeds from certain insurance policies covering Equipment leased under the
Lease, or, to the extent associated with the related Lease, the related obligors. The
Issuer will be entitled to receive all amounts collected on the Designated Assets
PLR-131253-16                                 6

transferred to the Issuer. If disposition proceeds with respect to any Equipment are
such that the Lessee is entitled to receive a TRAC payment, the obligation to make the
TRAC payment will be satisfied out of amounts belonging to the Issuer. After payment
of Issuer’s expenses, and assuming Loan and Lease defaults are consistent with
historical experience, the Issuer should receive amounts sufficient to 1) make any
necessary TRAC payments to Lessee; 2) satisfy obligations to the holders of its debt
instruments; and 3) return residual value to Taxpayer.

         When the outstanding principal balance of Issuer’s assets reaches a certain
level, generally 10 percent or less of the initial aggregate value of the assets securitized,
the Issuer will have the option to redeem the remainder of its outstanding debt
obligations by prepayment. The funds to redeem the outstanding debt obligations may
be advanced by Taxpayer. Once all of the obligations of Issuer have been satisfied, it
will liquidate and distribute its remaining assets to Company.

       Taxpayer expects that Company and Issuer will be disregarded as entities
separate from Taxpayer for U.S. Federal income tax purposes. Accordingly, Taxpayer
expects that any transfers between Taxpayer, Company, and Issuer will be disregarded
for U.S. Federal income tax purposes. Similarly, Taxpayer expects that any transfers
between an affiliate of Taxpayer, Company, and Issuer will be disregarded for U.S.
Federal tax purposes if the applicable affiliate of Taxpayer similarly is disregarded as a
separate entity from Taxpayer for U.S. Federal tax purposes.

       The use of the Trust to acquire and hold title to title Equipment serves two
functions. First, the use of Trust to hold Leases with respect to the titled Equipment
eliminates the need to re-title the Equipment multiple times by permitting the use of
SUBIs to transfer beneficial ownership of the Equipment. Second, the use of the Trust
to hold legal title to the titled Equipment avoids the need to qualify Issuer to do business
in each jurisdiction theEquipment is titled in, which facilitates Taxpayer’s ability to
include Leases as assets in Securitization Transactions.

      Taxpayer is authorized to enter into the documentation to establish Trust, to
acquire a beneficial interest in Trust, and to facilitate the acquisition, ownership, and
disposition by Trust of Leases, Equipment, and other related assets. Trust is authorized
to acquire cash, the leases, and Equipment, to receive payments made under the
leases, to sell or otherwise dispose of Equipment following the end of the leases, to hold
Equipment certificates of title, and to own other rights and assets (collectively “Trust
Assets”).

       The beneficial interests Taxpayer holds in Trust consist of an undivided trust
interest (“UTI”) and one or more Special Units of Beneficial Interest (individually,
“SUBI”). The UTI and the SUBI and their related assets constitute separate “Sub-trusts”
of Trust. Under State A law, all liabilities of a Sub-trust generally are enforceable only
against the assets designated to the Sub-trust.
PLR-131253-16                                7


        Taxpayer created Trust pursuant to a trust agreement dated Date a, which was
amended and restated on Date b, and was further amended and restated pursuant to
Amendment Number 1 on Date c (together, the "Trust Agreement"). Section 1.2 of the
Trust Agreement authorizes Trust to (1) execute, deliver, enter into and perform its
obligations under the Trust Agreement; (2) acquire, own, hold, and, as permitted under
the Trust Agreement, dispose of or pledge trust assets or beneficial interests therein,
and distribute trust funds not otherwise allocable to expenses; (3) subject to the Trust
Agreement, engage in such other activities as may be required in connection with the
preservation of the Titling Trust assets and the making of distributions to or upon the
order of the beneficiary or any related holder; and, (4) engage in any activities described
or authorized by the Trust Agreement and any and all activities necessary, appropriate,
or incidental to accomplishing the foregoing.

       The Trustee has no discretionary duties other than performing ministerial acts
necessary to accomplish the purposes of the Trust Agreement and therefore looks to
and acts at the direction of Taxpayer, as beneficiary, with regard to any non-ministerial
acts otherwise permitted under the Trust Agreement. In addition, Section 7.1 of the
Trust Agreement provides that the Trustee must establish and maintain, at the direction
and for the benefit of Taxpayer, trust accounts in which all cash and proceeds from trust
assets shall be deposited. Taxpayer, as beneficiary, may authorize the Trustee to make
deposits into, disbursements from, and investment of funds on deposit in, any trust
account.

       Taxpayer, as the settlor, will cause the Trust to establish the SUBIs to be used in
each Securitization Transaction. The SUBIs will represent beneficial interests in the
portion of the Trust Assets that comprise a specific Sub-Trust of Trust. The issuance of
the SUBIs permit the transfer of beneficial ownership of the Trust Assets that are
allocated as assets in a Sub-Trust without having to re-title the titled Equipment in the
Sub-Trust.

       Taxpayer anticipates that Trust will allocate groups of leases and related
equipment (with each group consisting of both TRAC and non-TRAC leases) to
separate Sub-Trusts. Unless and until leases and related equipment held by Trust are
allocated to a Sub-Trust, the beneficial ownership of those assets will be represented by
the UTI.

       If a group of leases and related equipment are allocated to a Sub-Trust, Trust will
issue a SUBI with respect to that Sub-Trust. The SUBI will represent, with respect to the
leased equipment in the Sub-Trust, beneficial ownership of the lease payments, and
beneficial ownership of the proceeds from the sale of the equipment increased or
decreased, respectively, by any payments due from, or to, the lessee. Title to the leased
equipment will remain in Trust and will not be allocated to the SUBI.
PLR-131253-16                                 8

        In furtherance of its activities, under the Trust Agreement, Trust will be
authorized to: (1) accept the designation as the legal title holder of the leased
equipment, (2) enter into and perform, or cause to be performed, obligations and duties
under Master Lease Agreements (TRAC and non-TRAC), (3) appoint Taxpayer (or third
party) as its attorney-in-fact and direct Taxpayer to perform administrative duties on
behalf of Trust, (4) enter into (or accept the assignment of) a servicing agreement under
which Taxpayer will act as the servicer of the leased equipment, (5) establish accounts
and receive, maintain, invest, and disburse funds in accordance with the Trust
Agreement and the servicing agreement, and (6) as long as Taxpayer has not defaulted
in its servicing duties, and at the direction of the holder of the UTI or the holder of a
SUBI, (i) pledge, transfer or otherwise dispose of any interest in the assets represented
by such UTI or SUBI, (ii) amend or revoke trust terms with respect to all or a portion of
the assets represented by such UTI or SUBI and (iii) enter into any agreement or
instruments affecting all or any portion of the assets represented by such UTI or SUBI.

        From time to time, the Taxpayer as owner of the UTI will direct Trust to create a
new Sub-Trust and allocate to the new Sub-Trust the Trust's beneficial interests in a
designated pool of equipment and related leases. In addition, when selecting the
equipment for any particular securitization Sub-Trust, Taxpayer will have to take into
account the ordinary concerns of creditors such as lessee concentration, lessee credit
ratings, equipment type and location, and lease term.

        Following an allocation of leases and related equipment to a Sub-Trust, Trust will
issue to Taxpayer as owner of the UTI, the SUBI representing beneficial ownership of
the cash flows related to the assets of the Sub-Trust. Taxpayer, as owner of the UTI,
will then convey the SUBI to a separate, special purpose entity, which in turn will convey
the SUBI to a securitization entity.

       In connection with a Securitization Transaction, Trust may issue to Taxpayer
SUBIs representing beneficial ownership of the Trust Assets held in one or more Sub-
Trusts of Trust. However, any SUBI issued to Taxpayer in connection with a
Securitization Transaction will represent beneficial ownership of all of the assets held in
the Sub-Trust of Trust to which the SUBI relates.

      Trust, Taxpayer, and Company will not pledge to Issuer the title to any
Equipment to which the SUBI relates. If Issuer fails to make its debt payments, the
assets acquired by the creditors will be the SUBI conveyed to Issuer and not the title to
any such Equipment. Equipment will not be considered for financing in a Securitization
Transaction before being acquired from the dealer or manufacturer with Taxpayer’s
funds and being made subject to a Lease.

       Trust’s activities are limited to those specified in the Trust Agreement and any
applicable supplement to the Trust Agreement, or as may be directed by Taxpayer in its
capacity as initial beneficiary. Trust’s activities may include participating in 1) financing
PLR-131253-16                                9

transactions (including Leases) undertaken by Taxpayer, Company, or other special
purpose entities (such as Issuer) that are secured by assets of Trust, by the UTI issued
by Trust, or by any SUBI; 2) and sale, transfer, or pledge by Taxpayer, Company, or
other special purpose entities (such as Issuer) of any interest in one or more SUBIs
issued by Trust; 3) other asset securitizations, secured loans, or similar transactions
involving Trust Assets; and 4) similar activities.

       Issuer will enter into a Servicing Agreement with Taxpayer, as servicer
(“Servicer”). Servicer will invoice the obligors under the Loans and leases, collect
payments, and perform ancillary functions on behalf of Issuer. In exchange for its
services, Servicer will receive a servicing fee equal to a fixed number of basis points on
each Loan and a fixed percentage of the discounted present value of the lease
payments on each lease that is a Designated Asset.

       Once Issuer has acquired the Designated Assets, it will begin receiving
payments on the Loan and Lease receivables. Issuer will use the payments it receives
on the Loans and Leases it holds to pay principal and interest on the debt instruments
issued by Issuer in the Securitization Transaction. Upon repayment of all principal and
interest due on the debt instruments issued by Issuer, and any unpaid expenses of
Issuer, Issuer will distribute any and all remaining assets to Company and liquidate.

       Taxpayer and its affiliates may enter into additional Securitization Transactions
by forming a new Issuer and transferring to it Loans and Leases that Taxpayer has
originated.

       Taxpayer makes the following representations:

       1) TRAC Lease payments paid by Lessees represent arm’s-length lease
          payments at current fair market value;

       2) The economic life of the Equipment exceeds the lease term for such
          Equipment by at least 20 percent;

       3) All current TRAC Leases have, and all future TRAC leases will have, a
          Lessee TRAC Certification that satisfies the requirements of § 7701(h)(2)(D);

       4) Each Lessee with respect to a TRAC Lease will provide a signed Lease
          TRAC Certification substantially in the form of examples submitted with
          Taxpayer’s letter ruling request;

       5) Taxpayer, Trust, Company, and Issuer have no reason to believe or
          knowledge that the Lease TRAC Certification provided by any Lessee is false;
PLR-131253-16                              10

     6) No Lessee is required to acquire the Equipment with respect to a TRAC
        Lease at the end of the lease term;

     7) If analyzed without regard to the TRAC, each TRAC lease will qualify as a
        lease for U.S. Federal income tax purposes;

     8) Taxpayer, Trust, Company, and Issuer will treat the TRAC Leases as leases
        for U.S. Federal income tax purposes;

     9) To the extent Taxpayer finances the acquisition of Equipment on behalf of
        Trust, the financing is fully recourse to Taxpayer;

     10) The amounts borrowed by Issuer pursuant to a Securitization Transaction
        provide for full recourse to Issuer;

     11) Defaults by Lessees have been rare as a matter of Taxpayer’s historical
        experience. Issuer will have more than sufficient assets to satisfy its
        obligations to the holders of its debt instruments based upon a level of rental
        defaults consistent with historical experience.

     12) Trust, as holder of the title to the Equipment, will be recognized as the sole
        owner of such Equipment for state law purposes.

     13) At the time Issuer issues debt instruments, Taxpayer will expect to receive an
        opinion from qualified tax counsel that such debt instruments are properly
        characterized as indebtedness for U.S. Federal income tax purposes.

     14) At the time Issuer issues debt instruments, Taxpayer and the holder of the
        debt instruments will expect the cash flows payable on the Loans and the
        SUBI held by Issuer to be sufficient to make timely and complete payments
        on the debt instruments issued by Issuer.

     15) Taxpayer will be the sole owner (either directly or through a disregarded
        entity or entities) of each of Trust, Company, and Issuer; and none of Trust,
        Company, or Issuer will file an election to be classified as an association for
        U.S. Federal income tax purposes under § 301.7701-3.

     16) Each of Parent, Taxpayer, Trust, Company, and Issuer uses the calendar
        year for its accounting period and the accrual method of accounting for
        purposes of maintaining is accounting books and records for U.S. Federal
        income tax purposes.
PLR-131253-16                                11

                                RULINGS REQUESTED

        Taxpayer requests rulings that each TRAC Lease pursuant to which Trust is the
Lessor, including those which are subsequently transferred to Issuer, is a qualified
motor vehicle operating agreement as defined in § 7701(h)(2); that, pursuant to §
7701(h)(1), qualification of each TRAC Lease as a lease for U.S. federal income tax
purposes will be determined without regard to the TRAC provision of the such TRAC
Lease; that for U.S. Federal tax purposes, Trust, Company, and Issuer will be
disregarded as entities separate from Taxpayer under § 301.7701-3(b); and that no
gain, loss, or income will be realized by Taxpayer, Trust, Company, or Issuer as a result
of the transfer of Designated Assets from Taxpayer to Company and subsequently from
Company to Issuer as a part of the Securitization Transaction.

                                  LAW AND ANALYSIS

        Section 7701(h)(1) provides that in the case of a “qualified motor vehicle
operating agreement that contains a terminal rental adjustment clause,” the agreement
is treated as a lease if (but for such “terminal rental adjustment clause”) the agreement
would be treated as a lease for federal income tax purposes, and the lessee is not
treated as the owner of the property subject to the agreement during the period the
agreement is in effect.

       Section 7701(h)(2)(A) defines a “qualified motor vehicle operating agreement” as
any agreement with respect to a motor vehicle (including a trailer) that meets three
requirements, which are set forth in subparagraphs (B), (C), and (D) of § 7701(h)(2).

       First, § 7701(h)(2)(B) requires that, under the agreement, the sum of the amount
the lessor is personally liable to repay, and the net fair market value of the lessor’s
interest in any property pledged as security for property subject to the agreement,
equals or exceeds all amounts borrowed to finance the acquisition of property subject to
the agreement. Any property pledged that is property subject to the agreement or
property directly or indirectly financed by indebtedness secured by property subject to
the agreement is not taken into account.

         Second, pursuant to § 7701(h)(2)(C), the agreement must contain a separate
written statement signed by the lessee that the lessee certifies, under penalty of perjury,
that it intends that more than 50 percent of the use of the property subject to the
agreement is to be in a trade or business of the lessee, and that clearly and legibly
states that the lessee has been advised that it would not be treated as the owner of the
property subject to the agreement for federal income tax purposes.

        Finally, § 7701(h)(2)(D) requires that the lessor must not know that the
certification in § 7701(h)(2)(C) is false.
PLR-131253-16                                 12

      Taxpayer represents that, if analyzed without regard to the terminal rental
adjustment clause, each TRAC Lease will qualify as a lease for federal income tax
purposes.

        Further, Taxpayer represents that any amount it borrows to fund the initial
acquisition from the manufacturer or dealer of Equipment that is subject to a TRAC
Lease will be recourse debt that Taxpayer is personally liable to repay, and that it will
fund the entire acquisition price of the Equipment using equity, operating capital, private
sale syndications of its financial assets, or fully-recourse loans from an affiliate of
Taxpayer. Hence, Taxpayer will be fully at risk on the acquisition price of the
Equipment from the time of initial acquisition of the Equipment. In addition, Taxpayer
represents that each TRAC Lease will contain a Lessee TRAC Certification that
satisfies the requirements of subparagraphs (C) and (D) of § 7701(h)(2).

        Based on the facts and representations made by Taxpayer, and provided that:
(1) Issuer borrows funds only on a recourse basis; and (2) amounts received in lease
payments and from the disposition of Equipment (using rental defaults consistent with
historical experience) are expected to be sufficient to satisfy all obligations to lenders,
we conclude as follows:

       (1) Each TRAC Lease pursuant to which Trust is the Lessor, including those
           which are subsequently transferred to Issuer, is a qualified motor vehicle
           operating agreement as defined in § 7701(h)(2);

       (2) Qualification of each TRAC Lease as a lease for federal income tax purposes
           will be determined without regard to the TRAC provision of such TRAC lease.

       (3) Trust will be treated as a business trust as described in § 301.7701-4(b) and
           not as a trust under § 301.7701-4(a) for federal income tax purposes;

       (4) Under § 301.7701-3(b)(1)(ii) Trust, Company, and Issuer are domestic eligible
           entities with a single owner that are disregarded as entities separate from the
           Taxpayer; and

       (5) No gain, loss, or income will be realized by Taxpayer, Trust, Company, or
           Issuer as a result of the transfer of Designated Assets from Taxpayer to
           Company and subsequently from Company to Issuer as a part of the
           Securitization Transaction.

        Except as expressly provided herein, no opinion is expressed or implied
concerning the tax consequences of any aspect of any transaction or item discussed or
referenced in this letter. Specifically, we express or imply no opinion concerning: (1)
whether the Lease Agreement is a true lease for federal income tax purposes; (2) a
situation in which Issuer borrows funds from lenders on a nonrecourse basis; and (3) a
PLR-131253-16                                  13

situation in which the amounts received in lease payments and from the disposition of
Equipment (using rental default consistent with historical experience) are not expected
to be sufficient to satisfy all obligations to lenders.

      This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3)
provides that it may not be used or cited as precedent.

        Temporary or final regulations pertaining to one or more of the issues addressed
in this ruling have not yet been adopted. Therefore, this ruling will be modified or
revoked by the adoption of temporary or final regulations, to the extent the regulations
are inconsistent with any conclusion in the letter ruling. See § 11.04 of Rev. Proc.
2017-1, 2017-1 I.R.B. 1, 60. However, when the criteria in § 11.06 of Rev. Proc. 2017-
1, 2017-1 I.R.B. 1, 61 are satisfied, a ruling is not revoked or modified retroactively
except in rare or unusual circumstances.

         In accordance with the Power of Attorney on file with this office, a copy of this
letter is being sent to your authorized representative.

      The rulings contained in this letter are based upon information and
representations submitted by the taxpayer and accompanied by a penalty of perjury
statement executed by an appropriate party. While this office has not verified any of the
material submitted in support of the request for rulings, it is subject to verification on
examination.

                                       Sincerely,



                                       SEAN M. DWYER
                                       Senior Counsel, Branch 7
                                       Office of Associate Chief Counsel
                                       (Income Tax & Accounting)




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