CLFP EXAMINATION PREP STUDY GUIDE
LATEST UPDATED PRACTICE SOLUTION
VERIFIED 100 PERCENT
◉ Beginning of Leasing. Answer: Oldest record - 2010 B.C. in the
Sumerian City of Ur. Used clay tablets for documenting leases for
agricultural tools, land and water rights, oxen, and other animals. The
Code of Hammurabi. King Hammurabi acknowledged leasing of
personal property in his code of laws. FIRST RECORD OF
LEASING LAW.
◉ Ship Charters. Answer: Early example of a true lease. Phoenicians
were shipping and trading experts who used ship charters to obtain a
ship and crew. Other charters covered the economic life of the ship
and required the lessee to assume the benefits and obligations of
ownership.
◉ Statute of Wales. Answer: English Common Law. 1284 AD, this
was used in England to deal directly with the leasing of personal
property. Further clarified in 1571 AD to define who owned the leased
property.
◉ Railroad Industry / Industrial Revolution. Answer: In the UK and
US, the railroad companies would only afford the track. Sought
financing from private investors for the locomotives and railcars. This
was accomplished through equipment trusts. The most well-known
,finance plan was the Philadelphia Plan. The railroad industry brought
the first real growth of leasing to the US.
◉ Early 1900s. Answer: Independent 3rd Party leasing companies
were formed to provide vendor financing for manufacturers.
Manufacturers saw the benefit of leasing to move product and gave
rise to early captives. At the start of WWII, the government used cost-
plus contracts making leasing attractive again post-Depression.
◉ Shift to Modern Leasing (1950's). Answer: The government tried to
simulate the economy in 1953, Section 167 of the Internal Revenue
Code was issued. This gave the owner/lessor the ability to take
ordinary payments into income associated with a lease and accelerate
depreciation. The accelerated depreciation is attractive because it
allows the tac payer to increase tax deductions in the early life. This
was designed to encourage capital spending.
◉ IRS Revenue Ruling 55-540. Answer: Specified conditions to
classify a transaction as a true lease for tax purposes.
PAINEE
P (Payments > Rental) --> Rental payments are not substantially
higher than a fair rental value.
A (Automatic Title) --> Ownership of the asset does not automatically
pass to the lessee at the end of the term.
I (Interest) --> No portion of the lease payment is characterized as
interest.
N (Nominal P.O.) --> The transaction does not include a nominal
purchase option (i.e. $1).
,E (Equity) --> No portion of the lease payments can be applied to an
equity position in the asset.
E (Excessive Payments) --> The amount paid under a short-term lease
is not a significant portion of the purchase price (excessive lease
payments).
If any of these are TRUE, it is a CSC ($1 PO)
◉ 1960s. Answer: Investment Tax Credit (ITC) was introduced in
1962. This is a credit that a taxpayer was permitted to claim on its
federal tax return. This acted as a direct offset to tax liability as a
result of ownership of qualified equipment. In 1963, the Comptroller
of Currency gave banks the go-ahead to own and lease personal
property. This brought a significant amount of capital help by banks
into the leasing market.
◉ 1970s. Answer: In 1972, Congress introduced the Asset
Depreciation Range (ADR), meaning lessors no longer had to guess
the useful life of an asset. In 1975, the Revenue Procedure 75-21 was
created in response to requests whether the lessor could be treated as
the owner for tax purposes. (55-540 was a RULING; 75-21 is a
PROCEDURE). In 1976, FASB13 was issued, providing consistency
in financial statement reporting.
◉ Revenue Procedure 75-21 Criteria. Answer: Initial minimum
investment - at least 20% risk
Lease term and renewal options - between 1 to 20 years
Purchase and sale rights - no bargain purchase option
, No investment by lessee - lessee cannot also be an investor
No lease, loans or guarantees - recourse
Profit requirement - lessor must expect profit outside of ITC
◉ ASC 842 (update to FAS13). Answer: 1.Title to the property
automatically transfers to the lessee by or at the end of the lease term
2.The lease contains a bargain purchase option
3.The lease term is equal to or greater than 75% of the estimated
economic life of the leased property
4.The present value of the minimum lease payments at the beginning
of the lease term is equal to or greater than 90% of the fair market
value of the property
5.The underlying asset is of a specialized nature
◉ Economic Recovery Tax Act (ERTA) - 1981. Answer: Revision to
the Internal revenue Code; it replaced the more complex Asset
Depreciation Range (ADR) system.
Created the Accelerated Cost Recovery System (ACRS).
- Only five classes of assets, ranging from 3-15 year life spans .
- The owner/lessor could now fully depreciate an asset without having
to estimate useful life and salvage value.
◉ Tax Reform Act of 1986 (TRA '86). Answer: Strengthened and
expanded the reach of the Alternative Minimum Tax (AMT)
- A company must do a third calculation using the AMT formula and
pay the greater of the regular tax calculation or of AMT.
LATEST UPDATED PRACTICE SOLUTION
VERIFIED 100 PERCENT
◉ Beginning of Leasing. Answer: Oldest record - 2010 B.C. in the
Sumerian City of Ur. Used clay tablets for documenting leases for
agricultural tools, land and water rights, oxen, and other animals. The
Code of Hammurabi. King Hammurabi acknowledged leasing of
personal property in his code of laws. FIRST RECORD OF
LEASING LAW.
◉ Ship Charters. Answer: Early example of a true lease. Phoenicians
were shipping and trading experts who used ship charters to obtain a
ship and crew. Other charters covered the economic life of the ship
and required the lessee to assume the benefits and obligations of
ownership.
◉ Statute of Wales. Answer: English Common Law. 1284 AD, this
was used in England to deal directly with the leasing of personal
property. Further clarified in 1571 AD to define who owned the leased
property.
◉ Railroad Industry / Industrial Revolution. Answer: In the UK and
US, the railroad companies would only afford the track. Sought
financing from private investors for the locomotives and railcars. This
was accomplished through equipment trusts. The most well-known
,finance plan was the Philadelphia Plan. The railroad industry brought
the first real growth of leasing to the US.
◉ Early 1900s. Answer: Independent 3rd Party leasing companies
were formed to provide vendor financing for manufacturers.
Manufacturers saw the benefit of leasing to move product and gave
rise to early captives. At the start of WWII, the government used cost-
plus contracts making leasing attractive again post-Depression.
◉ Shift to Modern Leasing (1950's). Answer: The government tried to
simulate the economy in 1953, Section 167 of the Internal Revenue
Code was issued. This gave the owner/lessor the ability to take
ordinary payments into income associated with a lease and accelerate
depreciation. The accelerated depreciation is attractive because it
allows the tac payer to increase tax deductions in the early life. This
was designed to encourage capital spending.
◉ IRS Revenue Ruling 55-540. Answer: Specified conditions to
classify a transaction as a true lease for tax purposes.
PAINEE
P (Payments > Rental) --> Rental payments are not substantially
higher than a fair rental value.
A (Automatic Title) --> Ownership of the asset does not automatically
pass to the lessee at the end of the term.
I (Interest) --> No portion of the lease payment is characterized as
interest.
N (Nominal P.O.) --> The transaction does not include a nominal
purchase option (i.e. $1).
,E (Equity) --> No portion of the lease payments can be applied to an
equity position in the asset.
E (Excessive Payments) --> The amount paid under a short-term lease
is not a significant portion of the purchase price (excessive lease
payments).
If any of these are TRUE, it is a CSC ($1 PO)
◉ 1960s. Answer: Investment Tax Credit (ITC) was introduced in
1962. This is a credit that a taxpayer was permitted to claim on its
federal tax return. This acted as a direct offset to tax liability as a
result of ownership of qualified equipment. In 1963, the Comptroller
of Currency gave banks the go-ahead to own and lease personal
property. This brought a significant amount of capital help by banks
into the leasing market.
◉ 1970s. Answer: In 1972, Congress introduced the Asset
Depreciation Range (ADR), meaning lessors no longer had to guess
the useful life of an asset. In 1975, the Revenue Procedure 75-21 was
created in response to requests whether the lessor could be treated as
the owner for tax purposes. (55-540 was a RULING; 75-21 is a
PROCEDURE). In 1976, FASB13 was issued, providing consistency
in financial statement reporting.
◉ Revenue Procedure 75-21 Criteria. Answer: Initial minimum
investment - at least 20% risk
Lease term and renewal options - between 1 to 20 years
Purchase and sale rights - no bargain purchase option
, No investment by lessee - lessee cannot also be an investor
No lease, loans or guarantees - recourse
Profit requirement - lessor must expect profit outside of ITC
◉ ASC 842 (update to FAS13). Answer: 1.Title to the property
automatically transfers to the lessee by or at the end of the lease term
2.The lease contains a bargain purchase option
3.The lease term is equal to or greater than 75% of the estimated
economic life of the leased property
4.The present value of the minimum lease payments at the beginning
of the lease term is equal to or greater than 90% of the fair market
value of the property
5.The underlying asset is of a specialized nature
◉ Economic Recovery Tax Act (ERTA) - 1981. Answer: Revision to
the Internal revenue Code; it replaced the more complex Asset
Depreciation Range (ADR) system.
Created the Accelerated Cost Recovery System (ACRS).
- Only five classes of assets, ranging from 3-15 year life spans .
- The owner/lessor could now fully depreciate an asset without having
to estimate useful life and salvage value.
◉ Tax Reform Act of 1986 (TRA '86). Answer: Strengthened and
expanded the reach of the Alternative Minimum Tax (AMT)
- A company must do a third calculation using the AMT formula and
pay the greater of the regular tax calculation or of AMT.
