AuthorTopic: another question, can you please help?
quincy
@2004-04-28 10:49:05
Two firms can derive tax benefits from a sale/lease-back arrangement where:

A: both lessor has a bustantial loss carry forward.
B. the lessor pays lower marginal taxes than the lessee.
C. the lessor pays higer marginal taxes than the leesee.

The answer given is 'C'. but I think it should be 'B' since it is a sales type capital lease, then the lessee "owns" the asset on its B/S, so the lessee would benefit more from tax advantage if he has higher marginal tax rate. Can anyone explain to me why the answer is 'C'?
cpamba
@2004-04-28 20:38:19
The question is not clear, or not clear as you typed it, but if the lessee, who is the instigator of the deal, can find a lessor who will retain the rights to depreciation, while in a higher tax rate, will get more value out of the tax deduction than the lessee would. The lessor would be able to share the "tax benefit" with the lessee by reducing the interest rate, etc to the lessee than would otherwise be able, since the taxing authority is subsidizing......
quincy
@2004-04-28 21:51:43
I didn't change or mistype any wording in this question. I guess you are right in the way how to interpreter it. Thanks a lot...
cpamba
@2004-04-30 13:19:10
Oddly, I came accross this question on another site, it gave the same answer I did, basically the lessor and lessee were able to use
a tax arbitrage strategy

CFA Discussion Topic: another question, can you please help?

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