§3674 Long-term Lease or Charter Defined; Substantial Termination Liability

Summary

Defines when a lease or similar agreement is "long-term" and when the United States has a "substantial termination liability." Normally, a lease, charter, service contract, or conditional sale is long-term if it lasts five years or more or covers more than half the useful life of the vessel, aircraft, or combat vehicle. If the first term is under five years but an option makes the total five years or more, it is also long-term. Extensions count the same way. A special rule applies when the lessor first puts the item in service or it has been in service less than one year and the lessor or charterer can claim an investment tax credit or depreciation under Internal Revenue Code section 168 (unless straight-line depreciation was chosen). Then the time test is three years instead of five, with the same extension rule. The United States has a substantial termination liability under a contract if either the U.S. agrees to pay at least 25 percent of the item's value, measured as the present value of the termination liability under rules the Secretary of Defense sets; or if the present value of the termination liability at the contract end (excluding options) plus the present value of capital-hire payments (excluding options) is more than one-half the item's price.