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F ederal Reserve Ba n k o f D allas
DALLAS, TEXAS

75222

Circular No. 72-72
April 13, 1972

INTERPRETATION OF REGULATION T
(Tax Shelter Programs)

To All Banks, Broker/Dealers, and Others Concerned
in the Eleventh Federal Reserve District:
The Board of Governors of the Federal Reserve System
announced on March 23, 1972, the adoption of an interpretation
of Regulation T prohibiting a broker/dealer from making instal­
ment sales of certain tax shelter programs that provide for
payment in instalments.
The interpretation is printed on the reverse of this
circular.
Yours very truly,
P. E. Coldwell
President

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

CREDIT BY BROKERS AND DEALERS
INTERPRETATION OF REGULATION T
SECTION 220.124 — INSTALMENT SALE
OF TAX-SHELTER PROGRAMS AS
“ARRANGING” FOR CREDIT.
(a) The Board has been asked whether the sale
by brokers and dealers of tax-shelter programs
containing a provision that payment for the pro­
gram may be made in instalments would constitute
“arranging” for credit in violation of Part 220.
For the purposes of this interpretation, the term
“tax-shelter program” means a program which is
required to be registered pursuant to section 5 of
the Securities Act of 1933 (15 U.S.C. § 77e), in
which tax benefits, such as the ability to deduct
substantial amounts of depreciation or oil explora­
tion expenses, are made available to a person in­
vesting in the program. The programs may take
various legal forms and can relate to a variety of
industries including, but not limited to, oil and gas
exploration programs, real estate syndications (ex­
cept real estate investment trusts), citrus grove
developments and cattle programs.

“A creditor [broker or dealer] may arrange
for the extension or maintenance of credit to
or for any customer of such creditor by any
person upon the same terms and conditions
as those upon which the creditor, under the
provisions of this part, may himself extend or
maintain such credit to such customer, but
only such terms and conditions (emphasis
supplied) . . .”
(d) In the case of credit for the purpose of
purchasing or carrying securities (purpose credit),
§ 220.8 of the regulation (the Supplement to
Regulation T) does not permit any loan value
to be given securities that are not registered on a
national securities exchange, included on the
Board’s OTC Margin List, or exempted by statute
from the regulation.
(e) The courts have consistently held invest­
ment programs such as those described above to
be “securities” for pupose of both the Securities
Act of 1933 and the Securities Exchange Act of
1934. The courts have also held that the two
statutes are to be construed together. Tax-shelter
programs, accordingly, are securities for purposes
of Regulation T. They also are not registered on a
national securities exchange, included on the
Board’s OTC Margin List, or exempted by statute
from the regulation.

(b) The most common type of tax-shelter pro­
gram takes the form of a limited partnership. In
the case of the programs under consideration, the
investor would commit himself to purchase and
the partnership would commit itself to sell the
interests. The investor would be entitled to the
benefits, and become subject to the risks of owner­
ship at the time the contract is made, although the
full purchase price is not then required to be paid.
The balance of the purchase price after the down
payment usually is payable in instalments which
range from one to ten years depending on the pro­
gram. Thus, the partnership would be extending
credit to the purchaser until the time when the
latter’s contractual obligation has been fulfilled
and the final payment made.

(f) Accordingly, the Board concludes that the
sale by a broker/dealer of tax-shelter programs
containing a provision that payment for the pro­
gram may be made in instalments would constitute
“arranging” for the extension of credit to purchase
or carry securities in violation of the prohibitions
of §§ 220.7(a) and 220.8 of Regulation T.

(c) With an exception not applicable here,
§ 220.7(a) of Regulation T provides that:

3/23/72


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102