Tax News

CCH (cch.taxgroup.com) reports:

Tax benefits from a sale-in/lease-out (SILO) transaction, where a partnership trust "bought" a waste-to-energy facility located in Germany from a German corporation owned by German municipalities, and then leased the facility back to the German corporation, were improper. Depreciation deductions under Code Sec. 168, transaction cost amortization deductions and interest expense deductions under Code Sec. 163(a) claimed by the partnership and its tax partner were denied. Additionally, accuracy-related penalties imposed at the partnership level for substantial understatement of tax liability were sustained, as was the IRS's determination that the partnership should have reported additional original issue discount (OID) income for the tax years in question.
The transaction had some economic substance, because the taxpayers engaged in it with a profit motive and could have reasonably expected to make a small but guaranteed pre-tax profit. However, the transaction failed the "substance over form" test because its stated form as a sale was inconsistent with its economic reality. The partnership never actually became the true owner of the facility for U.S. tax purposes. While hundreds of millions of dollars in purchase and rent payments were exchanged, essentially all the partnership did was pay to the German corporation a $28.5 million accommodation fee to sign paperwork that met the formal requirements of a sale and leaseback, and to arrange a circular cash flow from and back to two German banks that financed the purchase. The German corporation continued to have undisturbed and uninterrupted possession and control of the facility, continued to claim the tax benefits of ownership under German law, and had no economic or political motivation to give up control of the facility to the taxpayers at any time. Accordingly, the partnership was not entitled to the depreciation or amortization deductions.
The taxpayers were not entitled to deduct interest expenses that they incurred for two nonrecourse loans that the partnership entered into with the German banks, because the loans were not genuine indebtedness. The taxpayers would never be required to use their own funds to repay the debt; instead, they structured an entirely self-sustaining transaction under which the loan proceeds would be used to pay the loan debt. Under its agreement with the taxpayers, the German corporation was required to put the loan proceeds into two debt payment undertaking accounts (PUAs), which were created to pay the corporation's sublease obligations. If the debt PUAs were to go bankrupt before the loan balances had been paid off, the German corporation remained liable to the partnership for the amounts due.
The partnership did not present a partnership-level reasonable cause defense to the IRS's imposition of accuracy-related penalties for substantial understatement of tax attributable to the SILO transaction. The partnership took an "all-or-nothing" stance at trial regarding the propriety of its tax treatment of the transaction, and presented no evidence to support of reasonable cause defense. However, individual partners each might still be able to prove a reasonable cause defense in a subsequent partner-level refund action under Reg. §301.6221-1(d).
The taxpayers waived their argument challenging the imposition of OID income. The taxpayers briefly mentioned the OID income issue in their complaint, but failed to raise or discuss the issue in pre-trial briefs or proposed findings of fact and conclusions of law. The taxpayers offered no evidence and presented no testimony at trial regarding the OID income issue, and did not argue the merits of the issue in their post-trial briefs.
AWG Leasing Trust, DC Ohio, 2008-1 USTC ¶50,370
Other References:
Code Sec. 163
CCH Reference - 2008FED ¶9104.276
CCH Reference - 2008FED ¶9104.38
Code Sec. 167
CCH Reference - 2008FED ¶11,007.285
Code Sec. 6221
CCH Reference - 2008FED ¶37,569.12
Code Sec. 6662
CCH Reference - 2008FED ¶39,652.56
Code Sec. 6664
CCH Reference - 2008FED ¶39,661.65
Tax Research Consultant
CCH Reference - TRC INDIV: 48,158.20
CCH Reference - TRC INDIV: 48,158.25
CCH Reference - TRC INDIV: 48,202
CCH Reference - TRC DEPR: 15,254
CCH Reference - TRC FILEBUS: 9,158.20
CCH Reference - TRC PART: 60,060