Tax News

CCH (cch.taxgroup.com) reports:

The IRS has unveiled a settlement initiative for lease-in, lease-out (LILO) and sale-in, lease-out (SILO) tax shelters. Speaking by telephone with reporters on August 6, IRS Commissioner Douglas Shulman explained that the IRS will soon be sending out settlement offer letters to approximately 45 of the nation's largest corporations across a broad spectrum of industries, including banking.
These letters will contain identical offers that carry the same terms and must be accepted for all of a taxpayer's LILO or SILO leases within 30 days; after that time, the offer will be rescinded and no longer available. In return for "putting these cases behind them" and being excused of all underreporting penalties, each corporation will be required in effect to give up most of the deferral benefits of the shelter. The shelters targeted by the initiative represent "billions of dollars in lost tax revenues," Shulman reported.
The initiative is not universal but is "by-invitation-only." The IRS is planning no further announcement of this initiative to the public.
While hundreds of LILO and SILO transactions have taken place, many large corporations reportedly have participated in multiple shelter transactions. Shulman noted that some corporations will not be receiving settlement letters. Neither Shulman nor other IRS officials at the briefing, however, elaborated on how many taxpayers are being excluded from this initiative. Nor did anyone suggest that other taxpayers will be added to the offer-letter list over time. If a corporation that has participated in a LILO or SILO does not receive a letter, Shulman stated that the taxpayer could contact Paul DeNard, LMSB Deputy Commissioner, for the reason.
Settlement Offers
Shulman explained, and the settlement documentation (letters and attachments) distributed with his announcement show, that the settlement has five main features:
--The taxpayer must agree to concede 80 percent of any claimed interest expense deduction, amortized transaction costs, and head lease rent expense for each tax year through 2007;
--The IRS agrees to disregard 80 percent of any reported taxable rental income with respect to SILO or LILO transactions for each tax year through 2007;
--The taxpayer must agree to report in 2008, 80 percent of the original issue discount (OID) connected with the SILO or LILO transactions for each tax year through 2007;
--The taxpayer must exercise best efforts to terminate its SILO or LILO transactions on or before December 31, 2008; and
--The taxpayer must agree to recognize as ordinary income any termination gain, whether realized under an actual or deemed termination.
SILO/LILO Victories
The settlement initiative comes after a recent string of major IRS court victories involving these transactions earlier in the year. In AWG Leasing Trust (DC Ohio, 2008-1 USTC ¶50,370, TAXDAY, 2008/06/10, J.7), a federal district court denied tax benefits to a U.S. partnership related to its alleged purchase of a German waste-to-energy facility as an abusive SILO transaction. In BB&T Corp. (CA-4, 2008-1 USTC ¶50,306, TAXDAY, 2008/05/01, J.6), the Court of Appeals for the Fourth Circuit struck down the tax treatment of a financial services company's lease of wood-pulp manufacturing equipment as a LILO tax shelter, finding a lack of a genuine lease or genuine indebtedness. In Fifth Third Bancorp , DC Ohio, a federal district court jury, applying the economic substance doctrine, denied tax benefits related to a bank's leasing arrangement for passenger rail cars as an abusive LILO transaction.
Taxpayer Equity/IRS Pragmatism
Shulman was clear in representing the issue as one of fairness and equity among the taxpaying populace. "The public has a right to expect that large corporations be good corporate citizens and meet their legal and compliance obligations," he stated. "The nation's leading commercial enterprises have the legal and accounting resources to take full advantage of favorable provisions of the tax law," he continued, "but they are not entitled to use their extensive resources to twist provisions of the tax law to the point that they no longer reflect Congress's intent. As a basic matter of fairness to all taxpayers, the IRS cannot allow LILO and SILO deals to stand."
At the same time, however, Shulman reasoned that the settlement initiative also represented a pragmatic approach. Noting that "hundreds of these transactions" have not yet been examined and/or adjudicated, Shulman concluded that "the time has come to find the most effective way to resolve these existing disputes ... the settlement initiative achieves this." He added that pursuing this initiative against the most blatant offenders instead of following the usual examination and litigation route will allow the IRS to reclaim most of this revenue more quickly and free up its resources for other matters.
The Service expects, Shulman concluded, that offenders will take advantage of the penalty-free settlement as an "opportunity to clean up liabilities and move on."
By George Jones and Torie Cole, CCH News Staff
Remarks of IRS Commissioner Doug Shulman
IRS Letter 4395 (7-2008): Resolution of Lease-In/Lease-Out (LILO) Transactions
Attachment 1 --LILO Initiative
Attachment 2 --LILO Initiative
IRS Letter 4394 (7-2008): Resolution of Sale-In/Lease-Out (SILO) Transactions
Attachment 1 --SILO Initiative
Attachment 2 --SILO Initiative