Tax News

CCH (cch.taxgroup.com) reports:

  The IRS has released on its website more details about the recently announced settlement initiative for sale-in, lease-out (SILO) and lease-in, lease-out (LILO) tax shelters. On August 7, 2008, the Service announced a settlement initiative to more than 45 corporations to end SILO and LILO transactions that it considers abusive (TAXDAY, 2008/08/07, I.3). On August 21 the IRS extended the time to accept the settlement (TAXDAY, 2008/08/25, I.8), and promised to provide more details about the offer.

Offers and Appeals

  The Service reminded taxpayers of its recent push-back of the due date for acceptance of the SILO and LILO settlement offer to 60 days after the date of the IRS's offer letter. Taxpayers had criticized the IRS's prior 30-day deadline as too short for companies to sufficiently evaluate the IRS's settlement offer.

  Should a taxpayer refuse to participate in the initiative, the IRS assured taxpayers that they may pursue their matters with the IRS Appeals Division. Yet, similar to the terms of the SILO and LILO settlement initiative, taxpayers using the Appeals process would be required to terminate all leases, both deemed and actual. The Service explained that this move was for consistency of tax administration and finality of its decision process.

Procedures

  The IRS also clarified the procedure taxpayers must follow in order to participate in the initiative; including, terminating any leases used in the SILO or LILO transactions, accepting the settlement offer, calculating the basis of property involved, and computing original issue discount (OID).

Lease Termination

  According to the settlement terms, if taxpayers are not able to actually terminate the leases by December 31, 2008, despite "good-faith efforts," then they will be allowed to deem the leases terminated. Later, they may claim an ordinary deduction equal to any excess gain recognized in the deemed termination in 2008 over the actual gain recognized in subsequent terminations actually occurring before January 1, 2011.

  Taxpayers must provide the IRS with a list of steps that they took to terminate the leases in order to show good faith. The Service will then examine the documentation to determine if the taxpayer used its "best efforts." Once the taxpayer accepts the offer and provides "best efforts" documentation, the IRS will deem a lease terminated, even if a lessee does not want to unwind the transaction or acts to delay the actual termination. This documentation requirement applies to all of the SILOs or LILOs in which a taxpayer may have engaged.

  The IRS clarified that leases involved in the SILO or LILO transaction cannot be sold to a third party in order to be considered actually terminated. It explained that an "actual termination" of a SILO or LILO transaction cannot be unwound.

Acceptance

  In addition, taxpayers must accept the settlement terms in writing and the agreement must be received by the IRS by mail or fax. The terms may not be accepted subject to negotiating a closing agreement and replying to the settlement offer with an expression of understanding regarding undefined terms does not constitute acceptance. The IRS specified that such a response would be considered a counterproposal to the settlement offer. Instead, the IRS advised asking questions about undefined terms in order to understand their meaning before attempting to accept the offer.

Basis

  The guidance reported that, before January 1, 2011, transaction costs associated with closing the leases underlying a SILO or LILO tax shelter may be included in the calculation of their basis, rather than as a reduction of proceeds. To substantiate these transaction costs, taxpayers must provide documentation, including all contracts, agreements and a breakdown of costs by amount, nature and recipient.

OID

  Finally, the IRS stated that taxpayers must recognize 100 percent of the OID that accrued annually in the SILO or LILO transaction if there is a deemed termination of the lease, until the actual termination of the lease, which must occur before January 1, 2011.

  By Torie Cole, CCH News Staff

LILO/SILO Initiative Frequently Asked Questions