Tax Shelter IRS Resolution

New IRS settlement initiative for LILO and SILO transactions

Mike Habib, EA

IRS recently announced a settlement initiative for Lease-In/Lease-Out (LILO) and Sale-in/Lease-Out (SILO) transactions. Under this initiative, more than 45 of the nation’s largest corporations that participated in these shelters will receive a letter with an offer. Shelter participants will have 30 days to make a decision to accept the offer. Taxpayers would have to concede 80% of certain claimed tax breaks but they would not be hit with accuracy-related penalties.

Background. LILOs and SILOs involved complex and convoluted purported leasing arrangements in which some of the nation’s largest corporations supposedly leased or purchased large assets, such as foreign rail systems or sewer systems, and then immediately leased them back to their original owners. Companies engaging in these transactions improperly sought to defer tax for many years. IRS designated these transactions as “listed transactions”. IRS also has been victorious in court cases, see, e.g., BB&T Corp. v. U.S., (CA 4) 101 AFTR 2d 2008-1933 and AWG Leasing Trust, KSP Investments, Inc. as Tax Matters Partner v. U.S. (DC Ohio 5/28/2008) 101 AFTR 2d ¶ 2008-857.

Settlement initiative. IRS has decided that the settlement initiative is the most effective way to resolve the many outstanding transactions that have yet to be fully examined and/or adjudicated. The IRS letters being sent to affected taxpayers get right to the point. They state that IRS is willing to resolve all LILO or, as applicable, SILO transactions entered into by the taxpayer based on the terms stated in the applicable Attachment 1 for the type of transaction involved. The taxpayer has 30 days to accept the settlement offer. In order to accept the offer, the taxpayer must advise IRS in writing of its acceptance of all of the terms stated in Attachment 1. The taxpayer must provide certain documents requested by IRS as shown in the applicable Attachment 2 for the transaction involved. This would have to be done within 30 days of accepting the offer. More documents might need to be submitted depending on the specific transactions. IRS will entertain no counterproposals. IRS will take appropriate actions for those declining the offer.

Under the settlement terms for LILOs, among other items, the taxpayer would agree to concede 80% of any claimed interest expense deduction, amortized transaction costs, and head lease rent expense for each tax year through 2007. IRS would agree to disregard 80% of any reported taxable rental income with respect to the taxpayer’s LILO transactions for each tax year through 2007.

Likewise for SILOs, among other items, the taxpayer would agree to concede 80% of any claimed interest expense deduction, depreciation deduction, and amortized transaction costs for each tax year through 2007. IRS would agree to disregard 80% of any reported taxable rental income with respect to the taxpayer’s SILO transactions for each tax year through 2007. The taxpayer also would agree to report in 2008, 80% of the OID accrued with respect to its SILO transactions for each tax year through 2007.

In both cases, taxpayers would not be liable for accuracy-related penalties under Code Sec. 6662 or Code Sec. 6662A .

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