IRS Extends Offer to Settle LILO & SILO Law Suits

The Providence Journal / Bloomberg - September 6, 2008

The Internal Revenue Service gave 45 companies, including Providence-based Textron Inc. as well as utilities and banks, an extra month to decide whether to settle disputes over their use of a leasing tax shelter ruled improper by several courts.

In exchange for terminating the transactions, known as lease-in, lease-out or sale-in, lease-out deals, the companies can keep 20 percent of their savings and the IRS will waive some penalties.

The settlement offer involves shelters such as the one used by Wachovia Corp., which an appeals court ruled against in April. The bank said the ruling would cost it $975 million in back taxes.

The tax agency, in an announcement on its Web site, said companies have 60 days to respond to an offer letter it began sending on Aug. 6. The extension from 30 days was granted “to provide taxpayers with sufficient time to evaluate the offer,” the Web site says.

Under the terms of the IRS’ offers, the companies must use their best efforts to terminate the transactions by Dec. 31. In some cases, the IRS will give taxpayers until Dec. 31, 2010, to unwind the deals.

Companies must agree to concede 80 percent of all deductions associated with the transactions for taxes due in years before 2008. In exchange, the IRS won’t tax certain income generated by the transactions for the same years.

An IRS release said the government won’t agree to settle any of a taxpayer’s shelter-related tax issues unless the bank or company accepts the settlement terms for all of its lease transactions.

Companies have been trying to decide whether to accept the settlement or take their chances in court, said Ralph Izzo, chief executive officer of one of the 45 targeted companies, Public Service Enterprise Group Inc., owner of New Jersey’s largest utility. The IRS has scored victories in federal courts against BB&T Corp., Fifth Third Bancorp and KeyCorp.

Izzo said at an investor conference that, in his company’s case, taking the settlement may exceed cash reserves it has set aside.

The settlement offer affects a “broad range of companies,” Shulman said last month. In addition to banks, companies such as Altria Group Inc., the largest U.S. tobacco company, and Textron, maker of Cessna aircraft, engaged in the transactions.

The tax shelters, known by the acronyms LILO and SILO, entail letting banks or other companies to buy subway cars or other public assets and lease them back to cities or transit authorities. The banks and companies claimed tax deductions, such as depreciation on the equipment.

The leasing arrangements provided revenue to cities, transit systems, airport authorities and other municipal services.

Promoters of the transactions, such as Brussels-based Dexia SA, told clients that the arrangements would let buyers save on taxes as the assets depreciated, although the companies wouldn’t own or operate the equipment or services. The IRS challenged the arrangements in court, saying the purchase-and-lease transactions were shams designed to produce tax deductions on assets that the banks and companies never truly owned.

From 2001 to 2003, at least 16 U.S. companies bought transportation assets from cities through 35 leasing agreements. Other companies sought tax breaks by leasing municipal services, such as sewer lines in Germany and the Alamodome arena in San Antonio, as well as emergency 911 call centers in Chicago and air-traffic-control systems in Australia, Canada and France.

Shulman said about 1,000 separate transactions could be unwound as a result of the settlement. Sphere: Related Content