Tax

IRS Offers 45 Companies a Deal to Exit Tax Shelters

In the complex structures, big corporations lease or buy such large assets as foreign railroads or sewer systems and then lease them back to the or...
Stephen TaubAugust 6, 2008

The Internal Revenue Service has offered 45 companies a deal to end their involvement in certain banned tax shelters, called lease-in/lease-out (LILO), and sale-in/lease-out (SILO) systems, according to the Associated Press. The companies are engaged in more than 1,000 of the transactions, which are according to the AP.

In the complex structures, big corporations lease or buy such large assets as foreign railroads or sewer systems and then lease them back to the original owners, according to the report.

On Wednesday, the IRS sent a letter to the companies that gives them 30 days to decide the terms of the offer, according to the report. Under the deal, IRS Commissioner Doug Shulman would give the companies by the end of the year to terminate the transactions, which were banned in 2004. “As a basic matter of fairness to all taxpayers, the IRS cannot allow LILO and SILO deals to stand,” Shulman told the AP.

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According to the wire service, the IRS said it has won three cases against corporations involved in the transactions . The revenue service plans to pursue cases against those corporations that chose not to take in the settlement involved in those cases, according to the report.

Earlier this year, the IRS won a case against U.S.-based financial holding company, BB&T Corp., which in 1997 leased a 22 percent interest in pulp-manufacturing equipment at one of the mills owned by Swedish wood-pulp manufacturer, Sodra Cell. The arrangement had brought BB&T a substantial deduction.

Although the transaction predated the 1999 tax code changes that shut down LILOs, the IRS challenged it and won in 2007 — the first time such a shelter had been tested in court. Then, in April, a federal appeals court sided with the IRS. The verdict resulted in an extra $1.2 billion paid in taxes and interest to clear its bill for Sodra and similar transactions.

Banking giant Wachovia announced in April that as a result of the BB&T verdict it would take up to a $1 billion noncash charge to earnings related to SILO transactions. Another bank, KeyCorp, said in June that it would take a charge to earnings and capital of up to $1.2 billion, halve its dividend, and issue shares to raise another $1.5 billion — all because of a SILO strategy involving a German waste-to-energy facility that was struck down by the Northern District of Ohio court.