SERVICE LAUNCHES LILO, SILO SETTLEMENT
The IRS followed up its recent court victories against LILOs (lease in, lease out) and SILOs (sale in, lease out) with an offer to settle the estimated hundreds of the listed-transaction tax shelters still on companies’ books. The offer, sent initially on Aug. 6 to 45 large corporations known to have participated in one or both of the transactions, waives accuracy-related penalties under IRC §§ 6662 and 6662A. In exchange, taxpayers must agree to terminate the transactions by Dec. 31, 2008. If they are unable to do so, the transactions will be deemed terminated as of that date. Taxpayers may still claim any benefit of an actual termination if, after a termination is deemed, the transaction is actually terminated by the end of 2010.
Under the settlement’s terms, reported taxable rental income from the LILO or SILO will be 80% disregarded, and claimed interest expense, amortized transaction costs and head lease rent expenses will be 80% disallowed for tax years through 2007. In addition, 80% of original issue discount accrued through 2007 must be reported for 2008. Termination gain, actual or deemed, must be recognized as ordinary income in 2008 and each additional year until actual termination.
For two recent court opinions, see BB&T Corp. v. U.S. (101 AFTR2d 2008-1933, “Tax Matters: LILO Comes Up One Leg Short,” JofA, Aug. 08, page 84), and AWG Leasing Trust v. U.S. (101 AFTR2d 2008-2397, “Tax Matters: Another SILO Pulled Down,” JofA, Sept. 08, page 94).
RULES TIGHTEN CHARITABLE DONATION SUBSTANTIATION
The Service issued proposed regulations consolidating, modifying and clarifying earlier proposed regulations and other guidance on reporting and substantiation requirements introduced by the American Jobs Creation Act of 2004 and the Pension Protection Act of 2006 (PPA) for deductible charitable contributions. Comments on REG-140029-07 are requested by Nov. 5. Among its provisions are definitions of qualified appraisals that meet the requirements of IRC § 170(f)(11)(E) as amended by the PPA. A deduction of more than $5,000 for a contribution of property must be accompanied by an appraisal performed by a qualified appraiser in accordance with generally accepted appraisal standards.
The new rules, consistently with interim guidance in Notice 2006-96, define generally accepted appraisal standards as complying with the substance and principles of the Uniform Standards of Professional Appraisal Practice as developed by the Appraisal Standards Board of the Appraisal Foundation. They also address recordkeeping and substantiation requirements for donors of cash and noncash contributions, including deduction thresholds at which donors must obtain receipts or “reliable written records,” and specify information that must be recorded on each.
The IRS and the Treasury Department request suggestions of how guidelines published by charities might reflect the provision of IRC § 170(f)(16) that donated clothing and household items not requiring an appraisal must be in good used condition or better. New Prop. Treas. Reg. § 1.170A-18 further explicates this requirement.
IRS APPEALS JELKE TO SUPREME COURT
The government asked the U.S. Supreme Court to review the Eleventh Circuit’s decision in Estate of Frazier Jelke III v. Commissioner (100 AFTR2d 2007-6694, “Tax Matters: Dunn Does It Again,” JofA, March 08, page 70). The Eleventh Circuit previously declined to rehear en banc its decision overruling the Tax Court on a valuation discount for tax liability of an estate’s built-in capital gains.
In its brief to the Supreme Court, the government said the Eleventh Circuit in Jelke adopted the “categorical approach which it believed the Fifth Circuit had adopted in Estate of Dunn v. Commissioner” (90 AFTR2d 2002-5527). Following that approach, the Eleventh Circuit in Jelke rejected the Tax Court’s holding that discounted the built-in gains tax liability over a period of time. Rather, the Eleventh Circuit said, 100% of the built-in gains taxes must be taken into account under the net asset valuation method (regardless of the likelihood of liquidation), because the method assumes that all assets are liquidated as of the date of valuation. In its brief to the Supreme Court, the government argued the Eleventh Circuit had used an erroneous standard of review—it treated the selection of a valuation method as a matter of law (and therefore subject to de novo review) instead of as a matter of fact (which can be reviewed only for clear error).