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).