According to the IRS, more than two-thirds of corporations that received the LILO/SILO settlement offer have decided to accept the offer to participate in the initiative. Those accepting the offer had more than 80% of the total number of LILO and SILO leases. These leases involve about 80% of the dollars in dispute and will require the corporations to concede billions of dollars in tax deferrals. Participation in the settlement remains preliminary until final closing agreements are reached between the individual corporate taxpayers and the IRS.

“This broad response from some of the nation’s largest corporations reflects the success of the IRS campaign against aggressive tax shelters,” said IRS Commissioner Doug Shulman. “Corporations that have chosen to settle have done the right thing by putting this behind them. For those who failed to take us up on this offer, we will vigorously pursue their cases.”

LILOs and SILOs involve complex arrangements in which some of the nation’s largest corporations purportedly leased or purchased large assets, such as foreign rail systems or sewer systems, and immediately leased them back to their original owners. Under these arrangements, corporate taxpayers put off recognition of current income for tax purposes for many years.

The IRS designated LILOs as listed transactions in 2000. SILOs were designated in 2005. Since then, the government has gone to court and successfully challenged these transactions as having no purpose other than creating tax benefits. Prior to the settlement initiatives, there were hundreds of these transactions that had yet to be fully examined or adjudicated fully. The large percentage of eligible corporations electing to participate in the settlement offer has substantially reduced the IRS's audit backlog.

The LILO/SILO settlement initiative is the latest in a series of efforts to detect, deter and resolve individual and corporate tax shelters. Over the past eight years, the IRS has vigorously attacked tax shelters through examination, litigation and administrative guidance.

“In the end, all American taxpayers benefit because this strong response to a settlement offer frees up IRS staff to actively pursue other compliance priorities,” Shulman said.

The IRS's campaign against leasing tax shelters gained traction when the US Court of Appeals for the Fourth Circuit issued an opinion in April which disallowed tax benefits associated with certain of BB&T Corporation's lease-in, lease-out (LILO) transactions. According to this case, BB&T had leased pulp manufacturing equipment from Swedish firm Sodra Cell and immediately leased it back, meaning that Sodra Cell never lost possession and control of the equipment. The courts found that the lease and lease-back arrangements completely offset each other, and that the parties transferred no significant incidence of ownership. BB&T was therefore denied a tax refund of approximately USD4.5mn. Earlier that month, a similar conclusion was reached by a federal jury in Cincinnati, Ohio in a case against Fifth Third Bancorp which had its USD5.6mn tax refund claim, the result of a LILO transaction, rejected.

Seemingly conceding defeat on the issue, some companies adjusted their balance sheets in response to the rulings. One example was financial services firm Wachovia Corporation, which announced in May that as a result of its analysis of the BB&T case, it expected to record an after-tax non-cash charge of between USD800m and USD1bn in the second quarter of 2008.

By August, the IRS revealed that 45 un-named companies had been given the opportunity to settle LILO and SILO-related disputes with the agency. The IRS offer allows the companies in question to keep 20% of the deductions claimed through 2007 from use of the shelters if they agreed to extricate themselves from the leasing deals and associated transactions by December 31, although some companies with complex deals may be given until the end of 2010 to unwind the structures.

The companies agreeing to the settlement would have to pay the remaining 80% of the improperly claimed deductions but would not have to pay penalties, which are typically 20% of the disallowed deductions.

Once companies receive settlement offers, they will have 30 days to accept, and according to Shulman, this is a "one time offer" from the agency.