Court Backs IRS In LILO Tax Shelter Case

by Leroy Baker, Tax-News.com, New York

09 January 2007

The US Internal Revenue Service has won a significant court victory in its fight to outlaw the use of a tax shelter known as 'lease in lease out,' or LILO.

Judge Norwood Tilley ruled in the US District Court in North Carolina last week that a leasing arrangement used by financial services firm BB&T Corp. had no other purpose than to reduce its tax liability.

BB&T had used a LILO arrangement to lease wood-pulp facilities owned by a Swedish company, Sodra Cell AB. Under LILO arrangements, companies pay an accommodation fee to lease facilities from another company or a municipality, but then claim depreciation on these facilities to reduce their tax bill.

In 2004, Congress moved to ban the use of similar LILO arrangements, which coincided with a wider crack down on corporate tax sheltering, and legislation shutting down certain LILO schemes was included in the American Jobs Creation Act.

BB&T had attempted to claim a tax refund of $3.3 million which stemmed from a 1997 lease transaction, but the request was denied by the IRS and the company subsequently went to court to appeal the agency's decision.

According to Dow Jones Newswires, BB&T disagrees with the court's verdict and plans a further appeal.

"We had hoped to go to trial based on the strength of our case," spokesman Bob Denham was quoted as stating.

The court's decision was welcomed by Eileen J. O'Connor Assistant Attorney General for the Justice Department's Tax Division.

"To have a tax deduction for lease or interest expense, you must actually incur them. And to incur them, you must have a genuine lease and genuine indebtedness, respectively," she said in a statement.

"In BB&T vs. United States of America, the District Court found that the Lease-In, Lease-Out tax shelter involved neither, and therefore does not result in the tax deductions claimed by those who participate in it," she concluded.

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