Jury Rejects Altria's Bid For Tax Refunds On Leasing Transactions

by Glen Shapiro, LawAndTax-News.com, New York

14 July 2009

Altria Group, the largest tobacco company in the US, has announced that it will seek further review of a federal court jury verdict against it in a dispute with the United States Internal Revenue Service involving tax deductions related to four leveraged lease transactions.

Altria filed a suit seeking tax refunds totalling almost USD25m for taxes paid for years 1996 and 1997.

"We believe that Altria and its subsidiary, Philip Morris Capital Corporation, fully complied with the law governing these leveraged lease transactions and that Altria is entitled to a full refund," said Murray Garnick, Altria Client Services senior vice president and associate general counsel, speaking on behalf of Altria.

"We will seek further review of the jury's verdict in the trial court and, if necessary, in the appellate court," added Garnick.

However, such transactions, known as lease-in lease-out (LILO) and sale-in lease-out (SILO) have become increasingly shaky from a legal point of view after the IRS began cracking down on them some years ago. Under these arrangements, public infrastructure companies, such as subways and power plants, lease assets to a private company for an up-front fee, enabling the new owners to take large depreciation deductions on the assets.

The US government argues that these transactions lack economic substance because they are motivated solely by the avoidance of taxation.

These tax shelters were effectively outlawed by the 2004 American Jobs Creation Act, although the legislation only applies prospectively. Recently, US Senator Chuck Grassley, the Iowa Republican who was instrumental in shutting down LILOs and SILOs, suggested that the Washington Metropolitan Area Transit Authority’s budget was constrained by a tax-advantaged lease arrangement with a foreign bank, preventing it from making safety upgrades and contributing to the recent fatal crash on its system.

The leveraged lease transactions involved in the Altria case include a Metropolitan Transportation Authority maintenance railroad yard in New York, a wastewater treatment facility in the Netherlands; and power plants operated by Oglethorpe Power Corp. in Georgia and Seminole Electric Cooperative in Florida.

The IRS challenged deductions relating to four leases in 1996 and 1997, and Altria paid the disputed amounts and filed suit against the IRS for a refund.

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