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IRS SILO Settlement Initiative
On Aug. 6, 2008, the IRS announced settlement initiatives for more than 45 large corporate taxpayers that engaged in Lease-In/Lease-Out (“LILO”) or Sale-In/Lease-Out (“SILO”) transactions, which were designated as listed transactions in 2000 and 2005 respectively. About 45 corporate taxpayers received letters inviting participation in the settlement initiative. The resolution program represents the first time that LILO and SILO transactions have been the subject of a nationally coordinated taxpayer settlement initiative. The IRS is offering the initiatives, presumably based on the government-favorable decisions in BB&T Corp. v. United States, 523 F.3d 461 (4th Cir. 2008) and AWG Leasing Trust v. United States, 2008 U.S. Dist. LEXIS 42761 (N.D. Ohio May 28, 2008), in an effort to resolve the hundreds of LILO and SILO transactions currently being examined and litigated. The IRS has issued and posted to its Web site answers to questions raised by the original announcement: www.irs.gov/businesses/article/0,,id=186294,00.html. Originally given a 30-day window, taxpayers had until Oct. 5, 2008 to accept the offer.
As described in previous articles, in a LILO or SILO transaction, a U.S. taxpayer leases (LILO) or purchases (SILO) an asset from the asset owner by contributing an equity investment (typically around 20% of asset cost) and obtaining loans to finance the remainder of asset cost. The taxpayer then leases the asset back to the asset owner (as lessee) in exchange for rental payments. At the end of the lease period or earlier, the lessee generally has the right to purchase the asset for a fixed price early buyout option (“EBO”). In many transactions, the lessee economically defeases its rent and purchase option payment obligations by depositing the majority of the closing date asset sale proceeds with creditworthy banks or similar arrangements. That deposit is then pledged to the lessor as collateral to secure the lessee's payment obligations.
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