IRS offers deal on tax shelter disputes

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Bloomberg News / August 7, 2008

WASHINGTON - The Internal Revenue Service, capitalizing on recent court victories, offered 45 companies, including banks, the chance to settle disputes over the use of a leasing tax shelter.

The settlement offer involves a shelter like one that Wachovia Corp., after an Appeals Court ruling in April, said would cost the bank $975 million in back taxes.

The offer, under which the IRS agreed to waive penalties, requires companies to terminate so-called lease-in, lease-out or sale-in, lease-out deals.

In exchange, they will be allowed to keep 20 percent of their claimed tax losses. Bank of America Corp. and Wells Fargo & Co. were among other banks to use those kinds of transactions.

IRS commissioner Doug Shulman said billions of dollars in tax liabilities are at stake.

The settlement offer comes after IRS court victories against BB&T Bank Corp. and Fifth Third Bancorp. Wachovia said it was taking its $975 million charge after the BB&T decision on April 29.

The government also won a case in May involving a company called AWG Leasing Trust, in which a Cleveland judge allowed the IRS to impose penalties.

The settlement offer affects a "broad range of companies," Shulman said. In 2004, Bloomberg News reported that, in addition to banks, companies such as Altria Group and Providence-based Textron Inc. engaged in the transactions.

Bank of America spokesman Scott Silvestri declined to comment. Julia Tunis Bernard of Wells Fargo, said she had no immediate comment. Calls to Altria and Textron weren't immediately returned.

The IRS sent settlement offers to all 45 companies, Shulman said. The companies have 30 days to respond, he said.

In the tax shelters, known by the acronyms LILO and SILO, banks or other companies arranged to buy subway cars or other public assets and lease them back to cities or transit authorities. The banks and companies claimed tax deductions, such as depreciation on the equipment.

The leasing arrangements provided revenue to cities, transit systems, airport authorities, and other municipal services.

Promoters of the transactions, such as Brussels-based Dexia SA, told clients that the arrangements would let buyers save on taxes as the assets depreciated, though the companies wouldn't own or operate the equipment or services.

The IRS challenged the arrangements in court, saying they were designed to produce tax deductions on assets the companies never truly owned.

From 2001 to 2003, at least 16 US companies bought transportation assets from cities through 35 leasing agreements, Bloomberg News reported in March 2004. Other companies sought tax breaks by leasing municipal services, such as sewer lines in Germany and the Alamodome arena in San Antonio, and emergency 911 call centers in Chicago and air-traffic control systems in Australia, Canada, and France.

Under the terms of the IRS's offers, the companies must use their best efforts to terminate the transactions by Dec. 31.

In some cases, the IRS will give taxpayers until Dec. 31, 2010, to unwind the deals.

Companies must agree to concede 80 percent of all deductions associated with the transactions for taxes due in years before 2008. In exchange, the IRS won't tax certain income generated by the transactions for the same years.

An IRS release said the government won't agree to settle any of a taxpayer's shelter-related tax issues unless the bank or company accepts the settlement terms for all of its lease transactions.

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