Paul L. Caron

Tuesday, April 29, 2008

4th Circuit Affirms Government's Victory in BB&T Corp. LILO Tax Shelter Case

On the heels of the Government's big win last week in the Fifth Third Bancorp LILO tax shelter case:  the 4th Circuit today affirmed the Government's victory in the first LILO tax shelter case, BB&T Corp. v. United States, No. 07-1177 (4th Cir. 4/29/08):

This appeal requires us to determine the tax consequences of acomplex financial transaction. BB&T Corp. entered into a "leasein/ lease-out" transaction, often called a "LILO," hoping to reduce its tax liability, but the IRS disallowed the deductions it claimed. After BB&T sued for a refund, the district court granted summary judgment in favor of the Government.

BB&T now appeals, arguing that the district court misapplied the "substance-over-form" doctrine in determining that it could not claim deductions for rent and interest under §§ 162(a)(3) & 163(a). Specifically, BB&T disputes the district court’s conclusion that although the form of the transaction involved a lease financed by a loan, BB&T did not actually acquire a genuine leasehold interest or incur genuine indebtedness as a result of the transaction. For the following reasons, we affirm. ...

In closing, we are reminded of "Abe Lincoln’s riddle . . . ‘How many legs does a dog have if you call a tail a leg?’" Rogers v. United States, 281 F.3d 1108, 1118 (10th Cir. 2002). "The answer is ‘four,’ because ‘calling a tail a leg does not make it one.’" Id. Here, BB&T styled the LILO as a lease financed by a loan, but did not in substance acquire a genuine leasehold interest or incur genuine indebtedness. Accordingly, although we decline to resolve whether the transaction as a whole lacks economic substance — that is, whether it has "reached the point where the tax tail began to wag the dog," Hines, 912 F.2d at 741, we conclude that the Government was entitled to recognize that tail for what it was, not what BB&T professed it to be. The judgment of the district court is therefore.

Prior TaxProf Blog coverage:

Update:  Department of Justice press release:

“Taxpayers seeking to hide behind bogus paper transactions should think twice. Today, taxpayers have once again been told by a federal court that the Government may look at the substance, rather than the form, of a transaction to determine its legitimacy for tax purposes,” said Nathan J. Hochman, Assistant Attorney General of the Justice Department’s Tax Division.

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