Paul L. Caron

Tuesday, April 22, 2008

Government Wins Second Big LILO Tax Shelter Case

The Department of Justice announced yesterday that it has won a major LILO tax shelter case involving Fifth Third Bancorp in Cincinnati (Fifth Third Bancorp v. United States, No. 1:05CV350 (S.D. OH 4/18/08)):

A jury in Cincinnati ruled on Friday that Fifth Third Bancorp is not entitled to a $5.6 million tax refund for its 1997 tax year, the Justice Department and the IRS announced today. Fifth Third was seeking to take tax deductions that related to complex leasing transactions involving passenger rail cars.

The bank’s subsidiary leased passenger rail cars from transit authorities in Massachusetts, France and Germany, and then leased them back to the transit authorities on the same day. In each case, the transit authorities continued to use the rail cars without interruption. The bank claimed that it was entitled to tax deductions for rent payments and for interest on financing loans.

The jury found that these paper transactions lacked economic substance, because there was no realistic chance for the bank to earn an economic profit apart from the tax benefits. As a result of the jury’s finding, Fifth Third is not entitled to claim any deductions based on this scheme.

This type of leasing arrangement is commonly known as a Lease-In, Lease-Out or a LILO transaction. The government has prevailed in both of the LILO tax shelter cases that have been decided in court. A federal district court in North Carolina ruled in favor of the United States in January, 2007, in a LILO case brought by BB&T Corporation. Fifth Third was the first large, complex corporate tax shelter case tried by a jury.

Hundreds of LILO transactions were entered into by taxpayers in the late 1990s, and the Government calculates that billions of dollars are at stake nationwide in disputes over these transactions. In filings with the SEC, Fifth Third has disclosed that it is disputing with the IRS $900 million in tax deductions arising out of Fifth Third’s participation in LILO or similar transactions.

For a copy of the jury's verdict, see here.

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