FOR IMMEDIATE RELEASE|
FRIDAY, MAY 30, 2008
TDD (202) 514-1888
OHIO JUDGE REJECTS TAX CLAIMS ON $423 MILLION ALLEGED PURCHASE OF GERMAN FACILITY MADE BY CLEVELAND & PITTSBURGH-BASED BANKS
Alleged Cross-Border Leasing Transactions Involving Key Bank and PNC Bank
Were Improper Tax Shelters
WASHINGTON – A federal judge in Cleveland rejected tax claims presented by a partnership owned by Key Bank and PNC Bank that they were entitled to more than $100 million in deductions related to an international leasing transaction, the Justice Department and Internal Revenue Service (IRS) announced today. In addition to disallowing the deductions as improper, the court held the partnership was liable for penalties for substantial understatement of tax.
The banks claimed the deductions in connection with a purported Sale-In/Lease-Out (SILO) transaction in which they claimed to have acquired ownership of a trash disposal and energy generation plant in Germany. The banks claimed they acquired the plant from a German municipal utility and leased the plant back to the utility for at least 25 years on the same day. The utility continued to use and operate the plant without interruption, while the banks claimed depreciation deductions on the plant and interest deductions on loans used to finance the SILO transaction.
U.S. District Judge James Gwin ruled that these paper transactions did not represent a purchase of the plant by the banks because the SILO transaction was structured to ensure that the banks never acquired an ownership interest in the facility. Likewise, Judge Gwin found that the loans that financed most of the purported purchase price did not constitute genuine indebtedness because the loan proceeds were dedicated solely to repay the so-called debt.
This ruling represents another victory in the governments challenge to abusive leasing arrangements with tax-indifferent parties. The decision marks the first time a federal court has addressed the propriety of tax deductions from a SILO transaction. Earlier this year, a jury in Cincinnati ruled in favor of the government in a case involving several Lease-In/Lease-Out (LILO) transactions executed by Fifth Third Bank. Two weeks later, the U.S. Court of Appeals for the Fourth Circuit affirmed the judgment entered in favor of the United States in a LILO case brought by the BB&T Corporation in a federal district court in North Carolina. In rejecting the banks claims in this case, Judge Gwin observed that SILOs are a modified version of their tax-driven predecessors [LILO] transactions.
We are pleased that the court recognized the transaction as a purposeless transfer of tax benefits, rather than a legitimate sale-leaseback as the partnership had contended, said Nathan Hochman, Assistant Attorney General of the Justice Departments Tax Division. Taxpayers should take notice that the Justice Department and the IRS will continue to challenge improper tax shelters.
This opinion sends the right message to aggressive taxpayers who play games by changing their transactions to avoid IRS rules, said IRS Commissioner Doug Shulman. When faced with regulations that shut down LILOs, this taxpayer shifted gears and used Sale-in/Lease-out transactions. Fortunately, the court saw through this and put a stop to it. Once again, the court looked beyond the trappings of the transaction that had no purpose other than avoiding taxes.
Assistant Attorney General Hochman thanked those who tried the case – Robert Kovacev, Matthew von Schuch, Angelo Frattarelli, Karen A. Smith, Stuart J. Bassin and Timothy R. Tripp of the Justice Departments Tax Division, and Nancy B. Herbert of the IRSs Office of Chief Counsel. He also thanked Diane R. Mirabito, David OConnor and John Aramburu from IRSs Office of Chief Counsel, and the other Justice Department and IRS employees who were involved in preparing the case for trial.