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LILO FAILS

January 05, 2007

The IRS won another courtroom victory in the tax shelter wars yesterday. A federal judge in North Carolina ruled on summary judgement that a LILO (lease-in lease-out) tax shelter had no substance and could be disregarded.

BB&T Corporation set up a "lease" with Sodra, a Swedish paper manufacturer, where it leased Sodra's manufacturing equipment on a 36-year lease. It "borrowed" $68 million from a subsidiary of Dutch Bank ABN-AMBRO and paid $18 million of its own money. All of this money went into BB&T's ABN bank account.

$68 million then went from the ABN account to "lease" the equipment from Sodra, who then leased it right back from BB&T. Sondra had to pay the $68 million right back to ABN as part of the deal. Over the term of the "lease," Sodra's rent payments to BB&T equalled BB&T's debt payments to ABN, and the debt was non-recourse to BB&T.

The tax angle was the interest deduction purportedly generated by the $68 million "loan." The court said it didn't work:

When the intermediate payment steps are disregarded, which must be done in order to consider the substance of the loan transaction and not the form selected by the parties, it becomes clear that the loan transaction is only a circular transfer of funds in which the HBU loan is paid from the proceeds of the loan itself. There was no money lent to BB&T in a substantive sense, and the HBU loan does not reflect genuine indebtedness

No debt, no interest; no interest, no deduction.

Cite: BB&T Corp. v. United States, No. 1:04CV00941 (M.D. NC 1/4/06)

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