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4TH CIRCUIT REJECTS LILO APPEAL

April 30, 2008

After a defeat in a "Son of Boss" tax shelter case last week in a federal district court, the IRS bounced back yesterday with an appeals court victory. The Fourth Circuit upheld a 2007 decision defeating a "Lease-in Lease-out" shelter. From the opinion:

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 IRS has occasionally lost cases against the mass-marketed tax shelters of the late 1990s at the district court level, but I think they have won all of their cases at the more important appellate level.

Links:

TaxProf Blog
Prior Tax Update BB&T coverage

Tags: tax shelters.