USA-FEDERAL-STATE-COMPANY-TAX.COM
A LOWTAX NETWORK SITE
 USTAXNETWORK.COM:
NEWSLETTER

To receive our free monthly network newsletter enter your email address below:

ADVERTISING

ADVERTISE ON THIS SITE!

Our sites have more than 100,000 visitors every day. Like our inter-national site, this new US site will quickly grow to be one of
the most-visited American tax sites.

If you want to advertise with us, be an exclusive launch partner for new US sections, or show our highly-rated news content on your own site, just e-mail paul@usa-tax-news.com.

We'll get right back to you! If you give us a number to call you, we'll do just that.

HOME | CONTACT US | ABOUT US | LEGAL | LINKS
> Information provided on this site is for general guidance only and is often simplified. Actual IRS procedures are complex, and taxpayers should obtain professional assistance or use IRS sources for complete information.


Tax Shelters In 2005 Action and inaction at the Treasury and in Congress.

Alphabet Soup SILOs, BOSS and son, and other denizens in the zoo of shelters.

Tax Advisers Under Attack Major tax and accounting firms were the target of judicial attack in 2005.
Tax Shelters In 2006 Honours are even so far in 2006, but the Congress is as busy as ever churning its wheels.
Tax Shelters A brief review of the place of tax shelters in the American corporate landscape.

Alphabet Soup

In February, 2005, the Treasury Department and the Internal Revenue Service issued guidance that designated "sale-in/lease-out" or "SILO" arrangements as abusive tax avoidance transactions.

According to the tax authorities, SILO arrangements are designed to exploit the tax law by shifting tax benefits from a tax-indifferent party that cannot use them to a taxpayer that can.

Taxpayers entering into SILO arrangements cannot claim tax benefits as the purported owners of property subject to a lease because they do not acquire tax ownership of the property.

In the American Jobs Creation Act of 2004, Congress enacted limitations on the deductibility of losses from future SILO transactions. The Notice informed taxpayers that the IRS would challenge the purported tax benefits claimed by taxpayers entering into earlier SILO transactions on a number of grounds. It further stated that SILOs are considered ‘listed transactions.’

Taxpayers who enter into SILOs and who are required to file tax returns must disclose their participation to the IRS. In addition, promoters of listed transactions must keep lists of investors and, in certain cases, register those transactions with the IRS.

In March of that year, the IRS announced that more than $3.2 billion had been collected from over 1,000 taxpayers who participated in the Son of Boss tax shelter settlement scheme, a total that is expected to rise.

The figure included back taxes, fines and interest paid by the 1,165 taxpayers who had participated in the scheme at that point, and according to the IRS, the typical taxpayer payment was almost $1 million, with 18 taxpayers paying more than $20 million each. One taxpayer alone was said to have paid over $100 million.

Son of Boss evolved from an earlier scheme known as ‘BOSS’ (bond and option sales strategy). The scheme utilised a complex set of derivative transactions to reduce tax liability and was commonly used in the late 1990s to offset large one-off gains such as the sale of a business.

Under the stringent terms of the settlement initiative, taxpayers were required to concede 100% of the claimed tax losses and pay a penalty of either 10% or 20% of the total, unless they had previously disclosed the transactions to the IRS.

“This was a particularly bad shelter, and we’re glad so many chose to get right with the government,” commented IRS Commissioner Mark W. Everson.

“Despite the tough terms we offered, two-thirds of Son of Boss participants have come forward and paid up,” he added.

Based on disclosures the IRS has received from promoter investigations and from investor lists from Justice Department litigation, the agency believed that more than 1,800 people participated in Son of Boss. It is predicted that the total revenue yield from the settlement scheme would exceed $3.5 billion.

The Son of Boss ‘amnesty’ also benefited the coffers of various state governments, with Arizona, Illinois, Maine, Maryland, Michigan, New York, Ohio, Utah and Virginia having collected more than $23.5 million from voluntary state tax return amendments.

Furthermore, under an information sharing initiative between the IRS and state tax authorities, an additional $161 million in disallowed losses, and assessments of nearly $16 million in taxes, interest and penalties, were uncovered by the states of Colorado, Connecticut, Maine, Maryland, Missouri, North Dakota, Pennsylvania, Utah and Virginia.

Ever keen to emphasise the agency’s recent hard line policy on tax shelters, Commissioner Everson issued a stern warning to those yet to participate in the Son of Boss settlement initiative.

“For those who didn’t come forward, we know who they are (and) we are going after them,” he stated.

In April 2005, Senate Finance Committee Chairman Charles Grassley criticized tax legislation which he helped to write for allowing firms to take advantage of tax loopholes for an extra year.

During a committee hearing focusing on the US 'tax gap,' which is estimated at $312 billion, Grassley expressed frustration that the "watered down" final version of the American Jobs Creation Act had permitted firms to continue exploiting large depreciation allowances in leasing arrangements with state and local governments known as LILOs and SILOs (lease in lease out, and sale in lease out).

In particular, Grassley was angered by a provision allowing existing leasing arrangements to proceed if they had been submitted for approval by the Federal Transit Administration after June 30, 2003, and before March 13, 2004.

"Incredibly, this provides shelter promoters another full year to get their deals approved by the FTA. Treasury's has been forced to grandfather in these rotten deals because of the bill's effective dates," Grassley remarked.

The Senate version of the bill called for the tax shelters to be closed down with effect from November 17, 2003, in a measure which would have raised more than $40 billion in revenues over ten years.

However, Grassley went on to argue that: "There's no way these deals deserve another year."

Sen. Grassley also asked the Transportation Department for details of any corporate tax shelters involving the leasing of bridges and sewer systems that might be grandfathered under the American Jobs Creation Act of 2004.

In a letter to Transportation Secretary Norm Mineta, Grassley asked for details of all pending requests for approval of such tax shelters. Grassley also urged the secretary to discourage these deals.

“We exerted great effort in Congress to shut down this abuse, but the transition relief in the American Jobs Creation Act is a sop to shelter promoters and an insult to the American taxpayer,” Grassley wrote. “Corporations have no right to claim tax deductions for bridges, subways, and sewage pipes that were built with taxpayer dollars.”

The text of Grassley’s letter follows:

"On November 17, 2003, I wrote to you to enlist the assistance of the Department of Transportation in the Committee on Finance’s ongoing investigation of an abusive tax shelter that has come to be known as LILOs – an abbreviation for “lease-in-lease-out” transactions, and SILOs – the successor to LILOs called “service-in-lease-out” agreements. Other variations on these transactions have involved qualified technology equipment (QTE). A copy of our November 17th letter is attached.

"On January 20, 2004, you responded to our inquiry by advising us that after the release of Revenue Ruling 99-14 in March 1999, the Department of Transportation’s Federal Transit Administration (FTA) has not received, reviewed, or concurred in any LILO transaction. You indicated, however, that LILO promoters mutated those transactions into SILOs, and the first notice received by your department that SILO transactions were under challenge by the Department of Treasury was a November 26, 2003, letter from Treasury’s Assistant Secretary for Tax Policy. Presumably, the Department of Transportation ceased reviewing and approving SILO transactions on the receipt of Treasury’s letter, although your response did not confirm this to be the case. In February 2004, the staff of the FTA provided the Committee on Finance with a list of leveraged lease transactions submitted to and reviewed by the FTA from June 1988 though September 2003.

"Subsequent to our exchange of letters, Congress enacted the American Jobs Creation Act of 2004, which outlawed LILOs and SILOs, albeit not without considerable concessions to the interests of shelter promoters that were in the process of setting up these abusive schemes. Under the Senatepassed version of the American Jobs Creation Act of 2004, LILOs and SILOs would have been shut down as of November 17, 2003, the day that I sent you the letter. For LILOs and SILOs involving public assets of foreign jurisdictions, U.S. tax deductions would have ended on February 1, 2004, regardless of whether the foreign lease was entered into before November 17, 2003. In conference, however, these tough effective dates were watered down and delayed.

"The enacted bill doesn’t take effect until March 13, 2004, nearly 4 months later than the Senate bill. Incredibly, the enacted bill gave leasing shelter promoters more than a year to get their deals-inprocess approved by your department. The bill grandfathers domestic property leases if 1) the leases had been submitted for approval by the FTA after June 30, 2003, and before March 13, 2004; 2) the FTA approves the leasing shelter arrangement before January 1, 2006; and 3) the FTA application includes a description and the fair market value of the property.

"We exerted great effort in Congress to shut down this abuse, but the transition relief in the American Jobs Creation Act is a sop to shelter promoters and an insult to the American taxpayer. Corporations have no right to claim tax deductions for bridges, subways, and sewage pipes that were built with taxpayer dollars. As part of our continuing effort to stop this abuse, I ask that the Department of Transportation submit to the Committee on Finance copies of all LILOs, SILOs, QTE leases, and similar transactions that had been submitted for approval by the FTA after June 30, 2003, and before March 13, 2004. I also request a list of all such transactions that have been “approved” by the FTA as of the date of your response.

"Notwithstanding the grandfathering provisions of the American Jobs Creation Act, we would welcome assurances that FTA no longer approves SILO transactions, effective as of the date of the letter you received from the Assistant Secretary of Tax Policy. We also seek assurances that FTA has not approved any LILO transaction since the release of Revenue Ruling 99-14 in March 1999.

"I also request documentation regarding any other LILO, SILO, QTE or similar transactions that have been approved, funded, or otherwise reviewed by the Department of Transportation from the date of the FTA’s last response to the Finance Committee to the date of your response to this letter, provided that any such transactions is not otherwise covered by the above request.

"I appreciate your cooperation in our ongoing efforts to combat abusive tax shelters and look forward to receiving these materials within the next three weeks."

In January 2007, the IRS won a significant court victory in its fight to outlaw the use of LILO shelters.

Judge Norwood Tilley ruled in the US District Court in North Carolina that a leasing arrangement used by financial services firm BB&T Corp. had no other purpose than to reduce its tax liability.

BB&T had used a LILO arrangement to lease wood-pulp facilities owned by a Swedish company, Sodra Cell AB. Under LILO arrangements, companies pay an accommodation fee to lease facilities from another company or a municipality, but then claim depreciation on these facilities to reduce their tax bill.

BB&T had attempted to claim a tax refund of $3.3 million which stemmed from a 1997 lease transaction, but the request was denied by the IRS and the company subsequently went to court to appeal the agency's decision.

According to Dow Jones Newswires, BB&T disagreed with the court's verdict and planned a further appeal.

"We had hoped to go to trial based on the strength of our case," spokesman Bob Denham was quoted as stating.

The court's decision was welcomed by Eileen J. O'Connor Assistant Attorney General for the Justice Department's Tax Division.

"To have a tax deduction for lease or interest expense, you must actually incur them. And to incur them, you must have a genuine lease and genuine indebtedness, respectively," she said in a statement.

"In BB&T vs. United States of America, the District Court found that the Lease-In, Lease-Out tax shelter involved neither, and therefore does not result in the tax deductions claimed by those who participate in it," she concluded.

Also in January 2007, the Senate Finance Committee passed a series of measures cracking down on tax shelter abuses.

As previously stated, Grassley originally developed the bipartisan measures when he was chairman; the Senate passed them before but the House resisted them and they were never enacted.

“We need to keep cracking down on tax avoidance abuse,” Grassley said. “Every taxpayer who doesn’t pay what he owes makes a sucker out of everyone who does. It’s appropriate to shut down abuse and use the money from that to help small businesses preserve jobs as they face a minimum wage increase.”

The committee unanimously passed the tax shelter loophole closers as part of the Small Business and Work Opportunity Act of 2007, which extends tax relief for small businesses in conjunction with an expected minimum wage increase. The tax relief includes a tax credit to hire disadvantaged workers and allows retailers and restaurant owners to more quickly write off the costs of remodeling leased buildings.

The tax loophole closers approved as part of the package include:

A further crackdown on leasing tax shelters: These leases involve companies that pretend to sell or lease taxpayer-funded public works systems, such as subways and sewers, and then lease them back to the cities. The companies claim depreciation on these taxpayer-funded assets, while the cities get up-front money from the tax shelter promoter that Grassley has called “chump change”, compared to what the companies get. Under Grassley’s leadership, Congress in 2004 largely outlawed tax benefits from these transactions. Grassley and Sen. Max Baucus have argued that even in cases of leases entered into before the 2004 law, the holders of the shelters should not gain future benefits, especially if the lessee is a foreign person or company, because these deals are so abusive.

The 2004 law mainly restricts leases entered into after March 12, 2004. The new legislation prevents companies from receiving tax benefits for leases entered into with foreign entities on or before March 12, 2004.

Further restriction on 'corporate inversions': In this practice, US companies relocate nominally in overseas tax havens to reduce their US taxes. The 2004 tax law restricted such transactions after March 4, 2003. The bill approved in committee Wednesday moves back the effective date to March 20, 2002, when Grassley and Baucus warned companies considering these deals to proceed at their own peril. This change is meant to capture any inversions that occurred in a rush to beat the new crackdown.

A prohibition of the deduction of civil regulatory fines and penalties, as well as punitive damages from a lawsuit, on federal tax returns: This grew out of some companies’ attempts to deduct the expense of settling cases with the government over wrongdoing.

Encouragement of tax whistleblowers: These further refinements will help make sure the Internal Revenue Service fully encourages whistleblowers to come forward with information about tax cheats. Grassley sees this as an effort to help close the approximately $350 billion gap between taxes owed and taxes paid.

Grassley said the loophole closers are a logical follow-up to the American Jobs Creation Act of 2004, which under his authorship in the Senate offered the strongest crackdown on tax shelters since 1986.

“It’s only fair to fight tax avoidance abuse while giving continued tax relief to encourage job retention and creation,” Grassley said. “Those who play by the rules deserve consideration, and those who abuse the tax code deserve a crackdown.”

However, in April 2007, it emerged that the provisions had been omitted from tax cut legislation moving through Congress.

"Tax gap measures are yesterday’s news. Corporate inversion and leasing deal crackdowns are in the dust bin," Grassley remarked in response to an House-Senate tax agreement, which aims to provide tax relief to small businesses affected by the proposal to increase the federal minimum wage to $7.25 per hour from $5.15.

"It’s a real headscratcher. The Democratic leaders say they want to shut down tax shelters but when they have a chance to do it, we get a package that’s the toast of tax shelter hucksters," he added.

Included in the pre-conference Senate bill, which Grassley was instrumental in drafting, were the aforementioned offset provisions which would have closed loopholes, shelters and offshore arrangements such as sale-in lease-out (SILO) shelters on foreign properties. It also included measures against offshore corporate inversions, and a doubling of some fines, penalties and interest on underpayments related to certain offshore financial arrangements.

However, these have been omitted from the provisions agreed by the leaders of the Senate Finance Committee and the House Ways and Means Committee as part of a military spending package.

In May 2005, measures to stamp out some corporate tax shelters were added to a $295 billion highway bill pending in the Senate.

The 180-page bill, which included items dealing with excise taxes, alcohol tax and fuel taxes, contained just under $20 billion in revenue raising items added by the Senate Finance Committee in order to boost highway spending without adding to the budget deficit.

The most crucial of these measures is the "economic substance" doctrine to prevent firms from entering into transactions that have no economic basis, used solely in order to produce a tax gain.

According to Charles Grassley, who has led the charge against corporate tax sheltering in recent times, particularly on the issue of SILOs (sale in lease out) arrangements, the new legislation will end "an exceedingly generous transition rule permitting leasing tax shelter abuse in the transportation sector."

The bill also modifies the tax treatment of contingent payment convertible debt instruments, raising $462 million through 2015. This is designed to curtail a financial product tax strategy that allows debt issuers to claim an enhanced interest deduction.

Other measures will compel company bosses to sign a declaration that the firm's tax return is fully compliant with the law, and create a 'whistleblower's office' at the Internal Revenue Service allowing the agency to deal more effectively with those volunteering "valuable information about tax violations."

This latter provision will raise an additional $407 million in revenues through 2015.

In July 2006, an US appeals court overturned a previous ruling in favor of Coltec Industries Inc, a former subsidiary of Goodrich, a major manufacturer of aircraft landing systems.

In a ruling representing a victory for the IRS, the three judges on the US Court of Appeals for the Federal Circuit panel agreed with the tax authority that Coltec had used a transaction known as a contingent liability deal to artificially generate capital losses which the firm then used to offset capital gains from the sale of a business unit in 1996.

Applying the much-debated 'economic substance' test, the judges wrote that the law as it stands "does not permit the taxpayer to reap tax benefits from a transaction that lacks economic reality”. The judges went on to write that a lack of economic substance "is sufficient to disqualify the transaction without proof that the taxpayer’s sole motive is tax avoidance”.

Their decision overturned a judgment by Judge Susan Branden in the US Court of Federal Claims in 2004, which rejected the IRS’s argument that the transactions had no economic purpose. Branden stated that, in her opinion, Coltec had complied with all the statutory requirements laid down by Congress and awarded the company an $82.8 million refund.



Tax Shelters In 2005 Action and inaction at the Treasury and in Congress.

Alphabet Soup SILOs, BOSS and son, and other denizens in the zoo of shelters.

Tax Advisers Under Attack Major tax and accounting firms were the target of judicial attack in 2005.
Tax Shelters In 2006 Honours are even so far in 2006, but the Congress is as busy as ever churning its wheels.
Tax Shelters A brief review of the place of tax shelters in the American corporate landscape.

LOWTAX NETWORK SITES
  Lowtax.net
  Tax-News.com
  USTaxNetwork.com
  USA-Federal-State- Company-Tax.com
  USA-Federal-State- Individual-Tax.com
  USA-International-Offshore- Company-Tax.com
  USA-International-Offshore- Expatriate-Tax.com
  USA-Sales-Use-Tax-E - Commerce.com
  USA-Investment-Tax.com
  USA-Tax-News.com
  Investors Offshore.com
  LawAndTax-News.com
  Offshore-E-Com.com
THE LOWTAX SUBSCRIPTION LIBRARY

THE LOWTAX LIBRARY

One of the web's largest and most authoritative business and investment information sources. Alongside topical, daily news on worldwide tax developments, you can receive weekly newswires or access up-to-date intelligence reports on a range of legal, tax and investment subjects.

FREE TRIAL NEWS SUBSCRIPTION

Our 16 constantly updated intelligence reports cover every important aspect of 'offshore' and international tax-planning in depth, including banking secrecy, the EU's savings tax directive, offshore funds, e-commerce, offshore gaming and transfer pricing. Reports are available for immediate downloading or as subscription services with news pages.

IMPORTANT NOTICE: THE LOWTAX NETWORK has taken reasonable care in sourcing and presenting the information contained on this site, but accepts no responsibility for any financial or other loss or damage that may result from its use. In particular, users of the site are advised to take appropriate professional advice before committing themselves to involvement in offshore jurisdictions, offshore trusts or offshore investments. All materials on this site copyright The Lowtax Network 1999 - 2007. Contact us for further information.