Business Day

I.R.S. Offers a Settlement in Corporate Tax

Shelter Cases
By LYNNLEY BROWNINGAUG. 6, 2008

The Internal Revenue Service, bolstered by recent court rulings, offered more than 45
corporations Wednesday the chance to settle disputes involving two tax shelters used to defer
payment of billions of dollars in taxes.

The questionable shelters, known as LILO and SILO, involve corporations leasing, on paper
only, subways, bridges, sewers and other infrastructure, often overseas, and then leasing the
facilities back to their owners or operators.

I.R.S. officials said that the corporations, including many large banks, had bought more than
1,000 of the shelters, improperly deferring taxes and bolstering their balance sheets.

Under the settlement, the I.R.S. said it would allow the companies to keep 20 percent of the
deductions claimed through 2007 from use of the shelters — if they agreed to get out of them by
December 2010 at the latest. The companies would have to pay the remaining 80 percent of the
improperly claimed deductions — a level still likely to leave many with seven-figure tax bills.

The proposal is the latest by the I.R.S. to use incentives to try to entice users of tax shelters to
come forward. As the shelters have become increasingly sophisticated, the I.R.S. has had to
invent ways to figure out who is buying and selling them.

Corporations accepting the settlement would not have to pay penalties, which are typically 20
percent of the disallowed deductions. They would also be allowed to keep 20 percent of any
interest income earned from investment funds set up as part of the shelters; the corporations
would have to pay the remaining 80 percent to the government.

The corporations have 30 days to accept the offer. “It’s an all or nothing offer,” an I.R.S. official
said during a briefing. “Taxpayers cannot pick and choose which transactions they’d like to
settle.”

It was not clear Wednesday whether the more than 45 corporations were the only users of the
shelters.

LILO and SILO have attracted scrutiny from lawmakers in recent years, including from the
Treasury and the Senate Finance Committee, which held an investigative hearing on them in
2003.
The I.R.S. does not consider either shelter to be legitimate. It disallowed LILO, which is short
for lease-in/lease-out, in 2000, and the related SILO, for sale-in/lease-out, in 2005.

Despite the offer, I.R.S. officials said some corporations would not be eligible for the settlement.
Several corporations are being investigated or audited over their use of the shelters, the officials
said, adding that hundreds of transactions had yet to be fully examined.

The settlement offer comes on the heels of three recent court victories for the I.R.S. in cases
against corporations that used the shelters.

In May, a federal judge in Cleveland rejected claims by Key Bank in Cleveland and PNC
Bancorp in Pittsburgh that a joint partnership was entitled to more than $100 million in
deductions stemming from its SILO deal with a power plant in Germany.

Similar rulings in favor of the I.R.S. have come against Fifth Third Bancorp in Cincinnati and
BB&T in Winston-Salem, N.C. In May, a month after the BB&T ruling was upheld on appeal,
the Wachovia Corporation in Charlotte, N.C., said it would record charges of $800 million to $1
billion in the second quarter stemming from its use of SILO shelters.

In announcing the settlement offer, Douglas H. Shulman, the I.R.S. commissioner, said that “we
obviously have a strong hand, as we’ve been winning these cases in court.”

John C. Rodney, a tax lawyer with Thorp Reed & Armstrong, said: “Taxpayers who refuse this
offer are fighting a strong headwind. They might win, but I wouldn’t bet on it.”