US Treasury seeks to claw back tax breaks in ‘Silo’ leasing deals

Treasury and Internal Revenue Service (IRS) surprised the US leasing industry with the publication of guidance on February 11 designating so-called SILO deals as “listed transactions”. This adds the lease-to-service contract structure to a growing list of tax-driven products where the IRS intends to challenge claims for tax breaks, and requires investors and promoters of the schemes to disclose their participation to the tax authority.

The revenue notice comes as somewhat a surprise, given that ‘sale-in/lease-out’ transactions were made illegal under tax law changes in the American Jobs Creation Act, signed in October 2004. The legislation provided transitional relief for leases signed before March 12, 2004, effectively grandfathering the structure, and leasing industry representatives have seized on this as an indication that previous transactions were valid under legislation at the time. Says one source: “The Treasury and the IRS have taken the view that these transactions were an abuse of the tax code, but if they were already illegal why did Congress need to change the law?”

In a striking inconsistency, deals involving qualified transportation property remain exempt from the Treasury’s action. This allows selected leasing transactions planned by public transit authorities before the 2004 legislation to close under the now obsolete tax regime – as provided for under the Jobs Act. Tax lawyers will question why the Treasury has accepted this grandfathering provision, but rejected another that applied the new tax treatment only to deals closed after March 12 2004.

The chairman of the Senate Finance Committee, Senator Charles Grassley, has praised the Treasury action. Grassley, who failed in his campaign last year to apply the new legislation retroactively, said in a February 11 release: “Today’s action complements our new law going after these deals. It reaches back to the deals that otherwise might have gotten away. This Treasury Department has been very active in attacking tax shelters, and I appreciate the support it’s given to the Finance Committee in our anti-shelter efforts.”

The IRS guidance targets leasing to tax-exempt entities where “substantially all of the tax-indifferent person’s payment obligations are economically defeased and the taxpayer’s risk of loss from a decline, and opportunity for profit from an increase, in the value of the leased property are limited.” While some lease-to-service contract transactions were not defeased and will therefore escape scrutiny, most domestic and cross-border deals completed on the structure will be affected. Leases of qualified technological equipment (QTE) are not exempted from the new reporting requirements.

The notice advises taxpayers that tax advantages previously assumed may not be available, saying: “The Service and the Treasury Department recognize that some taxpayers may have filed tax returns taking the position that they were entitled to the purported tax benefits of the types of transactions described in this notice. These taxpayers should consult with a tax advisor to ensure that their transactions are disclosed properly and to take appropriate corrective action.”