Federal Circuit relies on substance over form to disallow tax shelter-related deductions 

January 9: The U.S. Court of Appeals for the Federal Circuit today reversed a decision of the Court of Federal Claims which had upheld the taxpayer’s claimed deductions with respect to a lease-in/lease-out (LILO) tax shelter transaction. The Federal Circuit applied the substance-over-form doctrine to disallow the taxpayer’s claimed deductions. Consolidated Edison Co. of New York v. United States, 2012-5040 (Fed. Cir. January 9, 2013)

Read today’s decision: Consolidated Edison [PDF 127 KB]

Summary

In its tax return for 1997, the taxpayer and its subsidiaries claimed multiple deductions pertaining to a LILO tax shelter transaction. The IRS disallowed these claimed deductions and assessed a deficiency of approximately $328,000.


The taxpayer paid the deficiency and filed a refund claim with the IRS; when this claim was denied, the taxpayer filed a refund suit in the Court of Federal Claims which in 2009 awarded a full refund to the taxpayer on a finding of a number of non-tax, business reasons for entering into the LILO transaction. See TaxNewsFlash-United States 2009-478 (PDF).


The government appealed, and today, the Federal Circuit reversed and remanded. The Federal Circuit applied the substance-over-form doctrine, to conclude that the taxpayer’s claimed deductions must be disallowed because there was a reasonable likelihood that the tax-indifferent entity in the LILO transaction (the lessor of the master lease) would exercise its purchase option at the conclusion of the taxpayer’s sublease, thus rendering the master lease illusory.


The case was remanded to the Court of Federal Claims for the limited purpose of determining whether previously paid interest was to be refunded to the taxpayer.




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