Academic journal article Journal of Accountancy

Appeal Lays Con Ed LILO to Rest

Academic journal article Journal of Accountancy

Appeal Lays Con Ed LILO to Rest

Article excerpt

In an opinion that appears to close the door on lease-in, lease out (LILO) tax shelters once and for all, the Federal Circuit Court of Appeals reversed and remanded a case to the Court of Federal Claims, which had upheld the transaction (Consolidated Edison Co. of New York, No. 2012-5040 (Fed. Cir. 1/9/13)). In a departure from most recent case law, the lower court had held that the LILO transaction had economic substance and allowed Consolidated Edison (Con Ed) the rental deductions and interest expense it had claimed (Consolidated Edison Co. of New York, 90 Fed. CI. 228 (2009); see previous Tax Matters coverage, "ULO Stands Up to Court Scrutiny," Jan. 2010, page 61). This issue should not arise in the future because Sec. 470, which was enacted in 2004, specifically prohibits LILO transactions.

Con Ed, through a trust, entered an agreement with a Dutch utility to lease a 47,47% interest in an electric generating plant in the Netherlands and then sublease it back to the Dutch utility. If the Dutch utility did not exercise an option at the end of its sublease to purchase Con Ed's remaining lease, Con Ed could either renew the sublease or require the Dutch utility to return its ownership interest in the Con Ed trust.

The IRS disallowed a claimed loss on the transaction, claiming the transaction lacked economic substance because Con Ed entered into it without any valid business purpose or reasonable expectation of making a profit beyond any tax benefits achieved. …

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