The first tip-off as to the Court's (Judge Allegra's) view of the shelter is in its opening quote:
“When does a taxpayer cross the fault line between the cheering fields of tax planning and the forbidding elevations of form over substance, far enough, at least, to require a transaction to be recharacterized for tax purposes? No map – statutory, regulatory or otherwise – precisely reveals this point of no return. Rather, . . . the judicial traveler [is] guided only by multi-factored analyses, balancing tests and other forms of ad hocery, which, if properly employed, serve hope that the terrain’s true character will be revealed.”The quote, by the way, is from Principal Life Ins. Co. v. United States, 70 Fed. Cl. 144, 145 (2006). As an aside, Judge Allegra penned a subsequent Principal Life opinion that, in my view is fantastic and, hence I assign it to my Tax Procedure class to read. Principal Life Insurance Co. v. United States, 95 Fed. Cl. 786 (2010) Readers wishing to read this opinion can download my class materials here. Judge Allegra's Wikipedia page is here.
The Court continues:
This case is about LILOs and, relatedly, SILOs. No, not the Disney character, mind you, nor anything remotely agricultural or martial. Rather, the LILOs and SILOs at play here are acronyms, given to so-called “lease in/lease out” and “sale in/lease out” transactions, respectively. In the world of Federal taxation, LILOs and SILOs are labyrinthine, leveraged-lease transactions in which United States taxpayers seek the tax benefits associated with the ownership of properties that the actual owners – owing to their tax-exempt status – cannot enjoy. Before such transactions were banned by Congress, a variety of prodigious assets owned by foreign corporations and government agencies were so leased – rail cars, hydroelectric plants, locomotives, public transit lines, cellular telecommunications equipment, sewer systems, to name a few – all with the same objective, namely, to take advantage of deductions that would otherwise be “wasted.”We have this saying in parts of the South that a day without grits is a day wasted. I guess the same notion that potential deductions captured in tax indifferent entities are deductions wasted.
I won't get into the labyrinth of the details of the shelter -- all of these are wrapped with detailed to make their substance less visible. I will give some key snippets penned in Judge Allegra's inimitable way:
The rent deductions taken here presuppose that UBC, via the Head Lease, possessed an ownership interest in the Pond. But is this so? To be sure, “[t]here is no simple device available to peel away the form of this transaction and to reveal its substance.” Frank Lyon, 435 U.S. at 576. On the other hand, as Burke once said, “[t]hough no man can draw a stroke between the confines of night and day still light and darkness are on the whole tolerably distinguishable.” And this is neither a hard case nor one of first impression.