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Court Finds Compelled Purchase Option in SILO Case
In the recently decided AWG Leasing Trust case, No. 1:07-CV-857 (N.D. Ohio 2008), a federal district court found against a taxpayer that engaged in a cross-border sale-leaseback of a waste-to-energy facility located in Germany. The court found, as a matter of fact, that the lessee, a consortium of German municipalities that burned its garbage and purchased electricity from the plant, was “nearly certain” to exercise its fixed price purchase option at the end of the lease term. Based on that finding of a compelled exercise of the purchase option, the court used a “substance over form” legal underpinning to hold that the leaseback was not a “true lease” ' use and possession of the asset were certain to be returned to the lessee at the end of the lease. The case is appealable to the Court of Appeals for the Sixth Circuit, and we understand at press time that the taxpayers intend to appeal.
The court disregarded the sale-leaseback and disregarded the nonrecourse debt that the taxpayer had incurred to purchase the facility. The overall transaction was recharacterized as a financing (non-true lease) of the equity portion of the purchase price that was paid by the taxpayer lessor to the lessee at closing. This deemed loan from the lessor to the lessee results in original issue discount (interest) income to the lessor. In addition all of the depreciation and interest expense deductions claimed by the taxpayer with respect to the facility and the nonrecourse debt were disallowed.
SILO Transactions
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