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Taxpayer Victory in Con Edison LILO Shocks IRS
It has been over a year since we reported on the contest between the IRS and corporate taxpayers over the tax treatment of equipment leasing transactions with tax-exempt lessees known as LILOs and SILOs. See Spector, “Court Finds Compelled Purchase Option in SILO Case,” 27 Equipment Leasing Newsletter 8, 9 (September/October 2008). Last year's taxpayer defeat in the AWG case nudged many taxpayers into unfavorable settlements with the IRS. See AWG Leasing Trust v. United States, 592 F. Supp. 2d 953. But, as reported here, the AWG decision left open the possibility of a taxpayer victory in a properly argued trial of the question of fact of whether the lessee in a LILO or SILO was certain to exercise its fixed price purchase option ' a question which, if answered in the affirmative, defeats the lessor's claim to tax ownership under longstanding judicial precedent. That trial occurred earlier this year in the Federal Court of Claims and the result, reported last month, is a stunning victory for the taxpayer, Consolidated Edison Company v. United States, No. 06-305T (Fed. Ct. Cl.), October 21, 2009. To access the text of the opinion, go to www.cofc.uscourts.gov/sites/default/files/HORN.CONSOLIDATED102109.pdf.
The Decision
In the above-mentioned case, the taxpayer's tax treatment of a LILO transaction was upheld by the court, and all tax benefits claimed by the taxpayer were sustained. Naturally, some muckraking columnists hurried to criticize the Con Edison decision, expressing disappointment that the court actually applied historic leasing case law to a well-developed factual record. Despite their whining, the case demonstrates that the IRS (and the muckrakers) was wrong to treat all LILO and SILO transactions as though they were some prepackaged tax-shelter commodity. Each case turns on its facts, and the taxpayer wins in a properly chosen and argued case.
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