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LILO/SILO Initiative Frequently Asked Questions

What's New:  

Revisions to FAQs 
(posted 09-23-08):

  • FAQ 3.1
  • FAQ 3.2
  • FAQ 3.3
  • FAQ 3.18
  • FAQ 3.19
  • FAQ 3.20a
     
    

New FAQs
(posted 09-19-08):

  • FAQ 3.20
  • FAQ 5.6
  • FAQ 5.7
  • FAQ 6.13
  • FAQ 7.6

Examples added to the following FAQs
(posted 09-19-08):

  • FAQ 4.20
  • FAQ 4.21
  • FAQ 5.1
  • FAQ 5.3
  • FAQ 5.4
  • FAQ 5.5
  • FAQ 5.7
  • FAQ 6.8

Table of Contents for FAQs:
Initiative Election
Appeals Process
Initiative Procedure
Termination
Basis
OID
General or Miscellaneous Questions


Initiative Election:

 

Questions

Answers

1.1

What is the due date for responding to the IRS LILO/SILO offer?

To provide taxpayers with sufficient time to evaluate the offer, the due date is extended to the date that is 60 days from the date of the taxpayer’s offer letter.

1.2

Can we make different elections for different taxpayers? We have received letters for a number of distinct taxpayers. Should we evaluate the offer independently for each recipient or jointly for the entire "controlled group"?

If by “distinct taxpayer,” you mean a taxpayer who is not included on a Consolidated return that received an offer letter, but a taxpayer who received it’s own offer letter, then each taxpayer stands on its own.

1.3

If the taxpayer is a TEFRA partnership, does the partnership have to accept the proposal? Does each partner also need to accept?

(further explanation). What if a partnership has three partners, and the controlling partner does not want to enter the Settlement Initiative and refuses to make “best efforts” to terminate the leases.  Will the remaining two partners be barred from entering the Settlement Initiative? 

Yes, the tax matters partner has to accept the proposal and all partners need to accept.

The Service expands its answer to FAQ 1.3.  For a TEFRA partnership to settle its LILOs and SILOs, the partnership and all its partners must accept the Initiative.  However, individual partners may separately settle with the IRS regarding their respective interests in the partnership’s LILOs and SILOs.  For a TEFRA partnership to settle, the TMP must exercise best efforts; failure to do so will not penalize the other individual partners if they wish to settle their partnership interests.

1.4 

If the Taxpayer is the owner of a Foreign Sales Corporation (FSC) and the Taxpayer accepts the proposal is the FSC required to accept the proposal? If a FSC accepts the proposal, do all of its shareholders have to accept the proposal?

Yes, the FSC is required to accept the proposal and all of its shareholders have to accept the proposal.

1.5

If a taxpayer, through an abundance of caution, disclosed as a listed transaction a transaction that it does not consider to be a listed transaction, will the taxpayer be allowed to exclude this transaction from the settlement offer?

There are a limited number of circumstances in which sale/leaseback transactions are not considered to be SILOs or substantially similar to SILO transactions.The IRS will make that determination. If a taxpayer is unsure whether a transaction is a SILO, it should ask the IRS contact person for a review of the transaction within the window for accepting the Initiative and the Service will determine whether a transaction is included within the Initiative.

1.6

 

How can a taxpayer determine which transactions will be treated as SILO transactions that must be included in any settlement? Attachment 2 to the SILO letter states that the taxpayer must provide a list of all transactions “that are the same as or substantially similar to those described in Notice 2005-13 for which losses or deductions were claimed in any taxable year.” It is not clear which transactions will be considered substantially similar to the SILO transactions described in Notice 2005-13. Notice 2005-13 identifies as a SILO a transaction that includes (1) a tax indifferent entity (e.g., foreign corporation or governmental body), (2) economic defeasance of rent and purchase option price, and (3) limited risk of loss or profit due to change in value of leased property. Does the inclusion or absence of any one particular item above affect whether a transaction is considered a SILO? For example, would a transaction with a U.S. corporate lessee that is liable for U.S. income tax at the time of the transaction be treated as a SILO? Would a transaction that does not have economic defeasance (or includes only partial economic defeasance) be treated as a SILO? If a taxpayer excludes a transaction from a settlement agreement because of a reasonable belief that the transaction is not a SILO, what would be the consequences if the Service contends that the transaction should be treated as a SILO?

The IRS will determine whether the transaction is a SILO or LILO as described in Notice 2005-13 and Notice 2000-15, respectively.  This settlement initiative was intended for the settlement of SILO and/or LILO transactions.

1.7

What if a taxpayer already has a closing agreement with respect to all its LILOs, but the taxpayer still has SILOs outstanding?

 

The settlement Initiative only requires that the Taxpayer resolve its outstanding SILOs or LILOs which are not subject to a previously executed closing agreement.

1.8

If a taxpayer has not yet received a letter, will it not be included in the settlement initiative?  Will a settlement be available at a later date to those taxpayers that do not receive a letter? 

If a taxpayer believes that it has a LILO or SILO transaction and it did not receive an offer letter, the taxpayer should contact their local case manager or appeals officer to discuss the matter.

1.9

How would entities that are currently in litigation be folded into the Initiative?

If the Service decides to extend an offer to a Taxpayer in litigation, the Taxpayer will be notified by letter.  If a Taxpayer is currently in litigation and wants to make inquiry about whether it may participate in the Initiative, it should contact the Department of Justice. 

     


Appeals Process:

  

Questions

Answers 

2.1

How will a LILO/SILO case be handled in Appeals if a taxpayer declines the offer?

Taxpayers who choose not to avail themselves of the initiative can pursue the resolution of their case in Appeals. However, in consideration of consistency of tax administration and finality, Appeals will require, as part of any resolution, the termination of all leases, deemed or actual, as described in the offer.

2.2

If the matter is not in Appeals, is the ex parte waiver still required? If so, what is the rationale for this requirement?

Yes, in order to protect the government’s interest, the ex parte waiver is still required.

2.3

Before I received the initiative offer, I had been in extensive discussions with Appeals about my lease transactions and have exchanged one or more settlement offers with Appeals.  If I choose to work with Appeals, will I receive some type of offset or reduction in my settlement percentage or settlement amount due to the added tax and costs related to the termination requirement? 

No,  no offset will be available against other terms or other issues.

2.4

Will Appeals engage in settlement discussions on LILO/SILO issues during the extended election period?

No.  Appeals has suspended settlement discussions on LILOs/SILOs during the initiative election period.  Taxpayers should carefully consider the initiative as a way to resolve these matters.

2.5

After the 60-day period expires, what happens if I have not elected into the settlement initiative?

If a taxpayer has not elected to participate in the initiative offering by the end of the election period,  and the case is under Appeals jurisdiction, Appeals will discuss settlement that in Appeals’ view reflects a fair assessment of the litigation hazards should the case continue unagreed to court.   Such settlements will not only reflect the hazards posed by litigation analysis through the date of signing a Closing Agreement but will, in addition, include the termination requirement.  However, taxpayers should be aware that Appeals’ view of particular terms, such as the percentage allowed or the imposition of penalties, could well result in less favorable outcomes from Appeals than from the settlement initiative. Thus, taxpayers should not expect to receive a better offer in Appeals than that offered under the settlement initiative and may, in fact, receive a less favorable outcome. 

2.6

I have other issues, unrelated to LILOs/SILOs pending in Appeals.  Can I get them resolved separately?

Any other issues in your case are not impacted by the IRS initiative offer and these discussions.  You may pursue resolution of those other issues even while considering the IRS initiative offer on LILOs/SILOs.

     


Initiative Procedure: 

   

Questions 

 Answers

3.1

What is the definition of "best efforts" to terminate LILO/SILO transactions by December 31, 2008?

The IRS has announced that taxpayers no longer need to demonstrate “best efforts” to actually terminate all of their LILO/SILOs in order to participate in the settlement initiative.

3.2

Who determines whether the Taxpayer exerted best efforts?

See revised FAQ 3.1.

3.3

If a Taxpayer and its affiliates have multiple SILOs/LILOs, will it need to exert best efforts on all transactions?

See revised FAQ 3.1.

3.4 

In what particular form must a taxpayer provide its acceptance of the Initiative?

The taxpayer must state, in writing, that it accepts all of the settlement terms outlined in the offering letter.

3.5

Is it adequate to state that the terms are accepted subject to negotiating a closing agreement?

No.

3.6

Is the mailing date adequate to establish the date of acceptance?

The IRS must receive the taxpayer’s acceptance by the 60th day from the date of the offer letter. A Taxpayer may mail or fax its acceptance.

3.7

Will the Taxpayer receive notice of its qualification for the settlement proposal?

Yes, the taxpayer will be notified by the IRS point of contact.

3.8

Does the expression of understanding of undefined terms constitute a counterproposal?

Yes. A Taxpayer should provide all of its questions to the IRS and must obtain express concurrence from the IRS to the understanding of the undefined terms in advance of sending its acceptance of the offer.

3.9

When will a Closing Agreement be executed?

A Closing Agreement will be executed when the IRS determines that the Taxpayer has complied with all of the terms of the offering and when all necessary computations are completed.

3.10

Can the terms of the LILO/SILO settlement initiative be incorporated in a closing agreement covering other issues?

No.

3.11

How does the consistency rule in Section 5 (which says the Service will not resolve any of the Taxpayer’s SILO transactions unless all of its SILO transactions are resolved) apply where the Taxpayer has both (i) directly engaged in SILO transactions and (ii) is a partner in a partnership (either a TEFRA or non-TEFRA partnership) that engaged in SILO transactions?  Is a partnership a separate “taxpayer” for purposes of this initiative?

A Taxpayer, who has LILO/SILO transactions both individually and as a partner in a partnership that has LILO/SILO transactions, must settle all of its LILO/SILO transactions. A partner in a TEFRA partnership may accept the terms of the initiative and settle out of the partnership.

3.12

Will transactions with Ownership Foreign Sales Corporations (“OFSCs”) be treated as SILOs?

Yes.

3.13

What is intended by the fifth bullet point under Item 5, Other Terms, of the attachment?

The fifth bullet point under Item 5, states, “The Taxpayer will agree that its acceptance of this settlement initiative indicates its agreement that it is not entitled to claim or receive tax benefits from the LILO transactions other than those outlined herein.” This means that the Taxpayers are not entitled to claim any tax benefits from these transactions other than those available through the Initiative.

3.14 

If the Taxpayer makes good faith efforts to, but fails to provide the documents listed in Attachment 2 within 30 days, is the proposal still available?

The original date for acceptance of the settlement offer has been extended to 60 days from the original letter date. Taxpayers have 30 days from that date to provide the documents. Under unusual circumstances, the IRS will use its discretion to determine whether to allow an extension and will do so for good cause.

3.15

In regards to Attachment #2, Item #2 (taxpayer computations) – What are IRS expectations as to scope, i.e., computations only for items directly related to the lease and addressed in the offer, as opposed to other items on the return that may change as a result of the adjustment?

The Taxpayer’s computations should relate directly to the transaction, including the disallowances, OID calculations and termination gain calculations. Additional documents may be requested at a later date.

3.16

How binding is the acceptance of the Initiative that we are asked to make by 60 days after the date of the initial offer letter?

An acceptance of the Initiative by the taxpayer is not binding until a closing agreement is executed by both parties.

3.17

When will a closing agreement be signed?  Can provisions covering other issues be incorporated in a closing agreement? Will the particular facts and circumstances of the taxpayer (e.g., NOLs, foreign tax credit, amt, etc.) be reflected in the closing agreement?

A Closing Agreement will be executed when the IRS determines that the Taxpayer has complied with all of the terms of the offering and when all necessary computations are completed.  Other issues will not be incorporated into such closing agreement.  Computational issues, such as NOLs, foreign tax credits, AMT, etc., will not be included in the Initiative closing agreement.

3.18

Does a reasonable determination that there is an economic or accounting loss on a termination of the equity collateral account, the debt, or the debt collateral account preclude the need to exercise additional best efforts?

See revised FAQ 3.1.


3.19

Will lack of best efforts be a reason for voiding an acceptance of the proposal?

See revised FAQ 3.1.

3.20

Assume a Taxpayer has already sold some of its LILO and/or SILO transactions to a third party prior to this Settlement Initiative and reported gain at that time: 

 

 

 

a. Since there has been a sale to a third party, the Taxpayer has no ability to terminate the transaction (using best efforts or otherwise).  Will the Taxpayer be excepted from this requirement?

See revised FAQ 3.1.

 

b.   How is OID taken into account when a Taxpayer has already sold LILO/SILO transactions? 

OID accrues until the date of disposition.

         


Termination

   

Questions

Answers

4.1

Can a sale to a third party be an Actual Termination or must the transaction be unwound?

A sale to a third party is not an Actual Termination under the Initiative. In an Actual Termination, the transaction must be unwound.

4.2

 

Will a Taxpayer be able to recognize a tax loss on either an Actual Termination or a Deemed Termination?

Yes, but to recognize a tax loss on an Actual Termination it must occur before January 1, 2011.

4.3

What happens if a lessee does not want to unwind a transaction or acts to delay an Actual Termination? 

If a taxpayer provides the IRS with an acceptance of the terms of the offering, there will be a Deemed Termination of transactions, in which the lessee refuses to, or delays, the termination of the transactions.

4.4

 

 If there is no Actual Termination by December 31, 2010, and "Actual Termination Gain" is less than "Deemed Termination Gain", will the difference be recovered?

The difference will not be recovered if there is an Actual Termination after December 31, 2010.

4.5

Would any tax payment due as a result of the 2008 deemed termination be due at the time the closing agreement was executed, at the time taxes ordinarily would be due for 2008, or at another time?

The taxes will be due when they are ordinarily due for 2008. The deemed termination gain will be recognized in the taxpayer’s 2008 tax return.

4.6

 

What is the value of the equity defeasance account referenced in the definition of Deemed Termination Proceeds—is it accreted value or fair market value?

The value of the equity defeasance account is the accreted value.

4.7

What if there is no equity defeasance account? 

If there is no equity defeasance account, the taxpayer should submit information regarding its equity deposits, including its equity investment and fees paid to counterparties.

4.8

What if the lessee established a defeasance account but it has not been pledged to the lessor and the lessor may not have any access to information regarding the value of that account?

The defeasance account will be valued based on the available information. The OID accreted value (as computed by the Service) will be the basis for settlement.  Such transactions are SILOs unless the taxpayer can establish that the money circles do not exist, that the nonrecourse loan will not be paid in full on the EBO/Purchase Option date, and that the taxpayer will not receive its return.

4.9

Is it not sufficient to have a deemed termination of the transactions and a new OID Note going forward?

It is not sufficient to have a deemed termination and a new OID Note going forward.

4.10

What is the tax consequence of an actual termination prior to August 2008?

The tax consequences of an actual termination prior to August 2008 would be consistent with the terms of the Initiative.

4.11

What is the tax consequence of payments received/made on the leases after 2008 but before an actual termination?  For example, are rent payments received completely disregarded?  Does the answer change if the actual termination does not occur before 2011?  Does the answer change if the lessee does not exercise the EBO?

The transaction is deemed to terminate at December 31, 2008.  Rent payments and terms of all operative documents would be disregarded after December 31, 2008.   Only OID would be reported going forward until actual termination.    The Initiative anticipates the exercise of the EBO. 

4.12

 

If the transactions, based on its original lease profile, has “turned around” and has generated positive taxable income in years before 2008, under the guidelines, the taxpayer needs to include 20% of such income in the year the income was generated (Item C.1.a.)  In calculating the taxpayer’s Adjusted Basis for purposes of determining Actual or Deemed Termination Gain, can the taxpayer add such previously included income to its Adjusted Basis?

The 20% amount that will be recognized according to the terms of the settlement will be added to the taxpayer’s adjusted basis.

4.13

What is meant by “net proceeds” in the definition of Actual Termination Proceeds?  For example, how does the taxpayer take into account transaction costs incurred, which may include legal fees of the taxpayer and perhaps even legal fees or other costs of the lessee that the taxpayer is required to reimburse as part of the termination agreement?

The “net proceeds” equal the actual proceeds received upon termination, which is expected to equal the balance of the equity collateral account.   The transactions costs will be added to the taxpayer’s basis.

 4.14

As a result of changes in market conditions, the amount in the equity defeasance account may be higher or lower than the amount expected at the outset of the transaction.  For purposes of calculating "Deemed Termination Proceeds," should the equity defeasance be recorded at the actual fair market value or the scheduled values?

The value of the equity defeasance account would be the accreted value based on the OID calculations as of December 31, 2008.

4.15

What if there is a gain on an Actual Termination after 2010?  Would that be taxed?

Under the terms of the Initiative, such gains would not be taxed, provided the transaction is not amended in any way after the taxpayer agrees to accept the Initiative.

4.16

What is the tax consequence of a loss on a deemed termination?  Will it be treated as an ordinary loss?

A loss on a Deemed Termination will be treated as an ordinary loss.

4.17

What is the tax consequence if the Actual Termination Gain on an actual termination after 2008 but before 2011 is more than the Deemed Termination Gain? The attachment only speaks to the situation where Actual Termination Gain is less than Deemed Termination Gain.

If there is an Actual Termination Gain after 2008 but before 2011 that exceeds the Deemed Termination Gain, the excess gain will not be taxed, provided the transaction is not amended in any way after the taxpayer agrees to accept the Initiative.

4.18

Can a sale to a third party, other disposition or charitable contribution of the taxpayer’s position in a transaction qualify as an "actual termination"?

No.

4.19 

Confirm intended application in a fiscal year context. The Taxpayer is on a September 30 fiscal year reporting date.

a. Does “tax years through 2007” mean “tax years through September 30, 2008”?  

  • Yes.

b. Does “actual termination on/before December 31, 2008” mean “actual termination on/before September 30, 2009”?

  • No.  The taxpayer will have a Deemed Termination on December 31, 2008 if it does not actually terminate the transaction on or before that date.

c. Does the deemed termination date of December 31, 2008 mean September 30, 2009”?

  • No.  The Deemed Termination date is December 31, 2008 regardless of the Taxpayer’s fiscal year end.

d. Does “actual termination after December 31, 2008 but before January 1, 2011” mean “after September 30, 2009 but before October 1, 2012”?

  • No. The Actual Termination dates after December 31, 2008 but before January 1, 2011 do not change regardless of the Taxpayer’s fiscal year end.

4.20

How is the Actual Termination after the Deemed Termination computed?

If there is an Actual Termination after December 31, 2008 but before January 1, 2011, the Actual Termination gain will be computed as defined in the terms of the Initiative. For such terminations, basis will include OID reported after December 31, 2008 but before January 1, 2011. The Actual Termination gain/loss will be compared to the Deemed Ttermination gain/loss.  If the Actual Termination gain is less than the Deemed Termination gain, the Taxpayer will be allowed to recognize an ordinary loss for the difference in the year of Actual Termination.

Example to FAQ 4.20:

First, the Taxpayer would compute its Deemed Termination in 2008. Assume the following:

  • The Taxpayer’s equity investment (equity investment = equity collateral + accommodation fees) was $38,000,000. 
  • The Taxpayer incurred transaction costs of $500,000.  
  • The Taxpayer deducted on its tax returns cumulative losses through 2007 of $(101,000,000).  
  • OID accrued through tax year 2007 was $9,375,000.
  • The accreted value of the equity collateral at 12/31/2008 is $26,000,000. 

The Taxpayer's Deemed Termination Gain/(Loss) is computed as follows:

Deemed Termination Gain/(Loss)

 

 

Termination Proceeds - 12/31/08 Accreted Value of Equity Collateral

 

26,000,000

Less: Basis (as defined in the Initiative)

 

 

    Equity Investment + Transaction Fees

38,500,000

 

    Less: 20% of Pre- 2008 Net Income/Loss ($101,000,000 * 20%)

(20,200,000)

 

    Plus 80% OID - Pre-2008 Years ($9,375,000 * 80%)

7,500,000

 

Total Basis (as defined in the Initiative)

 

25,800,000

Deemed Termination Gain/Loss

 

200,000

Second, the Taxpayer had an Actual Termination in 2010 with termination proceeds of $24,000,000.  In 2009, the Taxpayer recognized 100% of OID accrued in the amount of $1,600,000.  The Taxpayer’s Actual Termination gain/loss in 2010 is calculated as follows:

Actual Termination Gain/Loss

 

 

 

Actual Termination Proceeds

 

24,000,000

 

Less: Basis (as defined in the Initiative)

 

 

 

    Equity Investment + Transaction Fees

38,500,000

 

 

    Less: 20% of Pre- 2008 Net Income/Loss
    ($101,000,000 * 20%)

(20,200,000)

 

 

    Plus 80% OID - Pre-2008 Years ($9,375,000 * 80%)

7,500,000

 

 

    Plus 100% of 2009 OID

1,600,000

 

 

Total Basis (as defined in the Initiative)

 

27,400,000

 

Actual Termination Gain/(Loss)

 

(3,400,000)

In this example the Actual Termination in 2010 resulted in a loss of $3,400,000.  The Taxpayer can claim an ordinary loss in the amount of $3,600,000 (the difference between the Deemed Termination Gain of $200,000 and the Actual Termination Loss) on its 2010 tax return.  The Taxpayer would calculate its 2010 ordinary loss from the Actual Termination of this transaction as follows:

Actual Termination Gain/(Loss)

(3,400,000)

Less:  Deemed Termination Gain/(Loss) 

-   200,000

2010 Ordinary Loss on Actual Termination

(3,600,000)

If there is an Actual Termination after December 31, 2010, the Taxpayer will report 100% of OID after 2008 through the Actual Termination date.  If there is an Actual Termination after December 31, 2010, no gain or loss will be recognized.

4.21

How would transactions that have already had an EBO before 12/31/08 be handled?  Would these transactions be ignored for settlement purposes? 

No, these transactions will not be ignored.  For transactions with an exercised EBO before December 31, 2008, the tax consequences of the EBO termination gain will be calculated consistent with an Actual Termination under the Initiative.  If termination occurred before the date of election, then OID accrues until the date of termination and is reported in the year of termination. 

Example to FAQ 4.21:

Assume the following facts:

  • The Taxpayer receives EBO proceeds on January 2, 2006.
  • The Taxpayer’s equity investment was $23,100,000.  
  • The Taxpayer also incurred transaction costs of $1,100,000.  
  • The Taxpayer deducted cumulative losses through 2005 of $(42,800,000).  
  • OID through tax year 2005 was computed as $18,000,000. 
  • The equity portion of the EBO price was $33,400,000. 

For each tax year prior to 2006, the year of the EBO, there will be a tax adjustment for 80% of the claimed income/(losses) in each of the open tax years.  In this example, 80% of the cumulative losses claimed by the Taxpayer in tax years prior to 2006 equals $34,240,000.   The 2006 adjustments will include 80% of all OID that has accrued prior to the EBO.   Also, the Taxpayer will report an EBO gain/(loss) in 2006. The Taxpayer's EBO gain as determined by the initiative is computed as follows:

2006 EBO Gain/(Loss) (Calculated like an Actual Termination under the Initiative)

 

EBO Proceeds - (Equity portion of EBO price)

33,400,000

Less: Basis (as defined in the Initiative)

 

    Equity Investment + Transaction Fees

24,200,000

 

    Less: 20% of Pre- 2006 Net Income/Loss ($42,800,000 *    20%)

(8,560,000)

 

    Plus 80% OID – Pre-2006 Years ($18,000,000 * 80%)

14,400,000

 

Total Basis (as defined in the Initiative)

 

30,040,000

EBO Gain/(Loss)

 

3,360,000

This EBO gain/(loss) would be compared with the gain/(loss) as originally calculated and an adjustment made in the 2006 return. 

4.22 

With respect to a deemed termination is the Taxpayer deemed to acquire an OID note with an issue price equal to the Termination Proceeds and a stated redemption price equal to the EBO? Does the accrual of OID increase the Taxpayer’s basis in the OID note?

No.  The Initiative does not deem the taxpayer to acquire an OID note.

4.23

If a deemed termination or an actual termination prior to 1/1/11 produces a tax loss, would any such loss be offset against any gains from other LILO or SILO transactions?

Yes, losses may be offset against gains from other transactions.

        


Basis:    

  

Questions

Answers

5.1

Will transaction costs of terminating a transaction be included in basis or as reduction of proceeds?

Transaction costs of terminating a transaction before January 1, 2011, are includable in basis.

Example to FAQ 5.1:

Assume that the Taxpayer from Example 4.20 actually terminated on December 31, 2010 and incurred additional transaction costs of $1,000,000 on the termination.  The Actual Termination Gain/(Loss) is calculated as follows:

Actual Termination Gain/Loss

 

 

 

Actual Termination Proceeds

 

 

24,000,000

Less: Basis (as defined in the Initiative)

 

 

 

    Equity Investment + Transaction Fees

 

38,500,000

 

    Less: 20% of Pre- 2008 Net Income/Loss ($101,000,000 * 20%)

(20,200,000)

 

    Plus 80% OID - Pre-2008 Years ($9,375,000 * 80%)

7,500,000

 

    Plus 100% of 2009 OID

 

1,600,000

 

    Plus Costs Incurred to Terminate

 

1,000,000

 

Total Basis (as defined in the Initiative)

 

 

28,400,000

Actual Termination Gain/(Loss)

 

        

(4,400,000)

5.2

What detail is necessary to substantiate transaction costs?

A Taxpayer should provide all documents that evidence the amount of its transaction costs, including, but not limited to, all contracts and agreements and a breakdown of the transaction costs by amount, nature, and recipient.

5.3

 

How will benefits that a taxpayer received in closed years be treated?

If a Taxpayer claimed tax benefits in closed years, the losses claimed in those closed years will be subtracted from the Taxpayer’s basis.  This will result in a recapture of tax benefits that will increase the termination gain or decrease the termination loss. 

Example to FAQ 5.3:

 If the Taxpayer from Example 4.20 has tax losses in barred tax years of $(39,000,000), and there was no Actual Termination, the Taxpayer would have a Deemed Termination on December 31, 2008.  Thus, the cumulative losses claimed in the tax years that are currently open for examination equal $(62,000,000) (i.e., $101,000,000 – 39,000,000 = $62,000,000).  The Deemed Termination calculation would include the recapture of the tax benefits from barred years, because no tax adjustments were made to disallow the transaction for those years.  The Taxpayer’s Deemed Termination gain is calculated as follows:

Deemed Termination Gain/(Loss)

 

 

Termination Proceeds - 12/31/08 Accreted Value of Equity Collateral

 

26,000,000

Less: Basis (as defined in the Initiative)

 

 

    Equity Investment + Transaction Fees

38,500,000

 

    Less: 20% of Pre- 2008 Net Income/Loss ($62,000,000 * 20%)

(12,400,000)

 

    Plus 80% OID - Pre-2008 Years ($9,375,000 * 80%)

7,500,000

 

    Less: Other Adjustments to Basis
    (Recaptured tax benefits from barred years)

(39,000,000)

 

Total Basis (as defined in the Initiative)

 

(5,400,000)

Deemed Termination Gain/(Loss)

 

31,400,000

  

5.4

In calculating the Taxpayer’s adjusted Basis for purposes of computing Actual Termination Gain on an Actual Termination after 2008 but before 2011, does the Taxpayer receive credit for either (a) the gain recognized on the Deemed Termination or (b) the 100% OID required to be picked up after 2008?

If there is an Actual Termination after 2008 but before 2011, the Actual Termination gain would be calculated using the actual proceeds received less adjusted basis.  Adjusted basis will include 100% of OID required to be included in taxable income after 2008.

Example to FAQ 5.4:

See calculation of Actual Termination Gain/(Loss) in Example 4.20 and the comparison of the Actual Termination Gain/(Loss) to the Deemed Termination Gain/(Loss).  The OID recognized in income in 2009 is added to the basis to determine the Actual Termination Gain/(Loss) in 2010.

5.5

What happens if third parties (e.g. lenders) charge fees for permitting unwind?  Would such fees be deductible or added to basis?

There will be a Deemed Termination as of December 31, 2008 if the Taxpayer is not permitted to unwind the transaction.  Substantiated transaction costs in an Actual Termination will be added to basis if they are incurred before January 1, 2011. 

Example to FAQ 5.5:

See calculation of basis in Example 5.1.  Costs incurred to terminate the transaction were added to basis.

5.6

Item B(4) of the SILO Initiative provides that the SILO "basis" must be reduced by losses claimed in barred years.   Is it correct that the IRS is requiring that Taxpayers reduce their SILO "basis" by 100% of those losses and in essence recapture all those losses whether they arose from depreciation, interest, etc.?  As a related question, do Taxpayers get a corresponding increase in "basis" for amounts that they took into income with respect to the SILO in closed years?

Yes, Taxpayers must reduce their SILO basis by all of the losses claimed in barred years  (see Example to FAQ 5.3), and will get a corresponding increase in basis for income recognized with respect to the SILO in closed years.

5.7

How is "free cash" (cash rent received in excess of debt service during the lease term) received by the lessor prior to the 12/31/2008 deemed termination to be treated? Is it ignored, treated as a reduction in tax basis, treated as a payment of OID or some other assumption?

Under the terms of the Initiative when computing gain or loss on a Deemed Termination or an Actual Termination, it is necessary to treat "free cash" as a reduction to basis. The free cash adjustment to basis is necessary to reflect the economic impact of the transaction.

Example to FAQ 5.7:

Assume that the Taxpayer from Example 4.20 received free cash in 2005 of $1,700,000.  Following is the Deemed Termination Gain/(Loss) calculation:

Deemed Termination Gain/(Loss)

 

 

Termination Proceeds - 12/31/08 Accreted Value of Equity Deposit

 

26,000,000

Less: Basis (as defined in the Initiative)

 

 

    Equity Investment + Transaction Fees

38,500,000

 

    Less: 20% of Pre- 2008 Net Income/Loss ($101,000,000 * 20%)

(20,200,000)

 

    Plus 80% OID - Pre-2008 Years ($9,375,000 * 80%)

7,500,000

 

    Less: 100% of Pre-2008 Free Cash

(1,700,000)

 

Total Basis (as defined in the Initiative)

 

24,100,000

Deemed Termination Gain/Loss

 

1,900,000

        


OID:

  

Questions

Answers 

6.1

How is OID treated if there is a Deemed Termination but no actual termination occurs before January 1, 2011?

The taxpayer will recognize 100% of OID accrued yearly until there is an actual termination or the early buyout (EBO) date. 

6.2

Does a taxpayer get basis for 100% of OID for the period from December 31, 2008 through December 31, 2010?

If the Taxpayer has an Actual Termination during the period from January 1, 2009 through December 31, 2010, the Taxpayer receives basis for 100% of the OID reported during such period until the year of Actual Termination. 

6.3

Is cumulative OID (accrued through 2007) included in 2008 income?

Yes.

6.4

Should OID for 2008 be included in income and then deducted, or ignored altogether?

The 2008 OID would be included in the Deemed Termination proceeds.  There will be no basis offset for the 2008 OID, thus the 2008 OID will be recognized as part of the gain.  In an Actual Termination in 2008, the 2008 OID will be disregarded.

6.5

Does OID apply if not previously proposed in Revenue Agents Reports (e.g., LILOs)?

Yes. 

6.6

According to the offering, if there is no Actual Termination by December 31, 2010, then 100% OID applies for each subsequent year.  Will OID accrued after 12/31/10 be included in basis?

If there is no Actual Termination by December 31, 2010, then 100% of OID accrued on a year by year basis will be recognized as income in each year until there is an Actual Termination or the EBO date. No gain and/or loss will be recognized for tax purposes with respect to transactions terminated after December 31, 2010 for purposes of this initiative, provided the transaction is not amended in any way after the taxpayer agrees to accept the Initiative. Thus, OID accruing after December 31, 2010 will not be included in any tax basis calculations.

6.7

Will taxpayer’s be entitled to claim deductions for OID if there is an "Actual Termination" after December 31, 2010?

No.

6.8

What is the base for calculating OID?

The total of all deposits in the equity collateral account is the base for calculating OID.

Example to FAQ 6.8:

The Taxpayer made an equity investment totaling $38,000,000, of that amount $23,000,000 was the equity collateral and $15,000,000 was the accommodation fee.  The $23,000,000 equity collateral is the base for calculating OID.

6.9

How is OID calculated?  We understand taxpayers have considered the following methods: (1) using an effective interest rate that discounts future net cash flows less the equity investment (including transaction costs); and (2) using the scheduled rate applied to the amount of the cash deposited in the equity deposit account.

OID is calculated as the Service has done in the SILO Notice Of Proposed Adjustments (NOPA).   The base is the original equity collateral deposit.   Term is closing date through the EBO.   Free cash returns and EBO installments actually going back to the investor is considered to be the total earnings on the investment. 

6.10

Who will compute OID (Taxpayer or IRS)?

The IRS will review the OID computation submitted by the taxpayer. 

6.11

How does the taxpayer report 80% of the OID accrued through 2007 in 2008?

The 80% of OID accrued for tax years through 2007 will be reported on the original 2008 tax return as ordinary income.

a. Is the Taxpayer expected to report the OID with its original 2007 tax return?

The settlement initiative does not require the taxpayer to report OID on its 2007 return.

The IRS recommends that the taxpayer include a disclosure on the tax return that it has elected to participate in the settlement initiative and describing the complete tax treatment of the transaction as actually reported.    

b.   Is the Taxpayer expected to report OID on an amended return? 

The settlement initiative does not require the taxpayer to file an amended return to report OID on its 2007 return.

6.12

 

If OID from previous years is reported in 2008, would interest be imposed on any underpayment on the pre-2008 OID?

Interest would not be imposed on any underpayment relating to OID not reported prior to 2008.

6.13  

Does the settlement proposal require taxpayers to include OID for closed years in 2008 as well as for open years?   

Yes, OID must be included for closed years in 2008. 

           


General or Miscellaneous Questions:

  

Questions

Answers

7.1

Can federal income tax assessments be staggered so as to reduce administrative burden on filing state/local returns?

No.

7.2

If a Taxpayer closed its LILO/SILO transactions as an agreed issue during the examination and now wants a refund, what happens?

Provided no closing agreement has been executed by the Service, such taxpayer is eligible for the Initiative.

7.3

There is no mention of Section 6707A penalties.  Can resolution of this matter be incorporated into a closing agreement?

Section 6707A has not been waived as part of the Initiative, but all matters that are resolved will be in the closing agreement.

7.4

What is the reason that Taxpayer is being encouraged to prematurely terminate transactions? 

The Service wants to encourage termination of these transactions for effective tax administration.

7.5

Would exit strategy tax return benefits taken prior to 12/31/08 be reversed at 12/31/08, or would such benefits be removed from prior open tax years?

They will be reversed at 12/31/08.

7.6

Could an example of a resolution computation be provided that incorporates the FSC or ETI benefits? 

No, the Service will not be able to provide such an example because facts and circumstances will vary. 

        
Page Last Reviewed or Updated: 06-Nov-2014