Article

Note: Wells Fargo & Co. (Taxpayer), engaged in multiple sale-in/lease-out ("SILO") transactions with transit agencies, claiming tax deductions based on depreciation of property, interest, and transaction costs concerning the transactions. The U.S. Tax agency, the Internal Revenue Service ("IRS"), disallowed the deduction and Taxpayer sued IRS for the tax benefit. The Court of Federal Claims, Wheeler, J., entered judgment in favor of IRS.

In the several SILO transactions, Taxpayer entered into "head lease" agreements with non-tax entities for the sale of property and leased back the same to non-tax entities immediately for a period of time. The "head lease" agreements included a purchase option at the end of the lease period as means for the non-tax entities to repay Taxpayer in full. The funds for the purchase option were held in an account as provided in the "head lease" and secured by an "equity letter of credit" issued by American International Group ("AIG"). Taxpayer was the beneficiary of the "equity letter of credit".

The Court of Federal Claims, Wheeler, J., ruled that Taxpayer had not undertaken "substantial financial risk" of loss of its investment, and concluded that the SILO transactions could not be a basis for a tax deduction.

Comment:

Unlike Consolidated Edison Co. of New York, Inc. v. United States , the court did not discuss the risk inherent in the letter of credit, namely, issuer failing to honor, or going bankrupt. The court distinguished Consolidated Edison on the ground that Consolidated Edison's lease-in/lease-out transaction had purposes other than tax avoidance in the specific context of the transaction. The court concluded that this distinction, made the Consolidated Edison case unique and inapplicable in this context.

[JEB/jds]

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