The government won its second victory in the past month in a lease-in, lease-out tax shelter case, after the Court of Appeals for the Fourth Circuit agreed with a federal district court that BB&T Corp. is barred from obtaining a tax refund of approximately $4.5 million.
The appeals court ruled that BB&T was not entitled to any tax deductions relating to a complex leasing transaction between that company and Sodra Cell AB, a Swedish wood pulp manufacturer.
BBT claimed it was leasing pulp-manufacturing equipment from Sodra Cell, but immediately leased it back to Sodra Cell. Sodra Cell never lost possession and control of the equipment.
In January 2007, a federal district court found that the lease and lease-back arrangements completely offset each other and that the parties transferred no significant incidents of ownership. The court thus denied BB&T all tax deductions it had claimed with respect to the transaction.
BB&T appealed the district court's order. The Fourth Circuit agreed with the district court's ruling, holding that the transaction was in substance "a financing arrangement, not a genuine lease and sublease." This type of leasing arrangement is commonly known as a lease-in, lease-out transaction. The government said it has prevailed in both of the LILO tax shelter cases that have been decided in court.
On April 18, a federal jury in Cincinnati found that Fifth Third Bancorp was not entitled to a $5.6 million refund in a similar LILO transaction (see Jury Decides Bank Not Entitled to $5.6M Bank Refund).
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