An Ohio jury ruled that Fifth Third Bancorp is not entitled to a $5.6 million tax refund for its 1997 tax year after the bank sought to take tax deductions related to complex leasing transactions involving passenger rail cars.
The bank's subsidiary leased passenger rail cars from transit authorities in Massachusetts, France and Germany, and then leased them back to the transit authorities on the same day. In each case, the transit authorities continued to use the rail cars without interruption. The bank claimed that it was entitled to tax deductions for rent payments and for interest on financing loans.
The jury found that these paper transactions lacked economic substance, because there was no realistic chance for the bank to earn an economic profit apart from the tax benefits. As a result of the jury's finding, Fifth Third is not entitled to claim any deductions based on this scheme.
This type of leasing arrangement is commonly known as a lease-in, lease-out, or LILO, transaction. The government has prevailed in both of the LILO tax shelter cases that have been decided in court. A federal district court in North Carolina ruled in favor of the United States in January 2007, in a LILO case brought by BB&T Corp. Fifth Third was the first large, complex corporate tax shelter case tried by a jury.
Hundreds of LILO transactions were entered into by taxpayers in the late 1990s, and the government calculates that billions of dollars are at stake nationwide in disputes over these transactions. In filings with the Securities and Exchange Commission, Fifth Third has disclosed that it is disputing with the IRS $900 million in tax deductions arising out of Fifth Third's participation in LILO or similar transactions.
"This is a significant victory that continues to send an important message to corporations: they should not enter into transactions that lack economic substance," said IRS Commissioner Doug Shulman in a statement.
