IRS Publishes SILO and LILO settement initiatives
Sales & Lease backs




Attachment 1 - LILO Initiative



A. General
 The Taxpayer agrees to use its best efforts to terminate its LILO transactions on or before December 31, 2008.

 If the Taxpayer is unable to terminate all of its LILO transactions by December 31, 2008, then any of its LILO transactions that are not terminated by that date will be deemed terminated as of that date ("Deemed Termination").

 If a Deemed Termination has occurred, the taxpayer will be permitted to claim the benefit of an Actual Termination if its LILO transactions are terminated on or before December 31, 2010.



B. Definitions
 Actual Termination - An Actual Termination occurs when a Taxpayer terminates its LILO transactions.

 Actual Termination Gain - Actual Termination Gain is equal to the Actual Termination Proceeds less the Taxpayer's Adjusted Basis on the termination date.

 Actual Termination Proceeds - The net proceeds the Taxpayer receives when it actually terminates its LILO transactions (expected to be the balance in the equity defeasance account).

 Deemed Termination - If the Taxpayer is unable to terminate all of its LILO transactions by December 31, 2008, then any of its LILO transactions that are not terminated by that date will be deemed terminated as of that date.

 Deemed Termination Date - December 31, 2008.

 Deemed Termination Gain - The difference between the Deemed Termination Proceeds and the Taxpayer's Adjusted Basis on the Deemed Termination Date.

 Deemed Termination Proceeds - The amount which, at the Deemed Termination Date, is equal to the value of the equity defeasance account.

 Taxpayer's Adjusted Basis - The Taxpayer's Adjusted Basis includes all of the following items:

1) The Taxpayer's equity investment (equity collateral + accommodation fees) plus transaction fees;

Less
2) The allowed deductions (20% of the losses previously claimed) through the 2007 tax year;

Plus
3) 80% of the Original Issue Discount ("OID") that accrued through the tax year 2007.



Other Basis Adjustments
4) In the event that Taxpayer claimed losses in taxable years that the Service is now barred by the statute of limitations under I.R.C. §6501 from adjusting, basis will be reduced by the losses claimed in those barred years.



C. Terms



1. Tax Years Through 2007

a. 80% Disallowance of LILO Transactions
 The Taxpayer agrees to concede 80% of any claimed interest expense deduction, amortized transaction costs, and head lease rent expense for each tax year through 2007.

 The IRS agrees to disregard 80% of any reported taxable rental income with respect to Taxpayer's LILO transactions for each tax year through 2007.

b. Report 80% of Accrued OID
 The Taxpayer agrees to report in 2008, 80% of the OID accrued with respect to its LILO transactions for each tax year through 2007.



2. Tax Treatment of an Actual Termination on or before December 31, 2008
 In the event of an Actual Termination on or before December 31, 2008, the Taxpayer agrees to recognize as ordinary income the Actual Termination Gain.



3. Tax Treatment Under a Deemed Termination
 If the Taxpayer is unable to terminate all of its LILO transactions by December 31, 2008, then its non-terminated LILO transactions will be deemed terminated as of the Deemed Termination Date.

 If there is a Deemed Termination, the Taxpayer agrees to recognize as ordinary income the Deemed Termination Gain.

 If there is a Deemed Termination, the Taxpayer agrees to recognize as ordinary income 100% of the OID that accrues each year from the Deemed Termination Date until the date of an Actual Termination.



4. Tax Treatment of an Actual Termination occurring after the Deemed Termination on December 31, 2008, but before January 1, 2011
 If an Actual Termination occurs after December 31, 2008 but before January 1, 2011, and the Actual Termination Gain is less than the Deemed Termination Gain, then the Taxpayer will be entitled to an ordinary deduction for the difference between the gain that was recognized as a result of the Deemed Termination and the Actual Termination Gain in the taxable year of Actual Termination.



5. Other Terms
 The Taxpayer will not be liable for any penalties under I.R.C. §§6662 and 6662A.

 The Taxpayer will waive the prohibition against ex parte communications between Appeals and Compliance and Office of Chief Counsel employees as to any LILO and/or SILO transactions that are the subject of this initiative.

 The Taxpayer will sign the Closing Agreement that is part of this initiative.

 The Taxpayer will agree that all exit strategies will be disregarded for tax purposes. The Taxpayer will agree that if it has already received any such tax benefits, it will recapture such tax benefits as of the Deemed Termination Date.

 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.

 The Service will not resolve any of the Taxpayer's LILO transactions unless all of its LILO transactions are resolved. In the event that the Taxpayer also engaged in SILO transactions and is invited to participate in the SILO Settlement Initiative, the Taxpayer must also agree to participate fully in that initiative. The Service will not resolve any of the Taxpayer's LILO transactions unless the Taxpayer also agrees to fully resolve all of its SILO transactions.

 If applicable, resolution of the Taxpayer's LILO transactions will be reported to the Joint Committee on Taxation pursuant to I.R.C. §6405 .

Sale leaseback transactions



IRS Letter 4394 (7-2008): Resolution of Sale-In/Lease-Out (SILO) Transactions

August 7, 2008

Internal Revenue Service : IRS Letter 4394 : Sale-In/Lease-Out (SILO) transactions : Settlement initiative .



Internal Revenue Service



Department of the Treasury

K85CB

Digitally signed by K85CB

DN: CN = K85CB

Reason: I have

reviewed this document

Date: 2008.07.30

14:42:54 -04'00'

Dear


Resolution of Sale-In/Lease-Out (SILO) Transactions


The Internal Revenue Service (the Service) is willing to resolve all Sale-In/Lease-Out (SILO) transactions entered into by (the Taxpayer) based on the terms stated in Attachment 1.

This resolution offer will remain effective until 30 days from the date of this letter. In order to accept this offer, Taxpayer must advise the listed contact in writing of its acceptance of all of the terms stated in Attachment 1. The Taxpayer must also provide the documents listed in Attachment 2 within 30 days of accepting the terms of this offer. Additional documents may be needed depending on the specific transactions. No counterproposals will be entertained. If the Taxpayer fails to agree to all of the terms within the specified timeframe, the Service will take whatever action is necessary to protect the Government's interest and to bring the case to conclusion.

Thank you for your cooperation.

Sincerely yours,

Enclosures:

Attachment 1

Attachment 2

Letter 4394 (7-2008)

Catalog Number 51812Q


IRS Letter 4395 (7-2008): Resolution of Lease-In/Lease-Out (LILO) Transactions

August 7, 2008

Internal Revenue Service : IRS Letter 4395 : Lease-In/Lease-Out (LILO) transactions : Settlement initiative .



Internal Revenue Service



Department of the Treasury

K85C B

Digitally signed by K85CB

DN: CN = K85CB

Reason: I have

reviewed this document

Date: 2008.07.30

14:41:20 -04'00'



Resolution of Lease-In/Lease-Out (LILO) Transactions

Dear

The Internal Revenue Service (the Service) is willing to resolve all Lease-In/Lease-Out (LILO) transactions entered into by (the Taxpayer) based on the terms stated in Attachment 1.

This resolution offer will remain effective until 30 days from the date of this letter. In order to accept this offer, Taxpayer must advise the listed contact in writing of its acceptance of all of the terms stated in Attachment 1. The Taxpayer must also provide the documents listed in Attachment 2 within 30 days of accepting the terms of this offer. Additional documents may be needed depending on the specific transactions. No counterproposals will be entertained. If the Taxpayer fails to agree to all of the terms within the specified timeframe, the Service will take whatever action is necessary to protect the Government's interest and to bring the case to conclusion.

Thank you for your cooperation.

Sincerely yours,

Enclosures:

Attachment 1

Attachment 2

Letter 4395 (7-2008)

Catalog Number 51813B
IRS Announces Penalty-Free LILO/SILO Tax Shelter Settlement Initiative
The IRS has unveiled a settlement initiative for lease-in, lease-out (LILO) and sale-in, lease-out (SILO) tax shelters. Speaking by telephone with reporters on August 6, IRS Commissioner Douglas Shulman explained that the IRS will soon be sending out settlement offer letters to approximately 45 of the nation's largest corporations across a broad spectrum of industries, including banking.

These letters will contain identical offers that carry the same terms and must be accepted for all of a taxpayer's LILO or SILO leases within 30 days; after that time, the offer will be rescinded and no longer available. In return for "putting these cases behind them" and being excused of all underreporting penalties, each corporation will be required in effect to give up most of the deferral benefits of the shelter. The shelters targeted by the initiative represent "billions of dollars in lost tax revenues," Shulman reported.

The initiative is not universal but is "by-invitation-only." The IRS is planning no further announcement of this initiative to the public.

While hundreds of LILO and SILO transactions have taken place, many large corporations reportedly have participated in multiple shelter transactions. Shulman noted that some corporations will not be receiving settlement letters. Neither Shulman nor other IRS officials at the briefing, however, elaborated on how many taxpayers are being excluded from this initiative. Nor did anyone suggest that other taxpayers will be added to the offer-letter list over time. If a corporation that has participated in a LILO or SILO does not receive a letter, Shulman stated that the taxpayer could contact Paul DeNard, LMSB Deputy Commissioner, for the reason.

Settlement Offers
Shulman explained, and the settlement documentation (letters and attachments) distributed with his announcement show, that the settlement has five main features:

--The taxpayer must agree to concede 80 percent of any claimed interest expense deduction, amortized transaction costs, and head lease rent expense for each tax year through 2007;

--The IRS agrees to disregard 80 percent of any reported taxable rental income with respect to SILO or LILO transactions for each tax year through 2007;

--The taxpayer must agree to report in 2008, 80 percent of the original issue discount (OID) connected with the SILO or LILO transactions for each tax year through 2007;

--The taxpayer must exercise best efforts to terminate its SILO or LILO transactions on or before December 31, 2008; and

--The taxpayer must agree to recognize as ordinary income any termination gain, whether realized under an actual or deemed termination.

SILO/LILO Victories
The settlement initiative comes after a recent string of major IRS court victories involving these transactions earlier in the year. In AWG Leasing Trust (DC Ohio, 2008-1 USTC ¶50,370, TAXDAY, 2008/06/10, J.7), a federal district court denied tax benefits to a U.S. partnership related to its alleged purchase of a German waste-to-energy facility as an abusive SILO transaction. In BB&T Corp. (CA-4, 2008-1 USTC ¶50,306, TAXDAY, 2008/05/01, J.6), the Court of Appeals for the Fourth Circuit struck down the tax treatment of a financial services company's lease of wood-pulp manufacturing equipment as a LILO tax shelter, finding a lack of a genuine lease or genuine indebtedness. In Fifth Third Bancorp, DC Ohio, a federal district court jury, applying the economic substance doctrine, denied tax benefits related to a bank's leasing arrangement for passenger rail cars as an abusive LILO transaction.

Taxpayer Equity/IRS Pragmatism
Shulman was clear in representing the issue as one of fairness and equity among the taxpaying populace. "The public has a right to expect that large corporations be good corporate citizens and meet their legal and compliance obligations," he stated. "The nation's leading commercial enterprises have the legal and accounting resources to take full advantage of favorable provisions of the tax law," he continued, "but they are not entitled to use their extensive resources to twist provisions of the tax law to the point that they no longer reflect Congress's intent. As a basic matter of fairness to all taxpayers, the IRS cannot allow LILO and SILO deals to stand."

At the same time, however, Shulman reasoned that the settlement initiative also represented a pragmatic approach. Noting that "hundreds of these transactions" have not yet been examined and/or adjudicated, Shulman concluded that "the time has come to find the most effective way to resolve these existing disputes ... the settlement initiative achieves this." He added that pursuing this initiative against the most blatant offenders instead of following the usual examination and litigation route will allow the IRS to reclaim most of this revenue more quickly and free up its resources for other matters.

The Service expects, Shulman concluded, that offenders will take advantage of the penalty-free settlement as an "opportunity to clean up liabilities and move on."
LILO/SILO Initiative Frequently Asked Questions, Updated

September 22, 2008

Internal Revenue Service : Sale-in, lease-out (SILO) : Lease-in, lease-out (LILO) : Tax shelters : Settlement initiative .



LILO/SILO Initiative Frequently Asked Questions


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What's New:

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




 FAQ 1.3  FAQ 3.20  FAQ 1.3

 FAQ 6.8s  FAQ 5.6  FAQ 4.20

 FAQ 5.7  FAQ 4.21

 FAQ 6.13  FAQ 5.1

 FAQ 7.6  FAQ 5.3

 FAQ 5.4

 FAQ 5.5

 FAQ 6.8

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Table of Contents for FAQs:

Initiative Election

Appeals Process

Initiative Procedure

Termination

Basis

OID

General or Miscellaneous Questions


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Initiative Election:

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Questions Answers

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1.1 What is the due date for responding To provide taxpayers with sufficient
to the IRS LILO/SILO offer? 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.

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1.2 Can we make different elections for If by "distinct taxpayer," you mean a
different taxpayers? We have received taxpayer who is not included on a
letters for a number of distinct Consolidated return that received an
taxpayers. Should we evaluate the offer letter, but a taxpayer who
offer independently for each received it's own offer letter, then
recipient or jointly for the entire each taxpayer stands on its own.
"controlled group"?

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1.3 If the taxpayer is a TEFRA Yes, the tax matters partner has to
partnership, does the partnership accept the proposal and all partners
have to accept the proposal? Does need to accept.
each partner also need to accept?
The Service expands its answer to FAQ
(further explanation). What if a 1.3. For a TEFRA partnership to
partnership has three partners, and settle its LILOs and SILOs, the
the controlling partner does not want partnership and all its partners must
to enter the Settlement Initiative accept the Initiative. However,
and refuses to make "best efforts" to individual partners may separately
terminate the leases. Will the settle with the IRS regarding their
remaining two partners be barred from respective interests in the
entering the Settlement Initiative? 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.

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Example to FAQ 1.3:

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:


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Deemed Termination Gain/(Loss)

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Termination Proceeds - 12/31/08 Accreted Value of Equity Deposit 26,000,000

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Less: Basis (as defined in the Initiative)

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Equity Investment + Transaction Fees 38,500,000

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Less: 20% of Pre- 2008 Net Income/Loss ($101,000,000 * 20%) (20,200,000)

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Plus 80% OID - Pre-2008 Years ($9,375,000 * 80%) 7,500,000

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Less: 100% of Pre-2008 Free Cash (1,700,000)

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Total Basis (as defined in the Initiative) 24,100,000

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Deemed Termination Gain/Loss 1,900,000

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

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1.5 If a taxpayer, through an abundance There are a limited number of
of caution, disclosed as a listed circumstances in which sale/leaseback
transaction a transaction that it transactions are not considered to be
does not consider to be a listed SILOs or substantially similar to
transaction, will the taxpayer be SILO transactions.The IRS will make
allowed to exclude this transaction that determination. If a taxpayer is
from the settlement offer? 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.

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1.6 How can a taxpayer determine which The IRS will determine whether the
transactions will be treated as SILO transaction is a SILO or LILO as
transactions that must be included in described in Notice 2005-13 and
any settlement? Attachment 2 to the Notice 2000-15, respectively. This
SILO letter states that the taxpayer settlement initiative was intended
must provide a list of all for the settlement of SILO and/or
transactions "that are the same as or LILO transactions.
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?

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1.7 What if a taxpayer already has a The settlement Initiative only
closing agreement with respect to all requires that the Taxpayer resolve
its LILOs, but the taxpayer still has its outstanding SILOs or LILOs which
SILOs outstanding? are not subject to a previously
executed closing agreement.

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1.8 If a taxpayer has not yet received a If a taxpayer believes that it has a
letter, will it not be included in LILO or SILO transaction and it did
the settlement initiative? Will a not receive an offer letter, the
settlement be available at a later taxpayer should contact their local
date to those taxpayers that do not case manager or appeals officer to
receive a letter? discuss the matter.

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1.9 How would entities that are currently If the Service decides to extend an
in litigation be folded into the offer to a Taxpayer in litigation,
Initiative? 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.

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Appeals Process:

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Questions Answers

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2.1 How will a LILO/SILO case be handled Taxpayers who choose not to avail
in Appeals if a taxpayer declines the themselves of the initiative can
offer? 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.

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2.2 If the matter is not in Appeals, is Yes, in order to protect the
the ex parte waiver still required? government's interest, the ex parte
If so, what is the rationale for this waiver is still required.
requirement?

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2.3 Before I received the initiative No, no offset will be available
offer, I had been in extensive against other terms or other issues.
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?

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2.4 Will Appeals engage in settlement No. Appeals has suspended settlement
discussions on LILO/SILO issues discussions on LILOs/SILOs during the
during the extended election period? initiative election period. Taxpayers
should carefully consider the
initiative as a way to resolve these
matters.

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2.5 After the 60-day period expires, what If a taxpayer has not elected to
happens if I have not elected into participate in the initiative
the settlement 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.

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2.6 I have other issues, unrelated to Any other issues in your case are not
LILOs/SILOs pending in Appeals. Can I impacted by the IRS initiative offer
get them resolved separately? and these discussions. You may pursue
resolution of those other issues even
while considering the IRS initiative
offer on LILOs/SILOs.

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Initiative Procedure:

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Questions Answers

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3.1 What is the definition of "best "Best efforts" is defined as a
efforts" to terminate LILO/SILO taxpayer's good faith effort to
transactions by December 31, 2008? terminate by December 31, 2008. The
taxpayer should provide the IRS with
a specific list of the steps that it
took to terminate each transaction.

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3.2 Who determines whether the Taxpayer The IRS will determine whether the
exerted best efforts? taxpayer exerted best efforts after
review of any documentation provided
by the taxpayer that describes the
steps taken.

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3.3 If a Taxpayer and its affiliates have Yes, see answers to questions 3.1 and
multiple SILOs/LILOs, will it need to 3.2, above.
exert best efforts on all
transactions?

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3.4 In what particular form must a The taxpayer must state, in writing,
taxpayer provide its acceptance of that it accepts all of the settlement
the Initiative? terms outlined in the offering
letter.

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3.5 Is it adequate to state that the No.
terms are accepted subject to
negotiating a closing agreement?

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3.6 Is the mailing date adequate to The IRS must receive the taxpayer's
establish the date of acceptance? acceptance by the 60th day from the
date of the offer letter. A Taxpayer
may mail or fax its acceptance.

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3.7 Will the Taxpayer receive notice of Yes, the taxpayer will be notified by
its qualification for the settlement the IRS point of contact.
proposal?

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3.8 Does the expression of understanding Yes. A Taxpayer should provide all of
of undefined terms constitute a its questions to the IRS and must
counterproposal? obtain express concurrence from the
IRS to the understanding of the
undefined terms in advance of sending
its acceptance of the offer.

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3.9 When will a Closing Agreement be A Closing Agreement will be executed
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.

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3.10 Can the terms of the LILO/SILO No.
settlement initiative be incorporated
in a closing agreement covering other
issues?

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3.11 How does the consistency rule in A Taxpayer, who has LILO/SILO
Section 5 (which says the Service transactions both individually and as
will not resolve any of the a partner in a partnership that has
Taxpayer's SILO transactions unless LILO/SILO transactions, must settle
all of its SILO transactions are all of its LILO/SILO transactions. A
resolved) apply where the Taxpayer partner in a TEFRA partnership may
has both (i) directly engaged in SILO accept the terms of the initiative
transactions and (ii) is a partner in and settle out of the partnership.
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?

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3.12 Will transactions with Ownership Yes.
Foreign Sales Corporations ("OFSCs")
be treated as SILOs?

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3.13 What is intended by the fifth bullet The fifth bullet point under Item 5,
point under Item 5, Other Terms, of states, "The Taxpayer will agree that
the attachment? 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.

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3.14 If the Taxpayer makes good faith The original date for acceptance of
efforts to, but fails to provide the the settlement offer has been
documents listed in Attachment 2 extended to 60 days from the original
within 30 days, is the proposal still letter date. Taxpayers have 30 days
available? 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.

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3.15 In regards to Attachment #2, Item #2 The Taxpayer's computations should
(taxpayer computations) - What are relate directly to the transaction,
IRS expectations as to scope, i.e., including the disallowances, OID
computations only for items directly calculations and termination gain
related to the lease and addressed in calculations. Additional documents
the offer, as opposed to other items may be requested at a later date.
on the return that may change as a
result of the adjustment?

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3.16 How binding is the acceptance of the An acceptance of the Initiative by
Initiative that we are asked to make the taxpayer is not binding until a
by 60 days after the date of the closing agreement is executed by both
initial offer letter? parties.

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3.17 When will a closing agreement be A Closing Agreement will be executed
signed? Can provisions covering other when the IRS determines that the
issues be incorporated in a closing Taxpayer has complied with all of the
agreement? Will the particular facts terms of the offering and when all
and circumstances of the taxpayer necessary computations are completed.
(e.g., NOLs, foreign tax credit, amt, Other issues will not be incorporated
etc.) be reflected in the closing into such closing agreement.
agreement? Computational issues, such as NOLs,
foreign tax credits, AMT, etc., will
not be included in the Initiative
closing agreement.

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3.18 Does a reasonable determination that The terms of the settlement
there is an economic or accounting initiative should not be interpreted
loss on a termination of the equity to require a taxpayer to incur a
collateral account, the debt, or the significant economic loss to effect
debt collateral account preclude the an actual termination. However, it is
need to exercise additional best expected that the taxpayer will show
efforts? what actions it took to achieve
termination, and why it could not do
so. For example, the taxpayer might
show that it contacted the tax exempt
entity, the lender, the equity
account holder, the custodian, etc.
and attempted to negotiate terms. The
taxpayer might inform those entities
why it needs to terminate the leases
and that this involves the settlement
of a tax dispute with the U.S. tax
authorities and try to get those
entities to work with the taxpayer.
The actions taken and the reasons
termination could not be achieved
(including significant economic loss)
will be taken into consideration by
the IRS in making the best efforts
determination. Furthermore, the fact
that there would be an accounting
loss would not, by itself, relieve
the taxpayer of the obligation to
take actions, such as those described
above, to achieve termination. In
summary, if the taxpayer makes a good
faith effort to follow the IRS's
instructions to actually terminate
prior to 2009, it is not the
intention of the IRS to unduly
challenge the taxpayer's efforts as
inadequate.

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3.19 Will lack of best efforts be a reason Yes. Whether the Taxpayer has
for voiding an acceptance of the demonstrated best efforts will be
proposal? based on the IRS's review of the
facts in each case.

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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:

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a. Since there has been a sale to a The Taxpayer's sold transactions will
third party, the Taxpayer has no be included in the Initiative and
ability to terminate the transaction considered to be actually terminated
(using best efforts or otherwise). at the time of their sale. Best
Will the Taxpayer be excepted from efforts are still required to
this requirement? terminate any transactions that have
not already been sold prior to the
Settlement Initiative.

____________________________________________________________________________________
b. How is OID taken into account when OID accrues until the date of
a Taxpayer has already sold LILO/SILO disposition.
transactions?

____________________________________________________________________________________



____________________________________________________________________________________



___________________________________________________________________________________
Termination:

___________________________________________________________________________________
Questions Answers

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

___________________________________________________________________________________
4.2 Will a Taxpayer be able to recognize Yes, but to recognize a tax loss on
a tax loss on either an Actual an Actual Termination it must occur
Termination or a Deemed Termination? before January 1, 2011.

___________________________________________________________________________________
4.3 What happens if a lessee does not If a taxpayer provides the IRS with
want to unwind a transaction or acts an acceptance of the terms of the
to delay an Actual Termination? 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 The difference will not be recovered
December 31, 2010, and "Actual if there is an Actual Termination
Termination Gain" is less than after December 31, 2010.
"Deemed Termination Gain", will the
difference be recovered?

___________________________________________________________________________________
4.5 Would any tax payment due as a result The taxes will be due when they are
of the 2008 deemed termination be due ordinarily due for 2008. The deemed
at the time the closing agreement was termination gain will be recognized
executed, at the time taxes in the taxpayer's 2008 tax return.
ordinarily would be due for 2008, or
at another time?

___________________________________________________________________________________
4.6 What is the value of the equity The value of the equity defeasance
defeasance account referenced in the account is the accreted value.
definition of Deemed Termination
Proceeds-is it accreted value or fair
market value?

___________________________________________________________________________________
4.7 What if there is no equity defeasance If there is no equity defeasance
account? 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 The defeasance account will be
defeasance account but it has not valued based on the available
been pledged to the lessor and the information. The OID accreted value
lessor may not have any access to (as computed by the Service) will be
information regarding the value of the basis for settlement. Such
that account? 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 It is not sufficient to have a
termination of the transactions and a deemed termination and a new OID
new OID Note going forward? Note going forward.

___________________________________________________________________________________
4.10 What is the tax consequence of an The tax consequences of an actual
actual termination prior to August termination prior to August 2008
2008? would be consistent with the terms
of the Initiative.

___________________________________________________________________________________
4.11 What is the tax consequence of The transaction is deemed to
payments received/made on the leases terminate at December 31, 2008. Rent
after 2008 but before an actual payments and terms of all operative
termination? For example, are rent documents would be disregarded after
payments received completely December 31, 2008. Only OID would be
disregarded? Does the answer change reported going forward until actual
if the actual termination does not termination. The Initiative
occur before 2011? Does the answer anticipates the exercise of the EBO.
change if the lessee does not
exercise the EBO?

___________________________________________________________________________________
4.12 If the transactions, based on its The 20% amount that will be
original lease profile, has "turned recognized according to the terms of
around" and has generated positive the settlement will be added to the
taxable income in years before 2008, taxpayer's adjusted basis.
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?

___________________________________________________________________________________
4.13 What is meant by "net proceeds" in The "net proceeds" equal the actual
the definition of Actual Termination proceeds received upon termination,
Proceeds? For example, how does the which is expected to equal the
taxpayer take into account balance of the equity collateral
transaction costs incurred, which may account. The transactions costs will
include legal fees of the taxpayer be added to the taxpayer's basis.
and perhaps even legal fees or other
costs of the lessee that the taxpayer
is required to reimburse as part of
the termination agreement?

___________________________________________________________________________________
4.14 As a result of changes in market The value of the equity defeasance
conditions, the amount in the equity account would be the accreted value
defeasance account may be higher or based on the OID calculations as of
lower than the amount expected at the December 31, 2008.
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?

___________________________________________________________________________________
4.15 What if there is a gain on an Actual Under the terms of the Initiative,
Termination after 2010? Would that be such gains would not be taxed,
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 A loss on a Deemed Termination will
on a deemed termination? Will it be be treated as an ordinary loss.
treated as an ordinary loss?

___________________________________________________________________________________
4.17 What is the tax consequence if the If there is an Actual Termination
Actual Termination Gain on an actual Gain after 2008 but before 2011 that
termination after 2008 but before exceeds the Deemed Termination Gain,
2011 is more than the Deemed the excess gain will not be taxed,
Termination Gain? The attachment only provided the transaction is not
speaks to the situation where Actual amended in any way after the
Termination Gain is less than Deemed taxpayer agrees to accept the
Termination Gain. Initiative.

___________________________________________________________________________________
4.18 Can a sale to a third party, other No.
disposition or charitable
contribution of the taxpayer's
position in a transaction qualify as
an "actual termination"?

___________________________________________________________________________________
4.19 Confirm intended application in a a. Does "tax years through 2007"
fiscal year context. The Taxpayer is mean "tax years through September
on a September 30 fiscal year 30, 2008"?
reporting date.




 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 If there is an Actual Termination
the Deemed Termination computed? 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 26,000,000
Collateral

___________________________________________________________________________________
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 * (20,200,000)
20%)

___________________________________________________________________________________
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 * (20,200,000)
20%)

___________________________________________________________________________________
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 No, these transactions will not be
already had an EBO before 12/31/08 be ignored. For transactions with an
handled? Would these transactions be exercised EBO before December 31,
ignored for settlement purposes? 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 * (8,560,000)
20%)

___________________________________________________________________________________
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 No. The Initiative does not deem the
is the Taxpayer deemed to acquire an taxpayer to acquire an OID note.
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?

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

____________________________________________________________________________________



____________________________________________________________________________________



Basis:

____________________________________________________________________________________
Questions Answers

____________________________________________________________________________________
5.1 Will transaction costs of terminating Transaction costs of terminating a
a transaction be included in basis or transaction before January 1, 2011,
as reduction of proceeds? 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 * (20,200,000)
20%)

___________________________________________________________________________________
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 A Taxpayer should provide all
substantiate transaction costs? 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 Is it possible to have negative basis Yes. For example, if a Taxpayer
attributable to closed years? claimed tax benefits in closed years,
the losses claimed in those closed
years will be subtracted from the
Taxpayer's basis and, if large
enough, could result in a negative
basis.

____________________________________________________________________________________




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 26,000,000
Collateral

___________________________________________________________________________________
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 * (12,400,000)
20%)

___________________________________________________________________________________
Plus 80% OID - Pre-2008 Years ($9,375,000 * 80%) 7,500,000

___________________________________________________________________________________
Less: Other Adjustments to Basis (Recaptured tax (39,000,000)
benefits from barred years)

___________________________________________________________________________________
Total Basis (as defined in the Initiative) (5,400,000)

___________________________________________________________________________________
Deemed Termination Gain/(Loss) 20,600,000

___________________________________________________________________________________



____________________________________________________________________________________
5.4 In calculating the Taxpayer's If there is an Actual Termination
adjusted Basis for purposes of after 2008 but before 2011, the
computing Actual Termination Gain on Actual Termination gain would be
an Actual Termination after 2008 but calculated using the actual proceeds
before 2011, does the Taxpayer received less adjusted basis.
receive credit for either (a) the Adjusted basis will include 100% of
gain recognized on the Deemed OID required to be included in
Termination or (b) the 100% OID taxable income after 2008.
required to be picked up 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. There will be a Deemed Termination as
lenders) charge fees for permitting of December 31, 2008 if the Taxpayer
unwind? Would such fees be deductible is not permitted to unwind the
or added to basis? 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 Yes, Taxpayers must reduce their SILO
provides that the SILO "basis" must basis by all of the losses claimed in
be reduced by losses claimed in barred years (see Example to FAQ
barred years. Is it correct that the 5.3), and will get a corresponding
IRS is requiring that Taxpayers increase in basis for income
reduce their SILO "basis" by 100% of recognized with respect to the SILO
those losses and in essence recapture in closed years.
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?

____________________________________________________________________________________
5.7 How is "free cash" (cash rent Under the terms of the Initiative
received in excess of debt service when computing gain or loss on a
during the lease term) received by Deemed Termination or an Actual
the lessor prior to the 12/31/2008 Termination, it is necessary to treat
deemed termination to be treated? Is "free cash" as a reduction to basis.
it ignored, treated as a reduction in The free cash adjustment to basis is
tax basis, treated as a payment of necessary to reflect the economic
OID or some other assumption? impact of the transaction.

____________________________________________________________________________________



____________________________________________________________________________________



____________________________________________________________________________________
OID:

____________________________________________________________________________________
Questions Answers

____________________________________________________________________________________
6.1 How is OID treated if there is a The taxpayer will recognize 100% of
Deemed Termination but no actual OID accrued yearly until there is an
termination occurs before January 1, actual termination or the early
2011? buyout (EBO) date.

____________________________________________________________________________________
6.2 Does a taxpayer get basis for 100% of If the Taxpayer has an Actual
OID for the period from December 31, Termination during the period from
2008 through December 31, 2010? 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 Yes.
2007) included in 2008 income?

____________________________________________________________________________________
6.4 Should OID for 2008 be included in The 2008 OID would be included in the
income and then deducted, or ignored Deemed Termination proceeds. There
altogether? 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 Yes.
proposed in Revenue Agents Reports
(e.g., LILOs)?

____________________________________________________________________________________
6.6 According to the offering, if there If there is no Actual Termination by
is no Actual Termination by December December 31, 2010, then 100% of OID
31, 2010, then 100% OID applies for accrued on a year by year basis will
each subsequent year. Will OID be recognized as income in each year
accrued after 12/31/10 be included in until there is an Actual Termination
basis? 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 No.
deductions for OID if there is an
"Actual Termination" after December
31, 2010?

____________________________________________________________________________________
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 OID is calculated as the Service has
taxpayers have considered the done in the SILO Notice Of Proposed
following methods: (1) using an Adjustments (NOPA). The base is the
effective interest rate that original equity collateral deposit.
discounts future net cash flows less Term is closing date through the EBO.
the equity investment (including Free cash returns and EBO
transaction costs); and (2) using the installments actually going back to
scheduled rate applied to the amount the investor is considered to be the
of the cash deposited in the equity total earnings on the investment.
deposit account.

____________________________________________________________________________________
6.10 Who will compute OID (Taxpayer or The IRS will review the OID
IRS)? computation submitted by the
taxpayer.

____________________________________________________________________________________
6.11 How does the taxpayer report 80% of The 80% of OID accrued for tax years
the OID accrued through 2007 in 2008? 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 Interest would not be imposed on any
reported in 2008, would interest be underpayment relating to OID not
imposed on any underpayment on the reported prior to 2008.
pre-2008 OID?

____________________________________________________________________________________
6.13 Does the settlement proposal require Yes, OID must be included for closed
taxpayers to include OID for closed years in 2008.
years in 2008 as well as for open
years?

____________________________________________________________________________________



____________________________________________________________________________________
General or Miscellaneous Questions:

____________________________________________________________________________________
Questions Answers

7.1 Can federal income tax assessments be No.
staggered so as to reduce
administrative burden on filing
state/local returns?

____________________________________________________________________________________
7.2 If a Taxpayer closed its LILO/SILO Provided no closing agreement has
transactions as an agreed issue been executed by the Service, such
during the examination and now wants taxpayer is eligible for the
a refund, what happens? Initiative.

____________________________________________________________________________________
7.3 There is no mention of Section 6707A Section 6707A has not been waived as
penalties. Can resolution of this part of the Initiative, but all
matter be incorporated into a closing matters that are resolved will be in
agreement? the closing agreement.

____________________________________________________________________________________
7.4 What is the reason that Taxpayer is The Service wants to encourage
being encouraged to prematurely termination of these transactions for
terminate transactions? effective tax administration.

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

____________________________________________________________________________________
7.6 Could an example of a resolution No, the Service will not be able to
computation be provided that provide such an example because facts
incorporates the FSC or ETI benefits? and circumstances will vary.

____________________________________________________________________________________



____________________________________________________________________________________
IRS Letter 4394 Attachment 1 --SILO Initiative

August 7, 2008

Internal Revenue Service : IRS Letter 4394, Attachment 1 : Sale-In/Lease-Out (SILO) transactions : Settlement initiative .



Attachment 1 - SILO Initiative



A. General
 The Taxpayer agrees to use its best efforts to terminate its SILO transactions on or before December 31, 2008.

 If the Taxpayer is unable to terminate all of its SILO transactions by December 31, 2008, then any of its SILO transactions that are not terminated by that date will be deemed terminated as of that date ("Deemed Termination").

 If a Deemed Termination has occurred, the taxpayer will be permitted to claim the benefit of an Actual Termination if its SILO transactions are terminated on or before December 31, 2010.



B. Definitions
 Actual Termination - An Actual Termination occurs when a Taxpayer terminates its SILO transactions.

 Actual Termination Gain - Actual Termination Gain is equal to the Actual Termination Proceeds less the Taxpayer's Adjusted Basis on the termination date.

 Actual Termination Proceeds - The net proceeds the Taxpayer receives when it actually terminates its SILO transactions (expected to be the balance in the equity defeasance account).

 Deemed Termination - If the Taxpayer is unable to terminate all of its SILO transactions by December 31, 2008, then any of its SILO transactions that are not terminated by that date will be deemed terminated as of that date.

 Deemed Termination Date - December 31, 2008.

 Deemed Termination Gain - The difference between the Deemed Termination Proceeds and the Taxpayer's Adjusted Basis on the Deemed Termination Date.

 Deemed Termination Proceeds - The amount which, at the Deemed Termination Date, is equal to the value of the equity defeasance account.

 Taxpayer's Adjusted Basis - The Taxpayer's Adjusted Basis includes all of the following items:

1) The Taxpayer's equity investment (equity collateral + accommodation fees) plus transaction fees;

Less
2) The allowed deductions (20% of the losses previously claimed) through the 2007 tax year;

Plus
3) 80% of the Original Issue Discount ("OID") that accrued through the tax year 2007.



Other Basis Adjustments
4) In the event that Taxpayer claimed losses in taxable years that the Service is now barred by the statute of limitations under I.R.C. §6501 from adjusting, basis will be reduced by the losses claimed in those barred years.



C. Terms



1. Tax Years Through 2007

a. 80% Disallowance of SILO Transactions
 The Taxpayer agrees to concede 80% of any claimed interest expense deduction, depreciation deduction, and amortized transaction costs for each tax year through 2007.

 The IRS agrees to disregard 80% of any reported taxable rental income with respect to Taxpayer's SILO transactions for each tax year through 2007.



b. Report 80% of Accrued OID
 The Taxpayer agrees to report in 2008, 80% of the OID accrued with respect to its SILO transactions for each tax year through 2007.

2. Tax Treatment of an Actual Termination on or before December 31, 2008
 In the event of an Actual Termination on or before December 31, 2008, the Taxpayer agrees to recognize as ordinary income the Actual Termination Gain.



3. Tax Treatment Under a Deemed Termination
 If the Taxpayer is unable to terminate all of its SILO transactions by December 31, 2008, then its non-terminated SILO transactions will be deemed terminated as of the Deemed Termination Date.

 If there is a Deemed Termination, the Taxpayer agrees to recognize as ordinary income the Deemed Termination Gain.

 If there is a Deemed Termination, the Taxpayer agrees to recognize as ordinary income, 100% of the OID that accrues each year from the Deemed Termination Date until the date of an Actual Termination.



4. Tax Treatment of an Actual Termination occurring after the Deemed Termination on December 31, 2008, but before January 1, 2011
 If an Actual Termination occurs after December 31, 2008 but before January 1, 2011, and the Actual Termination Gain is less than the Deemed Termination Gain, then the Taxpayer will be entitled to an ordinary deduction for the difference between the gain that was recognized as a result of the Deemed Termination and the Actual Termination Gain in the taxable year of Actual Termination.



5. Other Terms
 The Taxpayer will not be liable for any penalties under I.R.C. §§6662 and 6662A.

 The Taxpayer will waive the prohibition against ex parte communications between Appeals and Compliance and Office of Chief Counsel employees as to any LILO and/or SILO transactions that are the subject of this initiative.

 The Taxpayer signs the Closing Agreement that is part of this initiative.

 The Taxpayer agrees that all exit strategies will be disregarded for tax purposes. The Taxpayer agrees that if it has already received any such tax benefits, it will recapture such tax benefits as of the Deemed Termination Date.

 The Taxpayer agrees that its acceptance of this settlement initiative indicates its agreement that it is not entitled to claim or receive tax benefits from the SILO transactions other than those outlined herein.

 The Service will not resolve any of the Taxpayer's SILO transactions unless all of its SILO transactions are resolved. In the event that the Taxpayer also engaged in LILO transactions and is invited to participate in the LILO Settlement Initiative, the Taxpayer must also agree to participate fully in that initiative. The Service will not resolve any of the Taxpayer's SILO transactions unless the Taxpayer also agrees to fully resolve all of its LILO transactions.

 If applicable, resolution of the Taxpayer's SILO transactions will be reported to the Joint Committee on Taxation pursuant to I.R.C. §6405 .

IRS Letter 4394 Attachment 2 --SILO Initiative

August 7, 2008

Internal Revenue Service : IRS Letter 4394, Attachment 2 : Sale-In/Lease-Out (SILO) transactions : Settlement initiative .


Attachment 2- SILO Initiative


1. A list of all Sale-In/Lease-Out (SILO) 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 (The Commissioner and the Department of the Treasury designated SILO transactions as "listed transactions" in Notice 2005-13 ).

2. Computations in electronic (Excel) format reflecting the settlement terms outlined in Section C of Attachment 1.

3. Interet/ABC Reports up through and including the EBO date showing annual cash flow analysis, annual tax presentation, and accretion of equity collateral balance.

4. Equity collateral schedules (schedules detailing beginning equity collateral and equity portion of rent, and/or EBO payments).

5. Documents evidencing EBO purchase price.

6. Documents evidencing amount of equity investment and transaction costs.

7. Detailed breakdown of transaction costs by amount, nature, and recipient



Remarks of IRS Commissioner Doug Shulman

August 7, 2008

IRS Commissioner Doug Shulman : Lease-In/Lease-Out (LILO) transactions : Sale-in/Lease-Out (SILO) transactions .


Remarks of IRS Commissioner Doug Shulman



August 6, 2008


In the last several years, as you know, the IRS has reinvigorated its enforcement program. A major part of this has been the IRS' stepped up efforts to detect and deter aggressive tax shelters. We have been particularly effective in rooting out tax shelter transactions. And I've said publicly that during my tenure here at the IRS, you can expect these efforts to continue. Promoters and participants in aggressive tax shelters should know that the IRS will remain vigilant.

Our success in uncovering tax shelters, however, is just the start of the process to resolving these issues. Today, I'm pleased to announce that the IRS has decided to launch a settlement initiative for both Lease-In/Lease-Out (LILO) and Sale-in/Lease-Out (SILO) transactions. Under this initiative, more than 45 of the nation's largest corporations that participated in these shelters will receive a letter with an offer. Shelter participants will have 30 days to make a decision to accept the offer.

Let me refresh everyone's memory, LILOs and SILOs involved complex and convoluted purported leasing arrangements in which some of the nation's largest corporations supposedly leased or purchased large assets, such as foreign rail systems or sewer systems, and then immediately leased them back to their original owners. Under the arrangement, these corporations, which include companies in the Fortune 500, buoyed their balance sheets by gaining billions of dollars of tax deferrals. Using LILOs and SILOs, these companies, which include many of the nation's top banks, put off recognition of current income for tax purposes for many years.

The IRS designated LILOs as "listed transactions" in 2000. SILOs were designated in 2005. Since then, the government has gone to court and successfully challenged these deals as having no purpose other than creating tax benefits. But there are hundreds of these transactions that have yet to be fully examined and/or adjudicated. With the government's recent victories in court demonstrating the strength of our position, the time has come to find the most effective way to resolve these existing disputes. As IRS Commissioner, I believe that the settlement initiative that the IRS is offering today achieves this.

The public has a right to expect that large corporations be good corporate citizens and meet their legal and compliance obligations. The nation's leading commercial enterprises have the legal and accounting resources to take full advantage of favorable provisions of the tax law. But they are not entitled to use their extensive resources to twist provisions of the tax law to the point that they no longer reflect Congress's intent. As a basic matter of fairness to all taxpayers, the IRS cannot allow LILO and SILO deals to stand. The time has come for these shelter participants to put these cases behind them. And the best way for them to do so is to act on the settlement offer they will receive today.
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