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Tax-Exempt Entity Leasing
Since 1984, Mr. Cozart
has been involved in the development and analysis of transactions
designed to enhance the tax depreciation of property leased to
tax-exempt lessees. He
 developed a unique structure for operating
lease transactions that was used to finance a fleet of
railcars in the U.S. This strategy has been limited by the enactment
of IRC §470 in 2004, which requires tax losses from property leased to tax-exempt lessees
to be suspended and carried forward against income from the property.
In the mid 1990’s, many investors became comfortable with a
simplified tax-exempt entity leasing structure now known generally
as the LILO (lease-in, lease-out), which was used to finance
billions of dollars of domestic and foreign plant and equipment.
Beginning in the late 1990s, the IRS attacked LILO’s on audit and in
several revenue rulings, and has specifically listed them as tax
shelters under the disclosure regulations. The proper treatment of
these transactions remains an important issue today for many
companies that invested in LILO’s. See
LILO Litigation.
Because the head lessor and sublessee are related in the LILO, these transactions raise significant economic substance and
business purpose issues. Following cautionary advice rendered to his
clients, Mr. Cozart analyzed these issues, and the IRS ruling
addressing them (which was subsequently withdrawn), in Disputing Rev. Rul. 99-14: Pre-Tax Profit,
Defeasance, and Circular Leases, 83 Tax Notes 557-571 (April 26,
1999). |
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