In Uncategorized on 09/19/2016 at 16:41

No, not an arithmetic error in the 1930 Sellar and Yeatman classic. This is the unravelling of an unlike like-kind exchange, of the genus SILO (sale-in/lease-out), with a nine-figure deficiency plus fifteen years’ worth of interest. The case is Exelon Corporation, As Successor by Merger to Unicom Corporation and Subsidiaries, 147 T. C. 9, filed 9/19/16, Judge Laro for the Court and fourteen lawyers (seven each) for IRS and Exelon.

For some background, see my blogpost “Woodshedding Your Expert – Redivivus,” 8/6/13, the story of John Hancock Life, a case much-quoted in this opinion.

Exelon was the ultimate successor to Commonwealth Edison of Illinois. In response to deregulation, Exelon unloaded its fossil fuel plants for $4.8 billion. Exelon had a problem…a $1.6 billion taxable gain, with but a short time to bury it. As Grandma would have said “We should all have such problems!”

So Exelon QI’d the cash, picked out some tax-exempt utilities around and about in the safe-harbor timeframe, bought their fossils, and leased them back for a term beyond their remaining useful lives (thus a sale, on paper), and bought separately cancellation options. The only economic sense the deal made was to cancel before expiry.

Exelon hired a squadron of legal, engineering and accounting white-shoes to make sure the deal was papered and worked properly. And the rents and cancellation fees were escrowed up front.

One of the local utilities described the deal to its government owner as the sale of tax benefits. And one of Exelon’s ace accounting firms registered this stuff with IRS as a corporate tax shelter per Section 6111(d).

You can see where this is going.

SNODs descend when Exelon starts canceling.

IRS claims the leases are loans, OID applies, depreciation doesn’t, and Exelon owes the tax.

The result is a fact-driven benefit-and-burdens test. Because all the cash was escrowed, barring an upfront payment to the tax-exempts that came out of Exelon’s tax-deferred sales proceeds, and because the “buyers” were tax-exempt, this was a loan on which interest was paid from the public fisc via tax deferrals benefitting Exelon.

Exelon had no real economic risk.

And as for the white-shoes and extensive due diligence, “In most prior SILO/LILO cases taxpayers also engaged in extensive due diligence before to entering into the transactions, including hiring prominent law firms to draft documents, accounting firms to structure transactions and provide appraisals, and engineering firms to evaluate the properties.  That nonetheless did not prevent the courts in those cases from holding that the substance of such transactions was inconsistent with their form and that the taxpayers did not obtain genuine attributes of ownership.” 147 T. C. 9, at pp. 121-122. (Citations omitted).

Now how about good-faith Section 6664 reliance on experts? Exelon hired a squadron of them.

But the appraisal done by the Big Four accounting firm was flawed, and Exelon’s in-house team should have known that the assumptions upon which it was based were faulty. And the white-shoe lawyers told the accountants what to say.

“We cannot condone the procuring of a tax opinion as an insurance policy against penalties where the taxpayer knew or should have known that the opinion was flawed.  A wink-and-a-smile is no replacement for independence when it comes to professional tax opinions.” 147 T. C. 9, at p. 173-174.

Practitioners, please copy.

  1. […] Lew Taishoff will not miss a regular Tax Court decision on a billion-plus gain and weighed in with 1031 And All That not long after the decision hit the Tax Court […]


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