UNIONBANCAL CORPORATION & SUBSIDIARIES v. United States
1:06-cv-00587
Fed. Cl.Oct 23, 2013Background
- UBC engaged in a Pond LILO with Anaheim to lease and sublease a public arena, aiming to obtain tax deductions.
- Pond involved a head lease from Anaheim to UBC and a sublease back to Anaheim, with complex defeasance and collateral structures.
- UBC claimed deductions for rent (section 162(a)(3)) and interest (section 163(a)) for 1999–2002; IRS denied deductions.
- The purchase option at the end of the sublease was fully funded and structured to defease obligations, incentivizing exercise.
- Anaheim and related entities provided collateral and guarantees, creating a circular debt-defeasance framework with funds flowing among affiliates.
- Court applied substance-over-form and related anti-abuse doctrines to determine whether UBC held a genuine leasehold and genuine indebtedness.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether UBC had a genuine leasehold in Pond for 162(a)(3) deductions | UBC asserts substantive ownership despite form. | Transaction lacks genuine leasehold; ownership remains with Anaheim for tax purposes. | UBC did not have genuine ownership; deductions denied. |
| Whether the debt/loan was genuine indebtedness for 163(a) deductions | Circular funding creates deductible interest. | Debt is a defeased, non-genuine loan routed through affiliates. | Debt not genuine; interest deductions denied. |
| Role of the purchase option in substance-over-form analysis | Option impact should be considered only if certain to be exercised. | Prudent investor expectations show option likely exercised. | Option reasonably expected to be exercised; reinforces lack of substance. |
| Whether the Pond LILO stands as a sham transaction under anti-abuse doctrine | Transaction serves legitimate economic purpose beyond tax benefits. | Structure is designed to generate tax benefits while insulating risks. | Substance-over-form discloses tax-avoidance; not a genuine lease or debt. |
Key Cases Cited
- Consolidated Edison Co. of New York, Inc. v. United States, 703 F.3d 1367 (Fed. Cir. 2013) (substance-over-form applied to LILO/SILO; purchase option focus)
- Wells Fargo & Co. v. United States, 641 F.3d 1319 (Fed. Cir. 2011) (purchase option likelihood standard; debt/offsetting obligations)
- BB&T Corp. v. United States, 523 F.3d 461 (4th Cir. 2008) (assessing ownership and offsetting obligations in LILO/SILO)
- Frank Lyon Co. v. United States, 435 U.S. 561 (Supreme Court 1978) (sale-leaseback realism; risk of ownership and defesance context)
- John Hancock Life Ins. Co. v. Commissioner, 141 T.C. 1 (Tax Court 2013) (economic substance considerations in LILO contexts)