Rev. Rul. disallows LILO transaction deductions

The IRS issued Rev. Rul. 2002-69, which reaffirmed the conclusion in Rev. Rul. 99-14 that a taxpayer may not deduct rent or interest arising from a lease-in/lease-out (LILO) transaction. However, in the new ruling, the Service did not look (as it had in the past) to a lack of pre-tax profit potential or business purpose to challenge the LILO for lack of economic substance. Instead, it examined the transaction on a limited technical basis, concluding that the arrangements conferred only a future property interest, rather than a current leasehold; thus, the ruling recommended that a US taxpayer defer any deductions until the possessory interest became actual.