Federal govt screws itself by approving abusive tax shelter transactions for fed funded projects

WASHINGTON – Sen. Chuck Grassley, chairman of the Committee on Finance, and Sen. Max Baucus, ranking member, have expanded their inquiry into federal agencies that may have played a role in approving abusive tax shelter leases using infrastructure assets. This week, the senators wrote to the Federal Aviation Administration and the Environmental Protection Agency asking for details of any such deals those agencies have approved. The letters follow an earlier letter to the federal Transportation Department; the senators released the results of that inquiry earlier this week.

Grassley and Baucus also wrote to the leaders of the House Appropriations Subcommittee On Transportation, Treasury, and Independent Agencies to share their findings so far. The letter came after press reports reflected the appropriators’ interest in the issue.

The Honorable Marion C. Blakey
Administrator
Federal Aviation Administration
800 Independence Avenue, S.W. Room 1022
Washington, DC 20591

We are writing to enlist the assistance of the Federal Aviation Administration in our ongoing investigation of abusive tax shelters. On October 21, 2003, the Committee on Finance held a hearing regarding the continuing proliferation of abusive tax shelters. During that hearing, we learned that shelter promoters are engaging in transactions with U.S. municipalities and other state and local governmental units, which allow major U.S. corporations to depreciate state and local infrastructure assets, such as railways, subways, dams, water lines, and air traffic control systems. Our subsequent investigations have disclosed that federal agencies have endorsed these transactions, even though the Department of the Treasury had classified them as abusive tax shelters.

Under this scheme, municipalities are paid an up-front cash fee to enter into a long-term lease of their infrastructure to the tax shelter promoters. The cash received by the municipality, however, pales in comparison to the federal tax benefits received by the corporations, which will be able to depreciate taxpayer-funded bridges, subways, and rail systems as a result of the lease. As part of the same agreement, the promoters will agree to simultaneously lease the assets back to the municipality.

The obligations of the promoters and municipalities are prepaid through “phantom” debt, and neither the tax promoters nor the municipality assumes any credit or ownership risk. At the end of the lease term, the infrastructure assets revert back to the municipality through a pre-funded repurchase arrangement. In reality, nothing changes regarding the ownership or use of the infrastructure. One municipal manager described these transactions as “people giving him money which he never had to pay back, for doing something that he was already doing.”

In March 1999, the Department of the Treasury under the Clinton Administration initiated enforcement actions against these transactions, which are called LILOs – an abbreviation of their industry name “lease-in-lease-out” transactions. We have further learned that these transactions have continued, albeit in a different form, and that other federal agencies may be approving these transactions. The LILO transactions have now been replicated through service agreement contracts and transactions called SILOs - “sales-in-lease-out.” Other variations on these transactions have involved qualified technology equipment (QTEs). We have been advised that state and local infrastructure projects which receive federal funding must obtain the review and approval of the Federal Aviation Administration in order to enter into these transactions.

We are certain that you share our concern that water lines, waste treatment plants, and air traffic control systems constructed with taxpayer dollars are being used by big corporations to shelter billions of dollars in taxes through bogus depreciation deductions. In order to assist us in assessing the scope and scale of this problem, we request that the Federal Aviation Administration submit to the Committee on Finance copies of all documents relating to LILOs, SILOs, QTEs, and similar transactions that have been approved, funded, or otherwise reviewed by the Federal Aviation Administration from the year 1995 to present. We appreciate your cooperation in our ongoing efforts to combat abusive tax shelters, and look forward to receiving these materials as soon as possible.

I know this is an old press release, but I was researching capital leases and found this. I thought it was hilarious that agencies within the federal government have approved such transactions. They try to put all the blame on corporate America, the accountants, and the attorneys. Please forgive me if this has already been discussed.

Designed unaccountability is what our politicians do best.

>>The obligations of the promoters and municipalities are prepaid through “phantom” debt, and neither the tax promoters nor the municipality assumes any credit or ownership risk.<<

“phantom” debt appears in every city budget making them all poor and needing a rise in local taxes.

2 posted on 07/01/2004 1:35:45 PM PDT by B4Ranch (We're going to take things away from you (guns) on behalf of the common good." Hillary 6/29/2004)

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