November 18,2003

Grassley Expands Inquiry Into Tax Shelters Using Leases

Announces Plans to Move Up Effective Date of Legislative Crackdown

WASHINGTON -- Sen. Chuck Grassley, chairman of the Committee on Finance, has expanded his pursuit of abusive tax shelters by asking for copies of any documents the Transportation Department may have regarding an abusive scheme that allows major corporations to claim huge tax breaks using the nation’s highways, subways, airports, and water lines. Grassley said he also plans to make the effective date of his legislation to shut down these shelters today instead of the date of enactment.

Grassley said that under these schemes, municipalities are paid an up-front accommodationfee to lease 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. Onemunicipal manager described these transactions as, “People giving him money which he never hadto pay back, for doing something that he was already doing.”

“Why do they think promoters would pay them such a handsome fee for doing nothing?” Grassley said. “The shelter promoters are hiding behind the cities and are sending them to Capitol Hill to talk about what an important source of funding this is. This has nothing to do with a ‘publicprivate’partnership. This is just good, old-fashioned tax fraud.”

Last month, Grassley held a hearing in which an anonymous witness testified on how majorU.S. companies receive huge tax deductions by pretending to lease the infrastructure of cities, suchas dams, bridges and subways, and then pretending to lease them back. Grassley's international tax reform and domestic manufacturing tax relief bill, which the committee passed on Oct. 1, shuts down the loopholes that tax shelter promoters exploit for such leasing transactions.

“These leasing shelter transactions are trickery at the taxpayers’ expense,” Grassley said.“The roads, bridges, and pipelines that companies exploit to avoid taxes were funded by the taxpayers. Say a city is getting $100 million through leasing its subway system to companies. Think about the fair market value of the assets to be leased to the promoter. Multiply that value by the 35 percent corporate tax rate, and you'll have a ballpark estimate of the tax savings to be realized by theprivate companies depreciating the underlying water line assets. I can guarantee it’ll be much higherthan $100 million.

“We know this abuse is continuing. Last week, we learned that the Alamodome was leasedunder one of these deals. A few weeks ago, we heard that water lines in New Jersey were leased outfor corporate deductions. My legislation will stop this abuse. Right now, it’ll be effective on thedate of enactment. However, when we get to the floor, I plan to offer an amendment that will shutdown these transactions as of today.”

The text of Grassley’s letter to the Transportation Department follows.

November 17, 2003

Norman Y. Mineta
Secretary of Transportation
Department of Transportation
400 Seventh Street, S.W.
Washington, DC 20590

Dear Mr. Secretary:

I am writing to enlist the assistance of the Department of Transportation 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 subsequentinvestigations have disclosed that the Department of Transportation has endorsed these transactions,even though the Department of 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 thesame 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 neitherthe tax promoters nor the municipality assumes any credit or ownership risk. At the end of the leaseterm, the infrastructure assets revert back to the municipality. In reality, nothing changes regardingthe 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 alreadydoing.”

In March 1999, the Department of Treasury under the Clinton Administration initiate denforcement actions against these transactions, which are called LILOs - an abbreviation of their industry name “lease-in-lease-out” transactions. You can imagine our surprise when we discovered that in February 2000, the Federal Transit Administration issued guidance entitled “FinancingTechniques for Public Transit,” which listed LILOs as a funding technique. That guidance statedthat in fiscal 1999, the Federal Transit Administration reviewed over $1 billion in lease hold transactions. We have further learned that these transactions have continued, albeit in a different form, and that the Department of Transportation 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 Department of Transportation in order to enter into these transactions. Several tax shelter promoters have defendedtheir deals on the basis that they were approved by the Department of Transportation. This is whyI wanted to bring this matter to your attention.

I am certain that you share my concern that bridges, water lines, sports stadiums, and subway systems constructed with taxpayer dollars are being used by big corporations to shelter billions ofdollars in taxes through bogus depreciation deductions. In order to assist us in assessing the scopeand scale of this problem, I request that the Department of Transportation submit to the Committeeon Finance copies of all LILOs, SILOs, QTEs, and similar transactions that have been approved,funded, or otherwise reviewed by the Department of Transportation from the year 1995 to present.

I appreciate your cooperation in our ongoing efforts to combat abusive tax shelters, and look forward to receiving these materials as soon as possible.

With best personal regards,

Charles E. Grassley