June 25,2009

Grassley Works to Safeguard Rail Transit Dollars for Equipment Upgrades Where Tax Shelter Corporations May Be Involved

WASHINGTON – Senator Chuck Grassley is urging House Majority Leader Steny Hoyer to include language in any proposal to give the Washington Metropolitan Area Transit Authority necessary additional funds for maintenance and upgrade of subway equipment to make sure the money would be used for safety improvements and not to pay off transit agencies’ obligations to corporations, including foreign corporations, who use the agreements as tax shelters.

Grassley also has written to the American Public Transportation Association to ask how many other public transit systems may be constrained from making equipment upgrades by tax- advantaged leases.

“In addition to safeguarding additional dollars to improve the subway system in Washington in the wake of this week’s tragedy, it’s very important that any restraints created by SILO deals be dealt with at transit agencies nationwide,” said Grassley.

Hoyer said earlier this week that Congress might consider providing more money to modernize Washington’s subway system, if a funding shortage was a factor in the fatal crash on Monday.

Grassley said the leasing transactions in question are known as SILOs, where transit agencies have sold public transportation assets such as railcars, only to lease them back from purchasers, with the result of providing tax depreciation deductions to the purchasers. Such transactions were motivated solely by collection of fees on one side and tax benefits on the other, rather than any change to the services provided by transit agencies. While he was Chairman of the Senate Committee on Finance in 2004, Grassley won passage of bipartisan legislation to shut down these kinds of tax shelters. His original reform was retroactive but was watered down during conference negotiations to apply only prospectively.

In 2006, the Washington Metropolitan Transit Authority rejected recommendations made by the National Transportation Safety Board to retire or do a heavy overhaul on the 1000 Series, Rohr railcars because “WMATA is constrained by tax advantage leases, which require that WMATA keep the 1000 Series cars in service at least until the end of 2014.” The recommendations came after a 2004 crash involving the series at the Woodley Park metro station. The railcars are said to be among Metro’s oldest cars and are reported to have been involved in Monday’s fatal crash near the Fort Totten station.

There was an effort late last year to secure a tax shelter bailout for transit agencies as part of the auto bailout that failed to pass in the Senate. Grassley and others opposed a bailout for the transit agencies because it would have perpetuated the tax shelter. “I don’t want any new money
in the pipeline for Metro today to potentially go to a foreign bank using a SILO deal as a tax shelter.”

The legislation enacted in 2004 established section 470 of the Internal Revenue Code. Section 470 effectively shuts down the tax benefits of entering into SILO transactions. Separate, subsequent legislation established Internal Revenue Code Section 4965, which designates certain transactions as prohibited tax shelter transactions and includes new entity-level and manager- level excise taxes and disclosure rules applicable to prohibited tax shelter transactions to which a tax-exempt entity is a party.

In between these two acts of Congress, the Internal Revenue Service issued Notice 2005- 13, Tax-Exempt Leasing Involving Defeasance. The Notice describes “transactions in which a taxpayer enters into a purported sale-leaseback arrangement with a tax-indifferent person in which substantially all of the tax-indifferent person’s payment obligations are economically defeased and the taxpayer’s risk of loss from a decline, and opportunity for profit from an increase, in the value of the leased property are limited.”

The Notice identifies these transactions, and substantially similar transactions, as listed transactions for purposes of section 1.6011-4(b)(2) of the Income Tax Regulations and IRC sections 6111 and 6112. In August 2008, the IRS announced a settlement initiative for parties to these transactions to unwind the tax benefits from these transactions.

The Washington Metropolitan Area Transit Authority and the foreign bank with which WMATA entered into the tax shelter entered into a settlement agreement regarding the fees owed by WMATA to the foreign bank as a result of WMATA’s default on its tax-shelter contract. Published reports indicate that the terms of the settlement have not been disclosed.

The text of Grassley’s letters to the House Majority Leader and the American Public Transportation Association is below.