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MAYBE YOU CAN BUY THE BROOKLYN BRIDGE...

October 23, 2003

The Senate Finance Committee this week held hearings on the U.S. tax shelter industry. The Committee found that the industry is one part of the economy that is doing quite well.

One booming sector of the shelter industry is the part that arranges with offshore or U.S. government entities to lease public infrastructure and lease it back to the entity (Lease-in Lease-out, or "LILO") transactions; another variant is the Sale-in, Lease-out ("SILO") transaction. These cases involve an up-front payment to the government agency; all future sale or lease payments between the buyer and seller offset, so only the first transaction is cash. The buyer then depreciates the "leased" property.

The Committee heard testimony that the LILO/SILO shelter is going strong even though the IRS says it doesn't work (Rev. Rul. 2002-69). An anonymous witness, speaking from behind a screen through a voice-altering microphone, testified:

A minimum of $20 to $30 billion dollars a year of foreign infrastructure is purportedly leased or sold in this manner. As I said, most of the existing infrastructure of Europe -- bridges, railroads, waterways, subways, air traffic control systems, and the like -- have been leased to Americans under these deals. Investment bankers scour the countryside looking for municipalities that are interested in the easy money of the up-front payment to enter the deal. Foreign officials are routinely enticed to enter into these transactions through promoter sponsored golf outings, expense paid trips, and similar arrangements.

So maybe you can buy the Brooklyn Bridge, if you get good lease financing.

OTHER TESTIMONY

The committee heard from a parade of whistleblowers and disillusioned professionals, as well as from a host of government officials.

One highlight was testimony from a Senior Manager of a national accounting firm that many tax shelters rely on hiding bad facts, rather than tricky but correct use of the tax law:

"These abusive tax shelters also require a distortion or concealment of facts. They require not only intellectual dishonesty, but also deception, secrecy, and even conspiracy. The reason for such fact distortion or concealment is simple—the promoters know that these transactions could never survive the light of day in court."

Several IRS and Treasury officials also testified that they are working hard to prevent taxpayers who actually pay taxes from being chumps. Senator Grassley did not seem cheered by the day's testimony:

"It seems nothing is safe from the illicit tax shelter promoter. Even our bridges, subways, and water systems are all ripe for the picking. It's hard to believe that city assets are helping tax shelter promoters. Roads and bridges built with tax dollars are leased out to shelter promoters so major corporations can get a phony tax deduction. Even the subway system of Washington, D.C., our nation's capital, has been leased as part of a shelter scheme. We need to shut down this type of tax shelter and all others in the process."

Grassley and the administration officials emphasized the need for disclosure of shelters; B. John Williams, former IRS Chief Counsel, noted that one important disclosure requirement lacks penalty provisions for failure to comply.

You can access all of the Committee testimony here (pdf files).

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