How you can resist funding the government →
about the IRS and U.S. tax law/policy →
corporate / municipal / wealthy tax dodgers →
Lease-In / Lease-Out, etc.
, I wrote about the various constitutional challenges and other fringe legal theories that some tax protesters use in their battle against the IRS, and how they don’t appear to be valid legal arguments.
But I acknowledged that these schemes “really work — if only in the sense that the IRS certainly loses more revenue from the adherents of these theories than it is able to recover from those it defeats in court.”
, the US Senate’s Finance Committee is holding hearings about fraudulent corporate tax shelters.
According to an article in the New York Times (link— requires registration and will probably go stale soon):
A consultant’s report, prepared for the I.R.S., but kept secret by the agency until now, is expected to show that corporate tax cheating in cost the government $14 billion to $18 billion.…
[M]any businesses and individuals are breaking the law because their risk of detection is small and even if they are caught they are unlikely to be punished or even made to pay the taxes.
Instead of voting for more funds to enforce the law, Congress has tightly restricted I.R.S. spending on auditors, criminal investigators, training and new technology while many of the agency’s most qualified auditors have left in .…
About eight of 10 known [emphasis mine] tax cheats are let go without having to even pay the taxes, interest or penalties.
…complex transactions that involve companies paying lump sums to foreign towns and cities to lease bridges, dams, subways and other infrastructure.
They then lease the property back to the town or city for the sole purpose of cutting their U.S. tax bill by depreciating the asset.
No lease payments are ever made and the town or city is in no danger of losing control of the subway or other asset…
Participants include major U.S. banks and Fortune 500 companies…
“This scheme is so pervasive that much of the old and new infrastructure throughout Europe has been leased to, and leased back from, American corporations”…
[T]he tax shelter scheme has been so successful that U.S. cities are now doing the same, with the subway systems of Boston, Chicago and Washington having been leased back to U.S. corporations.
He said he had reason to believe that New York and Chicago water authorities were about to lease the waterlines under their streets.
You’ve seen the stories before:
Huge US corporations making billions and yet somehow getting out of their taxes, or even getting refunds.
They’re occasions for brief flashes of righteous anger on the op-ed pages.
But I’m happy to see these companies being so clever — putting their accountants and lawyers to work outwitting the tax man — maybe even coming up with a dodge that the little guys can use from time to time.
I wrote about a neat little tax dodge that some companies were using: They hunt up a government or other organization that’s got some big hunk of stuff that’s depreciating without giving them any tax benefit.
They take that big hunk of stuff off of their hands, for a fee, and then lease the big hunk of stuff back, for a somewhat lesser fee, while writing off the expense of their new asset on their tax forms so as to lower their taxes (presumably by somewhat more than that somewhat lesser fee).
Our local newsweekly covers what happened when San Francisco’s Municipal Railway tried this trick in .
It seemed like a great idea:
[T]he agency received $43 million in a complex “lease/lease-back” deal that allowed private investors to depreciate (that is, to write off the wear and tear suffered by) 118 rail cars for federal income tax purposes.
Muni paid out $10 million to lawyers and financial consultants to prepare the deal, and kept $33 million.
The investors gained a tax advantage that presumably was valued far in excess of the $43 million that Muni received…
But then things got sticky.
The US Treasury Department started complaining to Congress about scams like this.
Now it looks like they’re going to make them illegal, and send auditors out to shut down the ones that have already been concocted.
And it looks like the tax-evading investors had better lawyers than did SF Muni:
In entering the tax-shelter deal, Muni signed a contract that, as interpreted by a tax expert I spoke with, would make San Francisco responsible for the benefits of the tax break to the private investors for the 25-year life of the deal, should the IRS ever disallow the shelter.
Doh!
I just finished watching Frontline’s recent exposé on corporate tax shelters — “Tax Me If You Can.”
Pretty good, over all, although I think they could have spent a little more time discussing the actual mechanics of the Lease-In/Lease-Out transactions — which are complicated, but not so complicated that they wouldn’t yield to a good minute of the show and some clever computer graphics.
These LILO schemes are the ones I’ve mentioned on past Picket Line entries ( and ), in which a profitable company leases something owned by a government (like a bunch of rail cars, or a set of sewage tunnels) and then leases it back to the government — effectively buying a paper financial loss for tax reasons.
, I made note of a tax dodge that large companies and cities were colluding in.
The cities would sell or lease out big hunks of municipal infrastructure, then lease the infrastructure back from the companies.
The cities would make some money up-front on the deal, while the companies would gain a bunch of tax write-offs.
The IRS has been known to frown on big transactions that don’t seem to have any practical value to anyone outside of the tax dodge angle, and they frowned on these.
But the lawyers for the companies were better than the lawyers for the cities, and they structured these things so that if the IRS cracked down, it would be the cities holding the bag.
The IRS did end up banning the practice, but existing contracts were left intact.
In addition, many of these schemes were insured by the now-assploded insurance company AIG — and in the wake of its collapse, the companies who partnered with cities in these plans were entitled to demand huge fees from the cities.
So, remember those lease-in/lease-out (LILO) transaction thingies?
Probably not.
I’ve mentioned them here a few times.
They’re a corporate tax dodge that works like this:
Say you’re a city government and you’ve got a big something-or-other like a bridge or a metro system.
Over the years it’s depreciating in value, but as a city government, you’re not able to get much tax advantage out of this depreciation.
So here’s what you do: you sell (or lease) your metro system to a big profitable company for a hunk of cash, then you lease your metro system back from the big profitable company for a somewhat smaller hunk of cash.
The big profitable company can then take advantage of the depreciation expenses to lower its taxes, in exchange for offering you a good deal on the lease so you both come out ahead.
Okay… that brings us up to today.
Plenty of insane behavior all around, all made quasi-rational courtesy of the tax code.
Now you’ll learn how these LILO schemes may have killed nine people this week:
Taxes raise revenue, of course, but they also induce behavior.
Sometimes these behavioral responses are intended by lawmakers (for example, when lawmakers raise taxes on an activity they deem undesirable, such as smoking), but often they are not.
The deadliness of [Monday]’s Metro crash in Washington, DC… may be, at least in part, one of these unintended consequences.
As you have doubtless seen elsewhere, two Metro trains collided when one train ran into the back of a stopped train, killing at least nine and injuring over 75 others.
The first car of the moving train was, the Washington City Paper reports, the oldest type of Metro car in the system, a 1000-series Rohr car.
The City Paper reports that the National Transportation Safety Board repeatedly recommended that Metro (more formally known as the Washington Metropolitan Area Transit Authority, or WMATA) retrofit or replace these older cars, but Metro refused.
Why?
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.”
What are these “tax advantage leases”?
They appear to be standard sale-leaseback transactions, in which WMATA sold equipment, including train cars, to another party and now leases it back.
The other party gets various tax advantages (depreciation, credits, and so forth) associated with owning the equipment, and WMATA, which as a tax-exempt organization cannot use these advantages, gets cash.
But apparently the leases did not include language that permits WMATA to break the leases if newer, safer equipment comes along.