March 04,2004

Grassley, Baucus Urge Budget Leaders to Consider Impact of Leasing Deals

WASHINGTON – Sen. Chuck Grassley, chairman of the Committee on Finance, and Sen. Max Baucus, ranking member, today urged the leaders of the Senate budget and appropriations committees to consider that city infrastructure leasing tax shelters drain the U.S. Treasury. The senators said the budget leaders should remember this impact when approving federal funds for city infrastructure needs.

The latest findings from Grassley and Baucus show that such leasing deals cost the federalfisc $2 for every $1 the cities and their agencies receive in fees from the promoters of such deals.City infrastructure items, such as transit systems, are often built with federal funds. Therefore, theU.S. Treasury takes a double hit under leasing deals: one hit for contributing to the projectconstruction, and another hit for federal taxes lost via such tax shelters.

For months, Grassley and Baucus have been investigating how major U.S. companies receivehuge tax deductions by pretending to lease the infrastructure of cities and foreign countries and thenpretending to lease them back. These arrangements have resulted in U.S. taxpayers picking up thetab for a huge portion of Europe’s transit infrastructure and are now proliferating in cities across thecountry as tax shelter promoters shop their wares to cash-strapped local governments.

Following are:

(1) http://www.ci.rochester.mn.us/mayor/leaseutility.htm – a Web link describing the potentiallease/leaseback financing program for the City of Rochester, Minn., municipal water and wastewatersystems

(2) http://www.assetfinance.com/contents/publications/afi/qte/qte12.pdf – a Web link to a sourceof information on large leasing deals

(3) the text of Senator Grassley’s Nov. 17, 2003, letter to Transportation Secretary Norman Minetaasking for details of leasing deals approved or funded by the department

(4) the text of Sens. Grassley and Baucus’ letters today to Senate Budget and AppropriationsCommittee leaders

Attachments include:

(1) the response to Sen. Grassley’s letter from Secretary Mineta

(2) a list of leasing deals reviewed by the Federal Transit Administration since 1988

(3) description of current law and the Grassley-Baucus-Administration proposal from the Joint Committee on Taxation


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 ongoinginvestigation of abusive tax shelters. On October 21, 2003, the Committee on Finance held a hearingregarding the continuing proliferation of abusive tax shelters. During that hearing, we learned thatshelter promoters are engaging in transactions with U.S. municipalities and other state and localgovernmental units, which allow major U.S. corporations to depreciate state and local infrastructureassets, 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 leaseof 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 todepreciate 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 initiatedenforcement actions against these transactions, which are called LILOs - an abbreviation of theirindustry name “lease-in-lease-out” transactions. You can imagine our surprise when we discoveredthat 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 leaseholdtransactions. We have further learned that these transactions have continued, albeit in a differentform, and that the Department of Transportation may be approving these transactions. The LILOtransactions have now been replicated through service agreement contracts and transactions calledSILOs -- “sales-in-lease-out.” Other variations on these transactions have involved qualifiedtechnology equipment (QTEs). We have been advised that state and local infrastructure projectswhich receive federal funding must obtain the review and approval of the Department ofTransportation 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 subwaysystems 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 lookforward to receiving these materials as soon as possible.

With best personal regards,

Charles E. Grassley

March 4, 2004

The Honorable Ted Stevens 
Chairman
Senate Committee on Appropriations 
U.S. Capitol, Room 128 
Washington, DC 20510 

The Honorable Robert C. Byrd
Ranking Member
Senate Committee on Appropriations
U.S. Capitol, Room 128
Washington, DC 20510

Dear Senators Stevens and Byrd:

We are writing to alert you to an ongoing tax shelter that will adversely impact the Federal budgetfor the 2005 fiscal year and subsequent years. This tax shelter is particularly important as the BudgetCommittee and the Appropriations Committee struggle to close the current budget deficit. We arespecifically referring to the tax-exempt use leasing transaction that has been described by theAdministration and previously in the Committee Report to S. 1637. In many of these shelters, U.S.taxpayers subsidize the purchase of property for a foreign government or business for which the U.S.taxpayers obtains no benefit. In other cases, domestic municipal property is used in the shelter. TheU.S. municipalities and transit authorities that have approved these transactions have failed toconsider the impact of their decisions on their own State or the Federal budget, but rather have turneda blind eye and acted as an accommodator in these shelters. Even more troubling is that, in manycases, the assets used have been acquired or built with taxpayer dollars.

The Administration estimates that this abuse will cost the federal government over $33 billion duringthe next 10 years. The magnitude of this abuse has forced the CBO to reduce the corporate taxreceipts baseline for shelter transactions that have already occurred and for the anticipated futurereductions in corporate tax receipts if this abuse is not stopped.

As background, we have attached a general explanation of these transactions. In addition, we haveattached the Joint Committee on Taxation’s analysis of the President’s Fiscal Year 2005 BudgetProposal. The Joint Committee had several observations regarding the impact of these abusiveleasing transactions on the federal budget and appropriations process. Rather than reiterate theiranalysis, we enclose copies of the relevant analysis for your review. However, two points must bemade. First, these abusive leasing shelters represent an open-ended, unsupervised drain that doubledipsfrom the Federal trough: once in the form of federal aid and again in the form of federal taxfraud. We find this particularly troubling given that the Senate recently passed a highwayreauthorization bill which increases transit funding 40 percent above the current baseline. Second,city managers often cite their ability to use these leasing shelters to avoid legislative and voterapproval for capital acquisitions. We believe these abuses should not be condoned or continued.

Because of your important roles in the budget and appropriation process, we thought it also wasimportant to report to you additional information, beyond the total impact on the Federal fisc, withrespect to a segment of these transactions. Many of the domestic shelter transactions have involvedtransportation assets. To appreciate the magnitude of this activity, we have enclosed a list providedby the Federal Transit Administration of all federally funded transit projects that have been thesubject of these abusive leasing shelters since 1988, along with the names of the promoters, banks,and advisors that have been involved in these transactions. As can be seen from these documents,only a discrete group of cities is engaging in these leases. We have also enclosed a copy of a letterfrom Department of Transportation Secretary Norman Mineta describing the Department ofTransportation’s history with the shelter leases, along with a letter from the Department of Treasuryasking Secretary Mineta to cease his agency’s approval of such leases.

In addition, we requested the Joint Committee on Taxation to compare the benefit obtained by amunicipality to the loss in Federal income tax revenues. Under its most conservative measurements,the Joint Tax Committee estimates that at least $2 of federal tax revenues is lost for every $1 ofbenefit that is received by a municipality or transit agency in the form of a shelter promoteraccommodation payment. The Joint Committee estimates that, over the next 10 years, localgovernments will receive $5.4 billion of promoter accommodation payments. Using the JointCommittee’s most conservative estimates, this translates into a federal loss of nearly $11 billion.

Just as important as the federal loss is the impact on State and local governments. Many statespermit depreciation deductions based upon the depreciation claimed in the federal corporate incometax return. The Joint Committee estimates that state treasuries will lose approximately $6 billionover the next 10 years if the leasing transactions are not stopped. Thus, the shelter accommodationfees paid to municipalities and transit authorities are being more than offset by the reduction inincome tax revenue to such governments.

We believe it is an abuse of the public trust for city managers to allow corporations to claim taxdeductions on bridges, waterlines, public stadiums, or subways that are paid for with taxpayerdollars. When highly visible public assets, such as municipal courthouses, athletic stadiums, ortransit assets are used in transactions solely to generate corporate tax deductions, the public questionsthe integrity of the tax system.

We believe the better process to address the proper federal subsidies for state and local governmentis through the appropriations and budget process. We hope you will consider the enclosedinformation as you continue your efforts to reduce our nation’s budget deficit.

With best personal regards,

Charles E. Grassley
Chairman

Max Baucus
Ranking Member

Enclosures

March 4, 2004

The Honorable Don Nickles 
Chairman
Senate Committee on the Budget 
624 Dirksen Senate Office Building 
Washington, DC 20510

The Honorable Kent Conrad
Ranking Member
Senate Committee on the Budget
624 Dirksen Senate Office Building
Washington, DC 20510

Dear Senators Nickles and Conrad:

We are writing to alert you to an ongoing tax shelter that will adversely impact the Federal budgetfor the 2005 fiscal year and subsequent years. This tax shelter is particularly important as the BudgetCommittee and the Appropriations Committee struggle to close the current budget deficit. We arespecifically referring to the tax-exempt use leasing transaction that has been described by theAdministration and previously in the Committee Report to S. 1637. In many of these shelters, U.S.taxpayers subsidize the purchase of property for a foreign government or business for which the U.S.taxpayers obtains no benefit. In other cases, domestic municipal property is used in the shelter. TheU.S. municipalities and transit authorities that have approved these transactions have failed toconsider the impact of their decisions on their own State or the Federal budget, but rather have turneda blind eye and acted as an accommodator in these shelters. Even more troubling is that, in manycases, the assets used have been acquired or built with taxpayer dollars.

The Administration estimates that this abuse will cost the federal government over $33 billion duringthe next 10 years. The magnitude of this abuse has forced the CBO to reduce the corporate taxreceipts baseline for shelter transactions that have already occurred and for the anticipated futurereductions in corporate tax receipts if this abuse is not stopped.

As background, we have attached a general explanation of these transactions. In addition, we haveattached the Joint Committee on Taxation’s analysis of the President’s Fiscal Year 2005 BudgetProposal. The Joint Committee had several observations regarding the impact of these abusiveleasing transactions on the federal budget and appropriations process. Rather than reiterate theiranalysis, we enclose copies of the relevant analysis for your review. However, two points must bemade. First, these abusive leasing shelters represent an open-ended, unsupervised drain that doubledipsfrom the Federal trough: once in the form of federal aid and again in the form of federal taxfraud. We find this particularly troubling given that the Senate recently passed a highwayreauthorization bill which increases transit funding 40 percent above the current baseline. Second,city managers often cite their ability to use these leasing shelters to avoid legislative and voterapproval for capital acquisitions. We believe these abuses should not be condoned or continued.

Because of your important roles in the budget and appropriation process, we thought it also wasimportant to report to you additional information, beyond the total impact on the Federal fisc, withrespect to a segment of these transactions. Many of the domestic shelter transactions have involvedtransportation assets. To appreciate the magnitude of this activity, we have enclosed a list providedby the Federal Transit Administration of all federally funded transit projects that have been thesubject of these abusive leasing shelters since 1988, along with the names of the promoters, banks,and advisors that have been involved in these transactions. As can be seen from these documents,only a discrete group of cities is engaging in these leases. We have also enclosed a copy of a letterfrom Department of Transportation Secretary Norman Mineta describing the Department ofTransportation’s history with the shelter leases, along with a letter from the Department of Treasuryasking Secretary Mineta to cease his agency’s approval of such leases.

In addition, we requested the Joint Committee on Taxation to compare the benefit obtained by amunicipality to the loss in Federal income tax revenues. Under its most conservative measurements,the Joint Tax Committee estimates that at least $2 of federal tax revenues is lost for every $1 ofbenefit that is received by a municipality or transit agency in the form of a shelter promoteraccommodation payment. The Joint Committee estimates that, over the next 10 years, localgovernments will receive $5.4 billion of promoter accommodation payments. Using the JointCommittee’s most conservative estimates, this translates into a federal loss of nearly $11 billion.

Just as important as the federal loss is the impact on State and local governments. Many statespermit depreciation deductions based upon the depreciation claimed in the federal corporate incometax return. The Joint Committee estimates that state treasuries will lose approximately $6 billionover the next 10 years if the leasing transactions are not stopped. Thus, the shelter accommodationfees paid to municipalities and transit authorities are being more than offset by the reduction inincome tax revenue to such governments.

We believe it is an abuse of the public trust for city managers to allow corporations to claim taxdeductions on bridges, waterlines, public stadiums, or subways that are paid for with taxpayerdollars. When highly visible public assets, such as municipal courthouses, athletic stadiums, ortransit assets are used in transactions solely to generate corporate tax deductions, the public questionsthe integrity of the tax system.

We believe the better process to address the proper federal subsidies for state and local governmentis through the appropriations and budget process. We hope you will consider the enclosedinformation as you continue your efforts to reduce our nation’s budget deficit.

With best personal regards,

Charles E. Grassley
Chairman

Max Baucus
Ranking Member

Enclosures