March 05,2004
March 4, 2004
The Honorable Marion C. Blakey
Administrator
Federal Aviation Administration
800 Independence Avenue, S.W. Room 1022
Washington, DC 20591
Dear Ms. Blakey:
We are writing to enlist the assistance of the Federal Aviation Administration 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 federal agencies have endorsed these transactions, even though theDepartment of the 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 through a pre-funded repurchasearrangement. In reality, nothing changes regarding the ownership or use of the infrastructure. Onemunicipal manager described these transactions as “people giving him money which he never had topay back, for doing something that he was already doing.”
In March 1999, the Department of the Treasury under the Clinton Administration initiatedenforcement actions against these transactions, which are called LILOs – an abbreviation of theirindustry name “lease-in-lease-out” transactions. We have further learned that these transactions havecontinued, albeit in a different form, and that other federal agencies may be approving thesetransactions. The LILO transactions have now been replicated through service agreement contractsand transactions called SILOs - “sales-in-lease-out.” Other variations on these transactions haveinvolved qualified technology equipment (QTEs). We have been advised that state and localinfrastructure projects which receive federal funding must obtain the review and approval of theFederal Aviation Administration in order to enter into these transactions.
We are certain that you share our concern that water lines, waste treatment plants, and airtraffic control systems constructed with taxpayer dollars are being used by big corporations to shelterbillions of dollars in taxes through bogus depreciation deductions. In order to assist us in assessingthe scope and scale of this problem, we request that the Federal Aviation Administration submit tothe Committee on Finance copies of all documents relating to LILOs, SILOs, QTEs, and similartransactions that have been approved, funded, or otherwise reviewed by the Federal AviationAdministration from the year 1995 to present.
We appreciate your cooperation in our ongoing efforts to combat abusive tax shelters, andlook forward to receiving these materials as soon as possible.
With best personal regards,
Charles E. Grassley
Chairman
Max Baucus
Ranking Member
Enclosures
March 4, 2004
The Honorable Mike Leavitt
Administrator
U.S. Environmental Protection Agency
1200 Pennsylvania Avenue, N.W. Room 3428 ARN
Washington, DC 20460
Dear Mr. Leavitt:
We are writing to enlist the assistance of the Environmental Protection Agency 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 federal agencies have endorsed these transactions, even though theDepartment of the 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 through a pre-funded repurchasearrangement. In reality, nothing changes regarding the ownership or use of the infrastructure. Onemunicipal manager described these transactions as “people giving him money which he never had topay back, for doing something that he was already doing.”
In March 1999, the Department of the Treasury under the Clinton Administration initiatedenforcement actions against these transactions, which are called LILOs – an abbreviation of theirindustry name “lease-in-lease-out” transactions. We have further learned that these transactions havecontinued, albeit in a different form, and that other federal agencies may be approving thesetransactions. The LILO transactions have now been replicated through service agreement contractsand transactions called SILOs - “sales-in-lease-out.” Other variations on these transactions haveinvolved qualified technology equipment (QTEs). We have been advised that state and localinfrastructure projects which receive federal funding must obtain the review and approval of theEnvironmental Protection Agency in order to enter into these transactions.
We are certain that you share our concern that water lines, waste treatment plants, and airtraffic control systems constructed with taxpayer dollars are being used by big corporations to shelterbillions of dollars in taxes through bogus depreciation deductions. In order to assist us in assessingthe scope and scale of this problem, we request that the Environmental Protection Agency submit tothe Committee on Finance copies of all documents relating to LILOs, SILOs, QTEs, and similartransactions that have been approved, funded, or otherwise reviewed by the Environmental ProtectionAgency from the year 1995 to present.
We appreciate your cooperation in our ongoing efforts to combat abusive tax shelters, andlook forward to receiving these materials as soon as possible.
With best personal regards,
Charles E. Grassley
Chairman
Max Baucus
Ranking Member
Enclosures
March 5, 2004
The Honorable Ernest J. Istook
Chairman
House Appropriations Subcommittee
On Transportation, Treasury, and Independent Agencies
2404 Rayburn House Office Bldg.
Washington, DC 20515
The Honorable John W. Olver
Ranking Member
House Appropriations Subcommittee
On Transportation, Treasury, and Independent Agencies
1027 Longworth House Office Bldg.
Washington, DC 20515
Dear Congressmen Istook and Olver:
We read in the press about your interest in addressing the ongoing abuses involvingleasing tax shelters. We wanted to provide you the new information we have on this abuse. Thistax shelter is particularly important as the Budget Committee and the Appropriations Committeestruggle to close the current budget deficit. We are specifically referring to the tax-exempt useleasing transaction that has been described by the Administration and previously in the CommitteeReport to S. 1637. In many of these shelters, U.S. taxpayers subsidize the purchase of propertyfor a foreign government or business for which the U.S. taxpayers obtains no benefit. In othercases, domestic municipal property is used in the shelter. The U.S. municipalities and transitauthorities that have approved these transactions have failed to consider the impact of theirdecisions on their own State or the Federal budget, but rather have turned a blind eye and acted asan accommodator in these shelters. Even more troubling is that, in many cases, the assets usedhave been acquired or built with taxpayer dollars.
The Administration estimates that this abuse will cost the federal government over $33billion during the next 10 years. The magnitude of this abuse has forced the CBO to reduce thecorporate tax receipts baseline for shelter transactions that have already occurred and for theanticipated future reductions in corporate tax receipts if this abuse is not stopped.As background, we have attached a general explanation of these transactions. In addition,we have attached the Joint Committee on Taxation’s analysis of the President’s Fiscal Year 2005Budget Proposal. The Joint Committee had several observations regarding the impact of theseabusive leasing transactions on the federal budget and appropriations process. Rather thanreiterate their analysis, we enclose copies of the relevant analysis for your review. However, twopoints must be made. First, these abusive leasing shelters represent an open-ended, unsuperviseddrain that double-dips from the Federal trough: once in the form of federal aid and again in theform of federal tax fraud. We find this particularly troubling given that the Senate recently passeda highway reauthorization bill which increases transit funding 40 percent above the currentbaseline. Second, city managers often cite their ability to use these leasing shelters to avoidlegislative and voter approval for capital acquisitions. We believe these abuses should not becondoned or continued.
Because of your important roles in the budget and appropriation process, we thought it alsowas important to report to you additional information, beyond the total impact on the Federal fisc,with respect to a segment of these transactions. Many of the domestic shelter transactions haveinvolved transportation assets. To appreciate the magnitude of this activity, we have enclosed alist provided by the Federal Transit Administration of all federally funded transit projects thathave been the subject of these abusive leasing shelters since 1988, along with the names of thepromoters, banks, and advisors that have been involved in these transactions. As can be seen fromthese documents, only a discrete group of cities is engaging in these leases. We have alsoenclosed a copy of a letter from Department of Transportation Secretary Norman Minetadescribing the Department of Transportation’s history with the shelter leases, along with a letterfrom the Department of Treasury asking Secretary Mineta to cease his agency’s approval of suchleases.
In addition, we requested the Joint Committee on Taxation to compare the benefit obtainedby a municipality to the loss in Federal income tax revenues. Under its most conservativemeasurements, the Joint Tax Committee estimates that at least $2 of federal tax revenues is lostfor every $1 of benefit that is received by a municipality or transit agency in the form of a shelterpromoter accommodation payment. The Joint Committee estimates that, over the next 10 years,local governments will receive $5.4 billion of promoter accommodation payments. Using theJoint Committee’s most conservative estimates, this translates into a federal loss of nearly $11billion.
Just as important as the federal loss is the impact on State and local governments. Manystates permit depreciation deductions based upon the depreciation claimed in the federal corporateincome tax return. The Joint Committee estimates that state treasuries will lose approximately $6billion over the next 10 years if the leasing transactions are not stopped. Thus, the shelteraccommodation fees paid to municipalities and transit authorities are being more than offset bythe reduction in income tax revenue to such governments.
We believe it is an abuse of the public trust for city managers to allow corporations toclaim tax deductions on bridges, waterlines, public stadiums, or subways that are paid for withtaxpayer dollars. When highly visible public assets, such as municipal courthouses, athleticstadiums, or transit assets are used in transactions solely to generate corporate tax deductions, thepublic questions the integrity of the tax system.
We believe the better process to address the proper federal subsidies for state and localgovernment is through the appropriations and budget process. We hope you will consider theenclosed information 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
Senators Expand Leasing Tax Shelters Probe to FAA, EPA
WASHINGTON – Sen. Chuck Grassley, chairman of the Committee on Finance, and Sen. Max Baucus, ranking member, have expanded their inquiry into federal agencies that may have played a role in approving abusive tax shelter leases using infrastructure assets. This week, the senators wrote to the Federal Aviation Administration and the Environmental Protection Agency asking for details of any such deals those agencies have approved. The letters follow an earlier letter to the federal Transportation Department; the senators released the results of that inquiry earlier thisweek.
Grassley and Baucus also wrote to the leaders of the House Appropriations Subcommittee OnTransportation, Treasury, and Independent Agencies to share their findings so far. The letter cameafter press reports reflected the appropriators’ interest in the issue.
Following is the text of the senators’ latest letters.
March 4, 2004
The Honorable Marion C. Blakey
Administrator
Federal Aviation Administration
800 Independence Avenue, S.W. Room 1022
Washington, DC 20591
Dear Ms. Blakey:
We are writing to enlist the assistance of the Federal Aviation Administration 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 federal agencies have endorsed these transactions, even though theDepartment of the 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 through a pre-funded repurchasearrangement. In reality, nothing changes regarding the ownership or use of the infrastructure. Onemunicipal manager described these transactions as “people giving him money which he never had topay back, for doing something that he was already doing.”
In March 1999, the Department of the Treasury under the Clinton Administration initiatedenforcement actions against these transactions, which are called LILOs – an abbreviation of theirindustry name “lease-in-lease-out” transactions. We have further learned that these transactions havecontinued, albeit in a different form, and that other federal agencies may be approving thesetransactions. The LILO transactions have now been replicated through service agreement contractsand transactions called SILOs - “sales-in-lease-out.” Other variations on these transactions haveinvolved qualified technology equipment (QTEs). We have been advised that state and localinfrastructure projects which receive federal funding must obtain the review and approval of theFederal Aviation Administration in order to enter into these transactions.
We are certain that you share our concern that water lines, waste treatment plants, and airtraffic control systems constructed with taxpayer dollars are being used by big corporations to shelterbillions of dollars in taxes through bogus depreciation deductions. In order to assist us in assessingthe scope and scale of this problem, we request that the Federal Aviation Administration submit tothe Committee on Finance copies of all documents relating to LILOs, SILOs, QTEs, and similartransactions that have been approved, funded, or otherwise reviewed by the Federal AviationAdministration from the year 1995 to present.
We appreciate your cooperation in our ongoing efforts to combat abusive tax shelters, andlook forward to receiving these materials as soon as possible.
With best personal regards,
Charles E. Grassley
Chairman
Max Baucus
Ranking Member
Enclosures
March 4, 2004
The Honorable Mike Leavitt
Administrator
U.S. Environmental Protection Agency
1200 Pennsylvania Avenue, N.W. Room 3428 ARN
Washington, DC 20460
Dear Mr. Leavitt:
We are writing to enlist the assistance of the Environmental Protection Agency 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 federal agencies have endorsed these transactions, even though theDepartment of the 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 through a pre-funded repurchasearrangement. In reality, nothing changes regarding the ownership or use of the infrastructure. Onemunicipal manager described these transactions as “people giving him money which he never had topay back, for doing something that he was already doing.”
In March 1999, the Department of the Treasury under the Clinton Administration initiatedenforcement actions against these transactions, which are called LILOs – an abbreviation of theirindustry name “lease-in-lease-out” transactions. We have further learned that these transactions havecontinued, albeit in a different form, and that other federal agencies may be approving thesetransactions. The LILO transactions have now been replicated through service agreement contractsand transactions called SILOs - “sales-in-lease-out.” Other variations on these transactions haveinvolved qualified technology equipment (QTEs). We have been advised that state and localinfrastructure projects which receive federal funding must obtain the review and approval of theEnvironmental Protection Agency in order to enter into these transactions.
We are certain that you share our concern that water lines, waste treatment plants, and airtraffic control systems constructed with taxpayer dollars are being used by big corporations to shelterbillions of dollars in taxes through bogus depreciation deductions. In order to assist us in assessingthe scope and scale of this problem, we request that the Environmental Protection Agency submit tothe Committee on Finance copies of all documents relating to LILOs, SILOs, QTEs, and similartransactions that have been approved, funded, or otherwise reviewed by the Environmental ProtectionAgency from the year 1995 to present.
We appreciate your cooperation in our ongoing efforts to combat abusive tax shelters, andlook forward to receiving these materials as soon as possible.
With best personal regards,
Charles E. Grassley
Chairman
Max Baucus
Ranking Member
Enclosures
March 5, 2004
The Honorable Ernest J. Istook
Chairman
House Appropriations Subcommittee
On Transportation, Treasury, and Independent Agencies
2404 Rayburn House Office Bldg.
Washington, DC 20515
The Honorable John W. Olver
Ranking Member
House Appropriations Subcommittee
On Transportation, Treasury, and Independent Agencies
1027 Longworth House Office Bldg.
Washington, DC 20515
Dear Congressmen Istook and Olver:
We read in the press about your interest in addressing the ongoing abuses involvingleasing tax shelters. We wanted to provide you the new information we have on this abuse. Thistax shelter is particularly important as the Budget Committee and the Appropriations Committeestruggle to close the current budget deficit. We are specifically referring to the tax-exempt useleasing transaction that has been described by the Administration and previously in the CommitteeReport to S. 1637. In many of these shelters, U.S. taxpayers subsidize the purchase of propertyfor a foreign government or business for which the U.S. taxpayers obtains no benefit. In othercases, domestic municipal property is used in the shelter. The U.S. municipalities and transitauthorities that have approved these transactions have failed to consider the impact of theirdecisions on their own State or the Federal budget, but rather have turned a blind eye and acted asan accommodator in these shelters. Even more troubling is that, in many cases, the assets usedhave been acquired or built with taxpayer dollars.
The Administration estimates that this abuse will cost the federal government over $33billion during the next 10 years. The magnitude of this abuse has forced the CBO to reduce thecorporate tax receipts baseline for shelter transactions that have already occurred and for theanticipated future reductions in corporate tax receipts if this abuse is not stopped.As background, we have attached a general explanation of these transactions. In addition,we have attached the Joint Committee on Taxation’s analysis of the President’s Fiscal Year 2005Budget Proposal. The Joint Committee had several observations regarding the impact of theseabusive leasing transactions on the federal budget and appropriations process. Rather thanreiterate their analysis, we enclose copies of the relevant analysis for your review. However, twopoints must be made. First, these abusive leasing shelters represent an open-ended, unsuperviseddrain that double-dips from the Federal trough: once in the form of federal aid and again in theform of federal tax fraud. We find this particularly troubling given that the Senate recently passeda highway reauthorization bill which increases transit funding 40 percent above the currentbaseline. Second, city managers often cite their ability to use these leasing shelters to avoidlegislative and voter approval for capital acquisitions. We believe these abuses should not becondoned or continued.
Because of your important roles in the budget and appropriation process, we thought it alsowas important to report to you additional information, beyond the total impact on the Federal fisc,with respect to a segment of these transactions. Many of the domestic shelter transactions haveinvolved transportation assets. To appreciate the magnitude of this activity, we have enclosed alist provided by the Federal Transit Administration of all federally funded transit projects thathave been the subject of these abusive leasing shelters since 1988, along with the names of thepromoters, banks, and advisors that have been involved in these transactions. As can be seen fromthese documents, only a discrete group of cities is engaging in these leases. We have alsoenclosed a copy of a letter from Department of Transportation Secretary Norman Minetadescribing the Department of Transportation’s history with the shelter leases, along with a letterfrom the Department of Treasury asking Secretary Mineta to cease his agency’s approval of suchleases.
In addition, we requested the Joint Committee on Taxation to compare the benefit obtainedby a municipality to the loss in Federal income tax revenues. Under its most conservativemeasurements, the Joint Tax Committee estimates that at least $2 of federal tax revenues is lostfor every $1 of benefit that is received by a municipality or transit agency in the form of a shelterpromoter accommodation payment. The Joint Committee estimates that, over the next 10 years,local governments will receive $5.4 billion of promoter accommodation payments. Using theJoint Committee’s most conservative estimates, this translates into a federal loss of nearly $11billion.
Just as important as the federal loss is the impact on State and local governments. Manystates permit depreciation deductions based upon the depreciation claimed in the federal corporateincome tax return. The Joint Committee estimates that state treasuries will lose approximately $6billion over the next 10 years if the leasing transactions are not stopped. Thus, the shelteraccommodation fees paid to municipalities and transit authorities are being more than offset bythe reduction in income tax revenue to such governments.
We believe it is an abuse of the public trust for city managers to allow corporations toclaim tax deductions on bridges, waterlines, public stadiums, or subways that are paid for withtaxpayer dollars. When highly visible public assets, such as municipal courthouses, athleticstadiums, or transit assets are used in transactions solely to generate corporate tax deductions, thepublic questions the integrity of the tax system.
We believe the better process to address the proper federal subsidies for state and localgovernment is through the appropriations and budget process. We hope you will consider theenclosed information 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
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