I read this on New York Times site and I was actually stunned this hasn't been talked about more. I don't know a darn thing about tax policy or tax shelters, but this really pissed me off when I saw it.
Lynnley Browning of the New York Times:
A little-noticed provision in the proposed bailout plan for Detroit’s automakers blesses an aggressive tax shelter sold by large banks and insurers to municipal transit agencies across the country.
The provision asks the government to help the agencies by guaranteeing the economics of the complex shelter, despite years of efforts by the Treasury Department and the Internal Revenue Service to shut it down and collect billions of dollars of unpaid taxes, interest and penalties owed by the banks and insurers.
I really don't want to support this bill with this kind of crap in it, but there are jobs involved here. We all knew the CEO's pleading with Congress was sort of an act anyway. While they were on Capitol Hill begging for cash, they were suing the very states that the people in Congress represent to get them to stop trying to curb auto emissions. If Republicans have anything to do with it, the bill won't pass the house, but who knows.
In May of 2008, the IRS won a case against AWG Leasing Trust:
...the IRS found that the banks’ partnership, the AWG Leasing Trust, mis-characterized a 1999 transaction as a $423 million purchase of a German waste-to-energy facility. The IRS says the transaction was a thinly-veiled tax dodge that attempted to skirt IRS and Congressional action directed to limiting transactions that had the purpose of transferring tax deductions for rental payments, depreciation, amortization, and interest payments from tax neutral entities. As a result, the IRS claims that the Plaintiffs owe approximately $88 million in taxes for the 1999 - 2003 tax years and will owe much more for subsequent years.
From what I read, the SILO (Sale in-Lease out) tax shelter has a lot of defenders, especially city governments because they use the scheme to funnel more income into the treasury. While they can be commended for finding more ways to make money, cities don't pay any income taxes to the federal government. The taxes they collect from their citizens goes directly into the city treasury.
JOHN D. MCKINNON wrote a story about how the city of Chicago sold its 911 system in an attempt to benefit from the SILO tax shelter.
In Chicago, FleetBoston and Sumitomo paid about $140 million, much of it borrowed, for the city's 911 system. It's difficult to say exactly how much the investors will save in taxes. The deal's terms suggest the investors' depreciation and interest deductions may total as high as $219 million over future years, and might produce a total tax saving of as much as $77 million. That's on top of the money they get from lease payments.
The calculation assumes the highest corporate tax rate of 35%, which is higher than many companies actually face. The net tax saving would be further reduced as lease payments from the city become taxable income to the investors.
Chicago -- leasing back the 911 system -- has put the bulk of its sale proceeds into a trust invested to produce enough income to guarantee the lease payments. Chicago gets to keep $18 million of the proceeds, except for $1.6 million in fees to middlemen.
So Chicago ends up with $16.4 million that it didn't have before. That helps its budget. But the cost to the U.S. Treasury might be several times this. It's an expensive way to send federal aid to a city, says Sen. Grassley, an Iowa Republican. He says the deals "don't meet the test of common sense."
Sale-and-leaseback arrangements are common in the business world. In effect, they put depreciation rights in the hands of whoever can make the most use of them. For instance, a business that regularly has losses can't use a big slug of depreciation, because without profits, it can't make use of deductions. So it may sell a building to a bank or insurer that has steady profits.
McKinnon also talks about Republican Senator of Iowa Charles Grassley, whose bill restricting this particular tax shelter passed the Senate in 2005. It appears to me that Grassley is pretty aggressive on banning these kind of practices but he is/was being lobbied by those in the financial industry and his Republican colleagues. The House was only willing to restrict new deals but allowed old deals to exist. Grassley is against bailing out Chrysler if the Cerberus (private equity company that owns 80 percent of the car company) isn't willing to use the liquidity it has to bail out the company that it owns.
I just heard on the radio that Harry Reid lambasted the Republicans on the floor of the Senate about filibustering the Auto bill. It is kind of funny that the Republicans think this will help them win more seats in 2010. If this country loses 3 million more jobs then the Republicans can kiss 2010 and 2016 goodbye. They will have no hope. But Democrats aren't any better in terms of their caving to everything Bush and the Republicans want in these bills.