Lawmakers Take Aim at SILOs as Metro Crash Raises Questions
By Alison Bennett
Publication date: 06/26/2009
Lawmakers June 25 took aim once more at tax-advantaged sale-in, lease-out transactions (SILOs) in the wake of a fatal subway collision in Washington, D.C., that potentially involved train cars that could not be replaced until 2014 under the terms of such a leasing deal.
Senate Finance Committee ranking Republican Charles Grassley (R-Iowa) June 25 asked House Majority Leader Steny Hoyer (D-Md.) to ensure that if money is given to the Washington Metropolitan Area Transit Authority, it not be used to pay off transit agencies' obligations to corporations, including foreign corporations, that use the controversial infrastructure leasing agreements as tax shelters.
Grassley's action came the same day Sen. Robert Menendez (D-N.J. ) introduced S. 1341, a bill that essentially would impose a 100 percent excise tax on certain payoff amounts in SILO agreements. One practitioner said the measure could legally be challenged as “a taking” rather than a tax.
Tax-Advantaged Leases Focus of Debate
The June 22 crash on Metrorail's Red Line killed nine people and injured dozens more. Hoyer said earlier the week of June 22 that Congress might consider providing more money to Metro if a funding shortage contributed to the accident.
In a June 25 letter to Hoyer, Grassley said he was troubled by WMATA's response to a 2006 National Transportation Safety Board report on a 2004 Metrorail crash in which the board recommended that older Metro subway cars be replaced or retrofitted. At that time, WMATA said it was constrained by tax-advantaged leases that required it to keep the older cars in service until 2014.
“It would seem from this response that WMATA disregarded risks to passenger safety in order to fulfill a contract entered into as an accommodation party to a tax shelter,” Grassley said.
Metro Stresses Commitment to Safety Investments
Metro spokeswoman Candace Smith told BNA June 25 that “we are committed to making safety investments first” and stressed that “any additional federal funding we get will absolutely go toward that,” particularly any money received to address safety concerns related to the accident.
“We're not going to use any precious new funding to resolve any tax liens,” Smith said.
She noted that replacing the aging Metrorail cars was a top priority well before the accident happened, and said the tax leases were only part of the equation in 2006. Smith said those cars generally were designed to last until 2015.
“We didn't have the money then to buy 300 new rail cars and we still don't have it now,” Smith told BNA, adding that there is now hope that additional funding will be included in the president's budget.
“Any additional help that we could get, we would greatly appreciate it,” she said.
SILO Settlements Target of Criticism
In the tax area, lawmakers appeared intent June 25 on ensuring that such funds not go toward settling SILO deals.
In the case of SILO transactions involving transit agencies, municipal governments have sold public transportation assets such as railcars only to lease them back from purchasers, with the result of providing tax depreciation deductions to the purchasers.
Grassley said in a news release that “such transactions were motivated solely by the collection of fees on one side and tax benefits on the other.”
He noted that Congress shut down the transactions, known as sale-in, lease-out deals, in 2004. Over his objections, however, the bill was only prospective, Grassley said. Although the Internal Revenue Service also is attacking the transactions and has a settlement offer on the table, some remain in place and unwinding the deals has proved to be messy.
Grassley Opposes Bailouts
In 2008, WMATA joined several other public transit agencies in seeking bailout money to make payments to participants in these same transactions, Grassley said. “I was opposed then, as I am now, to taxpayer dollars being used to pay off the counterparties to these transactions,” he said in the release. “I don't want any new money in the pipeline for Metro today to potentially go to a foreign bank using a SILO deal as a tax shelter.”
In his formal letter to Hoyer, Grassley urged that any money given to Metro be used for safety improvements and that WMATA be specifically prohibited from using the money to pay fees to the foreign bank.
Transit Agencies Under Scrutiny
Grassley also wrote to the American Public Transportation Association to ask how many other public transit systems may be constrained from making equipment upgrades by tax-advantaged leases.
“It appears that many of these transactions are still in place and may be the reason that public transit agencies are not making safety upgrades,” Grassley said.
He noted that when transit agencies requested federal bailout money in the fall of 2008, “it was not apparent that such funds would be used for actual system improvements or maintenance. It appeared the agencies sought funds to pay off the tax shelter accommodating parties in light of AIG's collapse.”
Menendez Bill Would Impose Heavy Excise Tax
The Menendez bill, unveiled the same day as Grassley's comments, appears to target the same payoffs that Grassley criticized.
The measure would impose an excise tax on “certain proceeds” received on SILO and lease-in, lease-out, or LILO, transactions.
In general, any person other than a SILO/LILO lessee that receives an “ineligible amount” as a party to such a transaction would have to pay a tax equal to the aggregate ineligible amounts received for the taxable year.
An “ineligible amount” is defined as the aggregate proceeds received by the taxpayer attributable to, or arising from, any remedial action relating to a SILO/LILO deal, or any consensual termination or rescission of any such transaction.
Paravano Calls Bill ‘Taking’
However, Jeffrey Paravano, chair of the tax group at Baker & Hostetler LLP, Washington, D.C., said the proposed excise tax would be subject to constitutional challenge under the 14th Amendment's Equal Protection Clause and under the Fifth Amendment's Takings Clause.
He told BNA that although tax legislation historically has not been vulnerable to claims that there has been a taking of private property for public use without just compensation, “the result may be different here because the proposed legislation seems more like a taking than a tax.”
Paravano noted that “the proposed tax is narrowly targeted and proposes to confiscate 100 percent of the targeted amounts. Congress may call that a tax, but in substance it is a taking.”
The complete text of this article can be found in the BNA Daily Tax Report, June 26, 2009. For comprehensive coverage of taxation, pension, budget, and accounting issues, sign up for a free trial or subscribe to the BNA Daily Tax Report today. Learn more »
© 2009, The Bureau of National Affairs, Inc.
Lawmakers Take Aim at SILOs as Metro Crash Raises Questions
By Alison Bennett
Publication date: 06/26/2009
Lawmakers June 25 took aim once more at tax-advantaged sale-in, lease-out transactions (SILOs) in the wake of a fatal subway collision in Washington, D.C., that potentially involved train cars that could not be replaced until 2014 under the terms of such a leasing deal.
Senate Finance Committee ranking Republican Charles Grassley (R-Iowa) June 25 asked House Majority Leader Steny Hoyer (D-Md.) to ensure that if money is given to the Washington Metropolitan Area Transit Authority, it not be used to pay off transit agencies' obligations to corporations, including foreign corporations, that use the controversial infrastructure leasing agreements as tax shelters.
Grassley's action came the same day Sen. Robert Menendez (D-N.J. ) introduced S. 1341, a bill that essentially would impose a 100 percent excise tax on certain payoff amounts in SILO agreements. One practitioner said the measure could legally be challenged as “a taking” rather than a tax.
Tax-Advantaged Leases Focus of Debate
The June 22 crash on Metrorail's Red Line killed nine people and injured dozens more. Hoyer said earlier the week of June 22 that Congress might consider providing more money to Metro if a funding shortage contributed to the accident.
In a June 25 letter to Hoyer, Grassley said he was troubled by WMATA's response to a 2006 National Transportation Safety Board report on a 2004 Metrorail crash in which the board recommended that older Metro subway cars be replaced or retrofitted. At that time, WMATA said it was constrained by tax-advantaged leases that required it to keep the older cars in service until 2014.
“It would seem from this response that WMATA disregarded risks to passenger safety in order to fulfill a contract entered into as an accommodation party to a tax shelter,” Grassley said.
Metro Stresses Commitment to Safety Investments
Metro spokeswoman Candace Smith told BNA June 25 that “we are committed to making safety investments first” and stressed that “any additional federal funding we get will absolutely go toward that,” particularly any money received to address safety concerns related to the accident.
“We're not going to use any precious new funding to resolve any tax liens,” Smith said.
She noted that replacing the aging Metrorail cars was a top priority well before the accident happened, and said the tax leases were only part of the equation in 2006. Smith said those cars generally were designed to last until 2015.
“We didn't have the money then to buy 300 new rail cars and we still don't have it now,” Smith told BNA, adding that there is now hope that additional funding will be included in the president's budget.
“Any additional help that we could get, we would greatly appreciate it,” she said.
SILO Settlements Target of Criticism
In the tax area, lawmakers appeared intent June 25 on ensuring that such funds not go toward settling SILO deals.
In the case of SILO transactions involving transit agencies, municipal governments have sold public transportation assets such as railcars only to lease them back from purchasers, with the result of providing tax depreciation deductions to the purchasers.
Grassley said in a news release that “such transactions were motivated solely by the collection of fees on one side and tax benefits on the other.”
He noted that Congress shut down the transactions, known as sale-in, lease-out deals, in 2004. Over his objections, however, the bill was only prospective, Grassley said. Although the Internal Revenue Service also is attacking the transactions and has a settlement offer on the table, some remain in place and unwinding the deals has proved to be messy.
Grassley Opposes Bailouts
In 2008, WMATA joined several other public transit agencies in seeking bailout money to make payments to participants in these same transactions, Grassley said. “I was opposed then, as I am now, to taxpayer dollars being used to pay off the counterparties to these transactions,” he said in the release. “I don't want any new money in the pipeline for Metro today to potentially go to a foreign bank using a SILO deal as a tax shelter.”
In his formal letter to Hoyer, Grassley urged that any money given to Metro be used for safety improvements and that WMATA be specifically prohibited from using the money to pay fees to the foreign bank.
Transit Agencies Under Scrutiny
Grassley also wrote to the American Public Transportation Association to ask how many other public transit systems may be constrained from making equipment upgrades by tax-advantaged leases.
“It appears that many of these transactions are still in place and may be the reason that public transit agencies are not making safety upgrades,” Grassley said.
He noted that when transit agencies requested federal bailout money in the fall of 2008, “it was not apparent that such funds would be used for actual system improvements or maintenance. It appeared the agencies sought funds to pay off the tax shelter accommodating parties in light of AIG's collapse.”
Menendez Bill Would Impose Heavy Excise Tax
The Menendez bill, unveiled the same day as Grassley's comments, appears to target the same payoffs that Grassley criticized.
The measure would impose an excise tax on “certain proceeds” received on SILO and lease-in, lease-out, or LILO, transactions.
In general, any person other than a SILO/LILO lessee that receives an “ineligible amount” as a party to such a transaction would have to pay a tax equal to the aggregate ineligible amounts received for the taxable year.
An “ineligible amount” is defined as the aggregate proceeds received by the taxpayer attributable to, or arising from, any remedial action relating to a SILO/LILO deal, or any consensual termination or rescission of any such transaction.
Paravano Calls Bill ‘Taking’
However, Jeffrey Paravano, chair of the tax group at Baker & Hostetler LLP, Washington, D.C., said the proposed excise tax would be subject to constitutional challenge under the 14th Amendment's Equal Protection Clause and under the Fifth Amendment's Takings Clause.
He told BNA that although tax legislation historically has not been vulnerable to claims that there has been a taking of private property for public use without just compensation, “the result may be different here because the proposed legislation seems more like a taking than a tax.”
Paravano noted that “the proposed tax is narrowly targeted and proposes to confiscate 100 percent of the targeted amounts. Congress may call that a tax, but in substance it is a taking.”
The complete text of this article can be found in the BNA Daily Tax Report, June 26, 2009. For comprehensive coverage of taxation, pension, budget, and accounting issues, sign up for a free trial or subscribe to the BNA Daily Tax Report today. Learn more »
© 2009, The Bureau of National Affairs, Inc.
| Sign up to receive news and updates from BNA Software |
