Banks aren't in the transit business, but in the tax-break business.

By Ryan J. Donmoyer

BLOOMBERG NEWS

(Due to the interest in the “SILO” action, this article is being re-printed

from Bloomberg News.   They have covered the ELA press conference,

and have been writing about these alleged tax abuse shelters from

the very beginning of the Congressional hearings.  This is an “educated,”

non-leasing viewpoint of the situation. Editor)

Altria Group Inc. and Wachovia Corp. bought 570 New York subway cars. Wells Fargo & Co. owns more than 700 Chicago buses. And half of Atlanta's commuter rail tracks belong to Wachovia and American International Group Inc.

The companies aren't running public transportation. They are just collecting $3.3 billion in federal tax breaks through leasing arrangements that Congress wants to curtail.

Since 2001, 16 U.S. companies have bought transportation assets from cities through 35 leasing agreements, a review by Bloomberg News shows. The arrangements allow the buyers to save on taxes as the assets depreciate, even though they don't operate the equipment.

Senate Finance Committee Chairman Charles Grassley (R., Iowa) called the sales an abuse of tax law that costs the federal government revenue.

"It's a scheme that doesn't benefit cities very much, but provides a real advantage to companies with no risk to them," Grassley, cosponsor of legislation to limit the practice, said in an interview last week. "Leasing arrangements are fine, but there ought to be risk involved to get a tax break."

The Department of Transportation has delayed 15 similar transactions worth $3.1 billion since November at Treasury Secretary John Snow's request. Leasing arrangements already in place won't be affected by the Senate measure, which will be voted on this month.

Grassley and cosponsor Sen. Max Baucus (D., Mont.) estimated that the federal government lost $2 for every $1 a transit system gets through leasing deals.

The Bush administration says the shelter, as currently allowed, will cost the federal government $33.5 billion during the next 10 years as more companies seek tax breaks by acquiring properties ranging from sewer systems in New Jersey to the Alamodome basketball arena in San Antonio, Texas, to emergency 911 call centers in Chicago.

While the transportation contracts mainly focus on infrastructure in the United States, most of the other leases involve municipal facilities in other countries.

Bank of America Corp., of Charlotte, N.C., for instance, bought and leased back Canada's air-traffic-control system last year. Pending arrangements involve U.S. banks' buying assets such as the baggage-handling systems at airports in Paris and Singapore.

The Internal Revenue Service is auditing transactions that have been completed.

"We're concerned," IRS Commissioner Mark Everson said in an interview. "All you're doing here in some of the transactions is, you're really abusing the system."

Defenders of the tax shelter say that it is legal and that the Department of Transportation encouraged transit authorities to pursue the contracts as a "creative" way to secure cash. The Federal Transit Administration even published an online guide for how to win approval of the agreements.

"It's found money," said Daniel Duff, chief counsel and vice president of governmental affairs for the American Public Transit Association. "It's legal and it's available, and that's why transit authorities have taken advantage of it."

Records on the 35 transit deals in the United States obtained under the Freedom of Information Act show that the agreements resulted in an almost 600 percent return on investment in taxes saved for the biggest investors. Those include Wells Fargo, which bought $1.6 billion worth of assets in 11 of the 35 transactions.

The deals pose little financial risk to participating banks because most proceeds given to transit authorities from the asset sales must be held in escrow so the municipality won't default on the lease payments.

Transit authorities pocketed only about 5 percent of the value of the assets - while the companies claim 100 percent depreciation.

Wachovia paid no taxes on a $3.6 billion profit in 2002 and got a $159 million tax refund, according to the company. That was due in part to its joint purchases of 570 New York subway cars with Altria's Philip Morris Capital Corp. unit and 155 cars with Textron Inc., maker of Cessna airplanes.

Wachovia spokeswoman Mary Eshet said the company made a "strategic decision" last year to stop doing the leasing transactions involving public infrastructure because of "the evolving regulatory environment."

But "the transactions comply with applicable tax laws [and] regulations, and are supported by tax opinions by a number of reputable law firms," she said.

Wachovia, of Charlotte, N.C., is a major bank in the Philadelphia area, with the largest share of deposits in the market.

Timothy Kellogg, an Altria spokesman, said the company's transactions were "based on long-standing and commonly accepted leasing principles." Still, the company is no longer entering such agreements "due to a change in strategic direction," he said.

Janis Smith, a spokeswoman for Wells Fargo, of San Francisco, said she didn't immediately have a comment. Comerica, of Detroit, and Boston's FleetBoston didn't return calls seeking comment.

Here's how one case worked: On Sept. 20, 2002, Altria and Wachovia purchased the 570 New York subway cars for $1.18 billion from the Metropolitan Transit Authority. The companies leased the cars back to the MTA for 30 years, after which the authority can repurchase them.

The transit authority got $104 million in cash up front, and $1.1 billion was put in an interest-bearing escrow account to guarantee that the buyers would get the lease payments.

Altria and Wachovia are splitting a federal tax break worth $413 million by depreciating the cars on their tax returns. Altria, of New York, will save up to $89 million on state income taxes.

Defenders of the practice say it is no different from companies' leasing lawn mowers, cars or airplanes. About $900 billion in equipment was leased in the United States last year, according to the Equipment Leasing Association, a trade group.

Richard Marsh, financial planning manager for the Metropolitan Atlanta Rapid Transit Authority, said he turned to leasing in 2001 when sales-tax revenue dropped because of the recession. "This has been a salvation," Marsh said.