MUNICIPAL LEASE DEALS are under investigation by the staff of the Senate Finance Committee.

The committee chairman, Senator Charles Grassley (R-Iowa), asked the US secretary of transportation in mid-November to supply the committee with copies of all “LILOs, SILOs, QTEs, and similar transactions” that the US Department of Transportation has reviewed since 1995.  Grassley said the transactions are allowing US corporations to claim “billions of dollars” in “bogus depreciation deductions” on “bridges, water lines, sports stadiums, and subway systems constructed with taxpayer dollars.”

Grassley said he will press for legislation to shut down municipal lease deals retroactively to November 18, 2003.  Language to do this is included in a bill the Senate Finance Committee reported to the full Senate in October.  The bill is “must-pass” legislation in 2004.  Its main focus is to rescind a tax break for US exporters that the World Trade Organization has declared illegal.  The European Union will start imposing punitive duties on imports of US goods starting on March 1 unless the export tax break is repealed.  The bill would require companies leasing equipment to municipalities to treat any service contract under which the municipality agrees to continue operating the equipment after the lease ends as part of the “lease term.” This would have the effect of reducing the value of the depreciation deductions that the lessor can claim on the leased equipment.  The Senate is expected to take up the measure in early 2004.  Grassley said he would seek to make it retroactive to leases entered into after November 18, 2003.

Meanwhile, the Democratic staff of the Senate permanent subcommittee on investigations — a separate subcommittee not normally involved in tax issues but with a wide mandate to investigate all government programs — issued an 86-page report in mid-November on the “tax shelter industry.” The report focuses on several tax shelters marketed by KPMG.  The subcommittee held two days of hearings on tax shelters on November 18 and 19.

Bob Roach, minority counsel to the subcommittee, said the investigation has not been completed.  No further hearings are planned, but they remain possible.

Keith Martin