One thing about the de facto nationalization of companies is that the government–that is, we–ends up being responsible for some of the really ugly things companies do. Now we might become the proud owner of tax shelters:
The troubles of the American International Group are causing headaches for dozens of municipal transit authorities, which want the federal government to help them avoid multimillion-dollar early-termination fees for tax shelters linked to the troubled insurance giant.
The authorities are asking the government to assume A.I.G.’s role in scores of tax shelters, even though the Internal Revenue Service considers the transactions abusive. They also want the government to help them avoid billions of dollars in payments caused by the downgrading of A.I.G.’s credit rating.
The deals are guaranteed by A.I.G., which was rescued by the government in September. But a prominent trade group that represents major transit authorities in the United States, including agencies in Chicago, Los Angeles, San Francisco and New York, has asked the government to back them instead.
Doing so, the authorities say, would allow them to avoid paying about $4 billion in early-termination fees to A.I.G., other insurance companies and banks involved in the deals. The banks say they are owed the money because A.I.G.’s credit ratings have been downgraded.
The tax shelters, known as Lilo and Silo, have been under intense scrutiny from the I.R.S. in recent years. They flourished from the late 1990s through 2003, and cost the Treasury an estimated $34 billion in unpaid federal taxes.
The I.R.S. banned a version of Lilo in 1999 and again in 2002, and then banned Silo in 2004. The agency says it has never considered them valid for tax deductions, meaning that the banks and insurers, and not the transit authorities, which are exempt from paying taxes, are the ones who got into tax trouble.
The shelters revolve around long-term lease-back arrangements. In the deals, corporations bought infrastructure like subways and bridges from municipal authorities and then leased them back to the authorities. The corporations got big tax breaks, and the authorities got enhanced cash flow.
Ugh. This sucks. 76 more days to go…