Sunday, June 6, 2004

The PBS News Hour on Friday had a segment called Taxes at the Top (available in both audiotape and transcript formats) on a new breed of tax shelters called “SILOs” (“Sale-In, Lease-Out”). The segment re-aired part of a Frontline program on tax shelters, Tax Me If You Can, originally broadcast February 19 (also available in both audio tape and transcript formats). Both programs feature Tax Prof Joe Bankman (Stanford).

What is a SILO? Here’s a good example from Forbes:

A typical deal works something like this. A subway authority owns a rail car. A corporation buys the car from the authority for $100,000 and then leases it back to the subway authority for 15 years, with a buyout option at the end of the lease. The authority invests enough of the $100,000 to cover lease payments and the buyout, typically pocketing 6%. The transit authority now has cash it wouldn’t otherwise have and the corporation can claim valuable tax benefits, including depreciation deductions and interest deductions, as “owner” of the train car. (Those tax benefits would have been useless to the not-for-profit.) Of course, the $6,000 cash that the tax-exempt gets pales in comparison to the tax benefits accrued to the corporate buyer.

Victor Fleischer (UCLA) offers some thoughts on how Tax Profs can use SILOs in class:

I taught a class hour on this topic earlier this year based on a term sheet I found on the web from the LA transit authority. What struck me were the huge transaction costs – about $8 million on a $100 million deal. Most of these fees went to the promoter, although the lawyers did okay too. (LA got some needed transit financing; Philip Morris got rid of some tax liability.)

At the end of the hour, I asked the students how they would have voted if they were on the City Council asked to approve the deal as proposed by the LA transit authority. Most of the students voted in favor of entering the deal. I guess all tax shelters, like politics, are local.

Calvin Johnson (Texas) disagrees with the UCLA students:

Your students should have voted the other way, and not because of any politics. The implicit tax on municipal bonds is under 10% these days and since muni bonds compete with SILOs, to the investor that indicates that SILOs are running with an implicit tax of under 10%. Philip Morris is saving tax at 35% and giving up say 8.5% to LA. So 3/4 of the cost is wasted.

Ask your students if it were their money so wasted, what would they do? Would they pay $100 so LA transit can get $25? And indeed it is their money that is being so wasted. They are paying it.

I am of course am too old to worry about paying it, so I object to such waste in government money only on ideological grounds.

For a great story on SILOs (also featuring Joe Bankman!), see Helter Shelter in the December 2003 American Lawyer. See also Gimme Shelter on the PBS web site.