Senator vows crackdown on tax shelters
WASHINGTON (CNN) -- A U.S. Senate committee chairman says he wants to crack down on tax shelters that let U.S. and European cities raise quick cash by leasing public facilities to companies, enabling them to get significant federal tax breaks.
Appearing Tuesday on CNN's "Lou Dobbs Tonight," Sen. Charles Grassley, chairman of the Senate Finance Committee, said that his panel had heard evidence of "tremendous abuse" by U.S. companies of a number of tax shelters and said strong support existed to stop the practice.
The companies play no role in managing or operating the facilities they lease, but they get to deduct depreciation on the properties from federal taxes, a leasing industry executive, who wanted his identity kept secret, told Grassley's committee on Tuesday.
The executive testified from behind a screen with his voice scrambled, citing fear that corporations or banks could sue him over the disclosures.
The congressional Joint Committee on Taxation estimates that such arrangements have cost the U.S. treasury about $1.4 billion over 10 years, but Tuesday's testimony indicated the practice is more widespread than Congress originally believed.
Grassley said that the practice commonly involves leasing facilities in European cities.
"You've got the Berlin subway being built by Berlin taxpayers, leased to some corporation in America," said Grassley, R-Iowa. "There's no risk. It will never be the property of the corporation. And they get the tax benefits. Indirectly, you're having American taxpayers pay for the infrastructure of Europe."
In a typical transaction, a corporation would pay an upfront fee to a city to lease a major public facility, such as a bridge or a subway system, the executive told the Senate panel.
In the paper transaction, the infrastructure is leased back to the public authority, and the corporation earns depreciation-related tax deductions that are significantly larger than the amount paid to cities.
The anonymous witness said the infrastructure leasing results from growing municipal budget deficits and the need for quick cash. He said the subway systems of Boston, Massachusetts; Chicago, Illinois, and Washington, D.C., have been leased back to U.S. corporations, and the New York and Chicago water authorities are about to lease their waterlines.
Mike Hammersley, an attorney with accounting firm KPMG, called many of the shelters "contortions." Hammersley -- who was placed on indefinite leave from KPMG for speaking to federal investigators -- testified that shelter promoters often promise clients "you'll never pay taxes again."
The testimony came as lawmakers discuss eliminating complicated tax shelters promoted by accounting firms, investment banks and law firms. Tax shelter experts, disappointed with what they see as a decline in ethical standards, want Congress to pass tougher licensing laws for tax preparers.
"You know there are powerful interests here -- we call them K Street lobbyists -- that are very prone to defending this sort of things," Grassley said. "There's big fees for defending them on the Hill."
The General Accounting Office told Congress that tax revenue lost from known shelters totaled $33 billion over the past decade. Losses from undetected shelters could total another $52 billion.
CNN's Louise Schiavone contributed to this report.