Draft Bailout Has Leaseback Guarantees

WASHINGTON - Draft legislation to bail out automakers includes a provision that would require the federal government to guarantee leaseback deals that transit agencies entered into with private investors and that were approved by the Federal Transit Administration before 2006.

The legislation would benefit some 31 transit agencies in 18 states that could face $2 billion to $4 billion in termination payments from "sale-in, lease out" and "lease-in, lease-out" deals for equipment and rails that technically defaulted when the ratings of the insurers that guaranteed the deals were downgraded.

Lobbyists for the transit agencies are pushing for lawmakers to pass the provision as part of the auto bailout legislation and have obtained the support of Senate Banking Committee chairman Christopher Dodd, D-Conn., and House Financial Services Committee chairman Barney Frank, D-Mass. Lobbyists indicated the legislation may have to change slightly because not all of the deals were not approved by the FTA.

Sen. Charles Grassley, R-Iowa, the ranking minority member of the Senate Finance Committee, is opposed to the provision, because the Internal Revenue Service has designated the transactions as abusive tax shelters whose only purpose was to provide banks and other private investors with tax breaks. In a letter yesterday, Grassley warned House and Senate Democratic leaders against including the provision in the $15 billion automaker bailout legislation.

"Because I have fought so hard to eliminate the benefits of LILO/SILO transactions, allowing parties to these transaction to reap these benefits with taxpayer dollars would be a perverse result," he wrote.

Under these leaseback transactions, which were done beginning in the 1980s, transit agencies sold or leased an asset such as transportation equipment to a private entity such as a bank, in exchange for cash, usually about 3% to 6% of the asset's value. The agency typically got an up-front payment and the private entity was able to write off the depreciation cost of the equipment on its federal taxes, while leasing the equipment back to the agency.

But the IRS designated LILOs as abusive tax shelters in 2000 and SILOs in 2005, even though the FTA had approved them.

The IRS began challenging the deals in lawsuits, but earlier this year offered to settle with corporate taxpayers. Under a settlement that was entered into by about 30 of the 45 companies to which the offer was extended, required the companies to return 80% of the tax breaks they would obtain from these transaction.

In October, KBC Bank of Belgium demanded a $43 million termination payment from the Washington Metropolitan Area Transit Authority from a leaseback deal done in 2002, after the rating of American International Group Inc., the guarantor on the deal, was downgraded. WMATA asked a federal court here to block the payment. The parties later settled, with WMATA paying the bank an undisclosed amount to the bank.

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Transportation industry
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