Senators hear about tax shelter dodges

Mystery witness calls deals a sham, bad for the economy

October 22, 2003|By NEW YORK TIMES NEWS SERVICE

WASHINGTON - Major companies have leased parts of the subway systems in Washington, Boston and Chicago, to be joined soon by the water mains in New York City, in deals designed to cut the companies' tax bills and to get around rules prohibiting abusive tax shelters, a witness said at a Senate Finance Committee hearing yesterday.

Big American corporations are also receiving tax breaks for leasing public assets in Canada and much of Europe in similar deals, said the witness, a longtime leasing industry executive who testified behind a screen to conceal his identity.

Using the pseudonym Mr. Janet, the witness said the deals were shams and bad for the economy because the amount by which they reduce federal and state corporate tax revenues is far greater than the amount of money they generate for local governments.

Although the new deals were described as improper and might not survive a court challenge, no current law or Treasury rule prohibits them.

In return for a sizable cash payment to what is often a cash-pinched local government, the company usually can depreciate the asset sharply, generating a big tax break. By including a service component in the contract for, say, maintaining the subway lines or the water system, the deal falls outside rules adopted several years ago by the Treasury Department to prevent abusive tax shelters.

The leasing executive was especially critical of recent deals across borders, in which an American company is supposed to operate a subway, water or other municipal service paid for by taxpayers in another country.

"I fail to see how the U.S. economy is stimulated by giving U.S. tax deductions for assets built by the French, funded by the French and used by the French," Mr. Janet said, his voice electronically altered to reduce the risk of being identified and sued by former co-workers.

The hearing was called to consider new curbs on tax shelters, an effort that has been stalled in Congress for two years. For three hours, witnesses described tax-avoidance plans sold by the major accounting firms and bought by the biggest companies with no fear that the IRS would uncover the deals or impose a meaningful penalty.

Former tax officials of Levi Strauss, the jeans company, and the accounting firm KPMG said they were fired or disciplined for objecting to what they considered illegal conduct. The former KPMG employee, Michael Hamersley, said his superiors openly expressed disregard for the law.

After the testimony, a KPMG spokesman, George Ledwith, said Hamersley was in no position to make the observations.

Another person noted problems at Ernst & Young. Henry Camferdam, an Indianapolis businessman whose company was a client of Ernst & Young, said he paid $7 million in fees for what turned out to be a fraudulent tax shelter. He said he bought it only because Ernst & Young described it to him as not just legal, but also conservative.

"Ernst & Young had always been to us the people who said no, so we had complete trust and faith in them," he said.

Sen. Charles E. Grassley, the Iowa Republican who chairs the committee, characterized tax abuses as widespread. A report by the General Accounting Office, released at the hearing, said that as of Sept. 30 abusive tax shelters had cost the government $85 billion, roughly the amount that President Bush persuaded Congress to appropriate for the occupation of Iraq and its rebuilding.

The GAO report criticized the IRS for lacking goals and a plan to measure its success in combating abusive tax shelters.

The major accounting firms have suffered a complete ethical collapse, said William J. McDonough, chairman of the new Public Company Accounting Oversight Board, created by Congress after Enron and other corporate scandals.

He said he found the willingness to sell faulty tax shelters and hide them from IRS auditors "immensely and immorally repugnant," and he warned that his board has told the firms they must change or face dire consequences.

"If they do not save themselves, we will save them and it will not be pleasant," McDonough said.

The testimony by the unidentified leasing executive called Mr. Janet drew criticism from leasing industry experts who attended the hearing. They said that his testimony referred to garden-variety deals.

Local officials in New York, Washington and Chicago said in interviews yesterday that their lease deals were routine.

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