Senate Hears Testimony on Tax Shelter Schemes

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Saying that Congress can't write laws fast enough to keep up with those who find ways around them, Sen. Charles Grassley, chairman of the Senate Committee on Finance, took aim at those promoting and selling tax shelters at a hearing on Tuesday. The hearing included testimony from a witness who shielded his identity for fear of reprisal.

With a resurgence of the once popular LILO schemes of the past—“lease-in, lease-out” — outlawed by a series of Treasury Department rulings in the 1990s - Grassley aimed his focus at those finding loopholes in the law.

The Wall Street Journal defines a LILO transaction as occurring when “a corporation typically would lease a major public facility, such as a subway or a town hall, then lease it back to the public authority that owns and operates it. That allowed the corporation to take advantage of big depreciation deductions associated with the structure.”

Grassley's hearing shed light on just how creative the schemes have gotten.

“The promoters of illicit tax shelters are infinitely creative,” Grassley said in a release issued by the committee. “So far, Congress hasn't written the laws fast enough to shut them down. We need to move faster than they do. That's why we need a mandatory disclosure regime like my bipartisan bill imposes. It's not just a matter of giving the IRS agents more shovels. We've also got to help show them where to dig."

Grassley has proposed bipartisan legislation that would give the IRS unprecedented information about questionable transactions so it can tell the difference between legal tax transactions and illegal tax shelters. The bill has passed in the Senate several times and he hopes that this time, it will get the support of the full Congress.

“The disclosure has the potential to unravel a whole yarn ball of conspiracy,” Grassley said. “It would get at the accounting and law firms that peddle these schemes like the snake oil salesmen of 100 years ago. I intend to keep the pressure on for final passage of this bill.”

The anonymous witness testified on the LILO schemes that are once again using public assets as tax shelters. Grassley's international tax reform and manufacturing legislation, which passed Oct. 1, would close this loophole, the release stated.

“It seems nothing is safe from the illicit tax shelter promoter,” Grassley said. “Even our bridges, subways, and water systems are all ripe for the picking. It's hard to believe that city assets are helping tax shelter promoters. Roads and bridges built with tax dollars are leased out to shelter promoters so major corporations can get a phony tax deduction. Even the subway system of Washington, D.C., our nation's capital, has been leased as part of a shelter scheme. We need to shut down this type of tax shelter and all others in the process.”

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