Author: Sarah Lawsky


The Metro Crash and Tax: Leaseback Infrequently Asked Questions

As discussed in an earlier post, Metro said that it could not comply with the NTSB recommendation that Metro replace its 1000-series Rohr cars because of a “tax advantage lease.” This post explains tax advantage leases in more detail–not the specifics of the WMATA’s Rohr leases, which we haven’t seen, but rather sale-leasebacks (sometimes called “sale-in/lease-outs,” or “SILOs”) in general.  We’ll talk about two parties: TransitCo, which, like WMATA, is a tax-exempt transit authority, and Taxpayer, which is not tax exempt and has a regular flow of income.  (This post discusses domestic sale-leasebacks; there are additional tweaks for cross-border sale-leasebacks.)

So: Leaseback Infrequently Asked Questions (or, Everything You Wanted To Know About Leasebacks but Were Afraid To Ask, Because You Thought You Would Probably Get Really Bored).

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The Metro Crash and Tax: A WMATA Leaseback Agreement

You can click here to see the documents that make up one of the WMATA leaseback agreements.  It was an exhibit last year in a lawsuit that was eventually settled.   I haven’t yet had a chance to read through it carefully, but in case others want to review it, I thought I would make it available.  Note that we do not know whether this particular leaseback agreement involved the Rohr 1000-series cars (the page that lists the equipment involved is blank).

Additionally, Senator Grassley has picked up on the issue.

(Thanks to Matthew Mantel, one of the many excellent GW law librarians, for finding this document.)

(Edit: This is the third post in a series. One, two, three, four, five.)


The Metro Crash and Tax: Known Unknowns

We know that a 1000-series Rohr car was involved in the recent Metro crash, that the National Transportation Safety Board had recommended that the 1000-series cars be replaced, and that at least one reason Metro provided for not replacing the 1000-series cars was that “tax advantage leases…require that WMATA keep the 1000 Series cars in service at least until the end of 2014.” In a future post, I will explain more about the general type of deal (sale-leasebacks) in which Metro was involved.  However, I first want to emphasize that there are at least two very important things I, at least, do not know about the crash and the sale-leaseback deals.

First, I do not know whether the 1000-series cars caused or exacerbated the damage and injuries from the crash.  We know that the cars are old, and that the NTSB recommended they be replaced, but as the excellent “Dr. Gridlock” writes, “Those cars do need to be replaced. They’re approaching the end of their useful lives, and it would make no sense to fix them again. But at the moment, we have no idea whether the age of the 1000 Series had anything to do with the cause of the accident or its consequences for those aboard.”  This information will come only after the crash is fully investigated, and perhaps not even then.

Second, because I have not been able to locate the sale-leaseback contracts, I do not know how those contracts would have treated replacing the cars.   (If anyone has the contracts, it would be wonderful if you wanted to send them to me).  When WMATA says that  it could not replace the cars because of “tax advantage leases,” I do not know whether that means the leases actually require that the cars remain in service (i.e., switching out the cars would trigger a termination fee), that switching out the cars would be possible but expensive under the lease (i.e., would not trigger a termination fee but would trigger some other kind of cost), or something else.

Obviously, the relevance of tax deal to the damage caused by the crash depends on the answers to these questions, answers I do not have.

(Title hat-tip: Donald Rumsfeld.)

(Edit: This is the second post in a series. One, two, three, four, five.)


The Washington Metro Crash and Tax

Taxes raise revenue, of course, but they also induce behavior.  Sometimes these behavioral responses are intended by lawmakers (for example, when lawmakers raise taxes on an activity they deem undesirable, such as smoking), but often they are not.

The deadliness of yesterday’s Metro crash in Washington, DC, my hometown and current location, may be, at least in part, one of these unintended consequences.

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“Your Prayers Can Save the World’s Fattest Cat!”

Genius.  In only eight words, this tabloid headline covers the crucial topics of religion, fat, and cats.  From the first word, “your,” the reader knows she is the true topic.  She has power: she can solve the most serious version of a particular world problem (the problem happens to be feline obesity, but that is a real problem, as many cat owners know).  Indeed, she is a savior.  And what’s more, there is a way to lose weight (having others pray) that is easier than eating less and exercising more. The only possible improvement I can imagine–and I’m not certain it is an improvement, in part because it is three letters longer–is “Your prayers can save the world’s fattest kitten.”

The headline, which I noticed last night in the grocery-store checkout line, reminded me of a passage from Sarah Schulman’s novel Girls, Visions and Everything.  The main character, Lila, writes fiction:

The very first things Lila had ever written were for the local Supermarket News.  That was great practice.  There was an event, say, the price of grapefruits.  There was an audience.  Her job was to describe the event….There was no looking around for subject matter, only for description, a task she took very seriously.  Did prices plummet, or were they slashed?

Some lawyers and law professors might model their writing on Cardozo or Holmes or even Scalia, but I’ll bring that anonymous headline writer and Lila along for the ride as well.


You Would’ve Thought They Worked for Moo-dy’s

If you were deciding whether to loan someone money, it would be very useful to know the chances that the person would pay you back.  (For example, the higher the chance they would default, the more you would charge them to borrow the money.)  Rating agencies–two dominant agencies are Moody’s and Standard and Poor’s (or “S&P”)–are supposed to provide lenders with that information.  The less the risk of default on a particular financial instrument, the higher the rating.   The rating agencies predict (or model) the risk, and if the rating agencies don’t do a good job, financial instruments’ market prices don’t reflect their actual value.

As others have discussed in a much more nuanced fashion, rating agencies may be partly to blame for the recent financial crisis.  The agencies appear to have been more concerned about keeping their clients (those who issued the financial instruments) happy than rating financial instruments accurately.  The ratings were too high, prices were too high, lenders and other purchasers of financial instruments didn’t anticipate default…and (to oversimplify) there’s your financial crisis.

But there appears to have been another market failure associated with rating agencies–a totally unexploited chance for profit.

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Geek, Memory

Do you remember the first time you rode a bike?  Your first day of school?  When your younger sibling was born?  How about your first experience with tax?

I have two early memories of tax, neither pleasant.

In the first, I was about six years old and went to the store near my grandmother’s apartment to buy a pretzel stick, which cost ten cents.  It said so right on the plastic container.  But when I gave the mean proprietor a quarter, he gave me back 14 cents. After standing outside crying for a while, I finally got up the courage to go back in and confront him: “I think you gave me the wrong change.”  “Haven’t you ever heard of sales tax, kid?” he yelled.  No, actually, I hadn’t.

Mean, horrible game.

Mean, horrible game.

My second tax memory, from around the same time:  The fourth square of the Monopoly board is labeled “Income Tax,” and, until last year, if you landed on it you had to pay $200 or, if you preferred, 10% of your total worth. The practice in my family was always to pay the $200.  But one day my father landed on this square and for some reason (probably, in retrospect, because the game had just started) decided he would pay the 10%.  I protested.  There are, as I discuss below the jump, a lot of things wrong with this rule, but when I was six, the biggest thing wrong with the rule is that it took a really long time to calculate your total worth.  “You’ll never finish!” I yelled.  “This is boring!”  Infuriated by the heavy compliance burden, I quit.

What are your early tax memories?

(Below the jump, I discuss three additional serious problems with the 10% rule, one definitional, one substantive, and one related to the fact that it’s really hard to be six years old.)

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