August 11, 2006
CC:PA:LPD:PR
(Notice 2006-65)
Room 5203
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044
(Download in Adobe PDF format)
Dear Reviewing Officials:
I write on behalf of the American Public Transportation Association (APTA), and its more than 1,500 member organizations, in response to the Department of Treasury's request for comments on provisions of the recently enacted Tax Increase Prevention and Reconciliation Act of 2005 (PL 109-222) (TIPRA) that appear to affect public transit agencies that entered into Sale In/Lease Out or Lease In/Lease Out (SILOs or LILOs) transactions. In brief, it appears that new Internal Revenue Code section 4965 created by TIPRA could impose an excise tax on transit systems of a significant portion of the proceeds and income of such transactions allocable to current and future taxable years. We respectfully request the Department not to apply TIPRA's excise tax to transit agency transactions lawfully entered into before its effective date.
About APTA
APTA is a non-profit international trade association of more than 1,500 public and private member organizations, including transit systems; planning, design, construction and finance firms; product and service providers; academic institutions; and state associations and departments of transportation. More than ninety percent of Americans who use public transportation are served by APTA member transit systems.
Fairness Issues - Reliance on DOT Advice and Presidential Executive Order
The U.S. Department of Transportation (DOT) and its Federal Transit Administration (FTA) for years urged public transit systems to use innovative financing mechanisms to generate additional revenue for public transportation purposes, and particularly promoted tax-advantaged leasing transactions in that regard. Indeed, a 1998 handbook of the Federal Transit Administration, "Innovative Financing Techniques for America's Transit Systems," was published for that purpose. The handbook was promulgated to implement Presidential Executive Order 12893 on Infrastructure Investment (January 26, 1994). That Executive Order provides in part -
Section 1. Scope. The principles and plans referred to in this order shall apply to Federal spending for infrastructure programs. For the purposes of this order, Federal spending for infrastructure programs shall include direct spending and grants for transportation, water resources, energy, and environmental protection.
Section 2. (c) Private Sector Participation. Agencies shall seek private sector participation in infrastructure investment and management. Innovative public-private initiatives can bring about greater private sector participation in the ownership, financing, construction, and operation of the infrastructure programs referred to in section 1 of this order. Consistent with the public interest, agencies should work with State and local entities to minimize legal and regulatory barriers to private sector participation in the provision of infrastructure facilities and services. (Emphasis supplied.)
The Executive Order clearly applied to the FTA; its central mandate is to provide federal transportation grants to public transit systems. The 1998 FTA handbook includes an introduction by the then FTA Administrator, which states in part that "to implement the Executive Order in times of increasing budget austerity required that innovative financing techniques be developed and tested, to allow as much leverage of local public and private funds as possible." The introduction further notes that "…we must use every means at our disposal to stretch every dollar - make it do as much as possible - to ensure the continued vitality of our transit systems. This handbook may help us to do just that." Tax-advantaged leasing transactions were among the techniques encouraged by FTA in its handbook. And many transit systems responded, entering into a variety of leasing transactions and earning critical revenues from them. It is important to emphasize that the FTA reviewed each tax-advantaged leasing transaction involving federally funded transit equipment to make certain that the equipment remained under the control of the transit system and that the transaction costs were not unreasonable.
Public transit systems acted in good faith in entering into these transactions, relying on DOT's encouragement that they do so, and on the FTA's review and approval of each transaction. There was no indication that the transactions were illegal or not appropriate. Critical revenues were earned, usually in a manner that enabled the transit systems to receive all cash proceeds at the beginning of the transaction and applied by the agencies for public transportation purposes. A brief word here about public transport financing. Public transportation is a public service; every public transit system in the United States relies on public funding to build infrastructure and operate services. Simply put, farebox and other earned revenues are insufficient to cover the cost of building and operating a transit system. Thus the proceeds earned by public transportation agencies under transactions such as SILOs and LILOs were immediately invested in critical public transit needs. In short, such proceeds are spent and long gone.
We believe it would be manifestly unfair now to penalize public transit systems and make them pay an excise tax on proceeds or income from transactions entered into legally and in good faith many years ago. Not only are the proceeds from the transactions long ago spent, current transit system budgets are extremely tight; any TIPRA excise tax payments a transit system would be required to pay now would be at the expense of service currently operating or items already budgeted and to the detriment of millions of Americans who use these vital services on a daily basis.
Retroactivity Issues
Equally unfair in our view would be the application of any new excise taxes retroactively to transactions that were entered into in good faith long before there was any question about their propriety. As noted above, each transaction involving a public transit system was vetted by the Federal Transit Administration before it was able to proceed. Moreover, when the American Jobs Creation Act of 2004 effectively ended tax-advantaged leasing transactions, no further transactions involving public transit systems took place. The 2004 Jobs Act curbed tax-advantaged leasing transactions with tax-exempt parties but did not affect the benefits received by state and local governmental entities. Rather, the 2004 Act limits deductions claimed by the taxpaying lessors for future transactions.
While the 2004 Jobs Act was being considered in Congress, APTA and others urged Congress to allow the fifteen or so transactions involving public transit systems then pending before the FTA to be allowed to proceed. Congress agreed, and the 2004 Jobs Act law allowed those transactions to take place as "grandfathered" transactions. Ironically, TIPRA does not impose an excise tax on those grandfathered transactions, but may impose an excise tax on transit system transactions that took place before them. This curious result raises a question as to whether Congress in TIPRA meant to impose retroactive application of the excise tax to transactions entered into before its effective date.
Request for Relief from Retroactive Application of TIPRA
Accordingly, in light of the foregoing - the good faith reliance by public transit systems on the federal government's encouragement and authorization to enter into tax-advantaged leasing transactions, and the lack of clarity as to the intent of TIPRA particularly with respect to its retroactive application - we respectfully request the Department not to apply the Act's excise tax to transit agency transactions entered into before its effective date.
Application of Tax
Alternatively, if the excise tax is to be applied to the transit system transactions under discussion we believe that net income and proceeds for Internal Section Code section 4965 purposes should be determined in a manner consistent with the determination of net income and proceeds for other purposes of the Internal Revenue Code.
In that regard, tax counsel for certain transit systems separately are submitting comments to the Treasury to the effect that, applying Internal Revenue Code principles to these transactions, there is no net income subject to the excise tax, nor are there current proceeds that would be subject to the excise tax. We support and endorse those comments.
For further information about this matter please contact Chief Counsel Daniel Duff of APTA's Government Affairs Department at (202) 496-4860 or email dduff@apta.com.
Thank you for consideration of our views.
Sincerely yours,
William W. Millar
President
WWM/tjj
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