December 11, 2008 CONGRESSIONAL RECORD — SENATE S10909 

floor to share with me some thoughts 

about this relationship that is not only 

historical and one which we take great 

pride in as a nation, that ability to 

quickly expand, to turn a manufacturing, an industrial base into an arsenal of democracy. 

That hopefully will not happen, as 

the Senator points out. Maybe it is less 

likely to happen. But we must be there 

when it does. That aspect has been focused on by others, the need to be able 

to have a manufacturing base for our 

national security and to have a base of 

suppliers for our national security. I 

have tried to add another aspect to this 

argument that points to the relationship between the survival of our big 

three and our national security by 

pointing out the ongoing relationship 

in the area of research and development, which has produced critically 

important technologies currently in 

our vehicles and developing today the 

technologies which will make future 

vehicles. 

Mr. WARNER. Our military vehicles. 

Mr. LEVIN. Absolutely. 

Mr. WARNER. I wish to make that 

clear because that technology has been 

available in the open market to those 

manufacturers, other than the oil industry, which have, in a remarkable 

way, taken these up-armored vehicles, 

that general category we have today, 

very quickly, to the great credit of the 

Secretary of Defense, Secretary Gates, 

he put together a structure of five companies to get into immediate production of those vehicles and into those 

vehicles has gone the development and 

technology that our distinguished colleague from Michigan has described. 

Mr. LEVIN. Thankfully, we still have 

a few colleagues, including the great 

Senator from Virginia, who have a personal connection to that war. 

Mr. WARNER. It was very minor, but 

it was a privilege to have been associated with that generation. 

Mr. LEVIN. I thank my friend from 

Virginia. 

f 

RECESS 

The PRESIDING OFFICER. Under 

the previous order, the Senate stands 

in recess until 3 o’clock. 

Thereupon, at 2:17 p.m., the Senate 

recessed until 3:03 p.m. and reassembled when called to order by the Presiding Officer (Ms. KLOBUCHAR). 

The PRESIDING OFFICER. In my 

capacity as a Senator from the State of 

Minnesota, I suggest the absence of a 

quorum. 

The clerk will call the roll. 

The legislative clerk proceeded to 

call the roll. 

Ms. MIKULSKI. Madam President, I 

ask unanimous consent that the order 

for the quorum call be rescinded. 

The PRESIDING OFFICER. Without 

objection, it is so ordered. 

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EXTENSION OF MORNING 

BUSINESS 

Ms. MIKULSKI. Madam President, I 

ask unanimous consent that the period 

for the transaction of morning business 

be extended until 5 p.m., with Senators 

permitted to speak for up to 10 minutes 

each. 

The PRESIDING OFFICER. Without 

objection, it is so ordered. 

Ms. MIKULSKI. Madam President, I 

suggest the absence of a quorum. 

The PRESIDING OFFICER. The 

clerk will call the roll. 

The legislative clerk proceeded to 

call the roll. 

f 

SILO TAX SHELTER 

Mr. BAUCUS. Madam President, the 

House bill before us contains a provision that causes me great concern. The 

provision would make the U.S. Government an active participant in an abusive tax shelter transaction. 

In the past, Congress has voted to 

shut that tax shelter down. And this 

week, I sought to offer an amendment 

to strike the provision from this bill. 

But I have been prevented from offering that amendment. That this provision will remain in the bill makes this 

bill a far less attractive measure. 

Section 18 of the bill requires the 

United States to serve as a guarantor 

of obligations incurred by domestic 

subway and other transportation systems. These obligations arise from the 

systems’ participation in leasing arrangements called lease in/lease out, or 

LILOs, and sale in/lease out, or SILOs. 

LILOs and SILOs are sham transactions. The IRS has designated them 

as ‘‘listed’’ tax shelters. That means 

that these tax shelters are among the 

most egregious abuses of the tax law. 

LILOs and SILOs are very complicated deals, designed to look like legitimate leasing transactions. But in 

reality, they are shams. 

In a SILO, a tax-exempt entity nominally ‘‘sells’’ an asset, like a subway 

system. The other party to the deal is 

an investor who is subject to taxation 

and who needs a tax write-off. The investor nominally ‘‘buys’’ the asset. The 

investor then nominally ‘‘leases’’ the 

asset back to the tax-exempt entity. 

In truth, the benefits and burdens of 

ownership never shift. And the sale and 

the lease have no economic reality. 

These parties purport to make purchase payments and rent payments. 

But in reality, these payments are just 

paper entries, facilitated by a bank 

that is in on the deal. The investor 

pays the tax exempt entity an up-front 

fee in exchange for its willingness to 

participate in the deal. But other than 

that, no real money changes hands. 

There is little, if any, risk to any 

party to these transactions. That is because the deal is cooked from the beginning. It is planned so as to eliminate any risk. 

But there are significant tax benefits 

to the investor. The investor gets interest and depreciation deductions. 

And those deductions generate tax 

losses. Employing these tax losses, the 

investor pays less tax on income that 

the investor earns elsewhere. 

This chart illustrates how a SILO 

transaction works. You do not have to 

understand all the details to see how 

complicated the transaction is. 

As Chairman of the Finance Committee, I have had these deals on my 

radar screen for quite some time. In 

2003, the Finance Committee held a 

hearing with a confidential informant. 

The witness risked his professional reputation to tell us how abusive LILO 

and SILO transactions are. 

I pushed for legislation to shut these 

deals down. The 2004 Jobs Act eliminated the tax benefits for most of the 

investors who had entered into these 

transactions. 

Since 2005, I have worked to shut 

down the remaining deals that the Jobs 

Act failed to address. Unfortunately, 

our efforts have met with resistance. 

Some argue that shutting down these 

transactions would be applying law 

retroactively. But I believe that these 

transactions always violated the law, 

as they lack any economic substance. 

In the Tax Increase Prevention and 

Reconciliation Act of 2005, Congress 

imposed excise taxes on tax-exempt entities and their managers who entered 

into tax shelter transactions. That law 

recognized the role that some tax exempt entities, including transit agencies, played as ‘‘accommodating parties’’ to tax shelter deals. 

Since 1999, the IRS has devoted considerable resources to shutting down 

these deals. The IRS has designated 

both LILOs and SILOs as ‘‘listed’’ tax 

shelter transactions. The IRS has audited every one of these transactions 

that it could find. The IRS has litigated four cases, and won every time. 

Recently, the IRS announced a settlement initiative to shut down the remaining cases and reports an 80-percent participation rate. 

We have been trying to stop these tax 

shelters for years. So how does the 

Government end up guaranteeing this 

kind of tax shelter? The complicated 

structure of LILOs and SILOs plays a 

part. 

Under the terms of the agreements, 

transit agencies are required to obtain 

a guarantee from an insurer. The insurer guarantees that the agencies will 

be able to buy back the subway at the 

end of the lease period. The agreements 

require that the insurer have a very 

high credit rating. 

The current economic crisis has 

caused downgrades of insurers’ credit 

ratings. That has put the tax-exempt 

entities into technical default on their 

agreements. Under the agreements, 

when the tax-exempt entities default, 

the investors have a right to terminate 

the lease. 

The investors are taking advantage 

of this legal opportunity. They are trying to cash in. The investors are attempting not just to recoup the nominal purchase price of the assets. They 

are also demanding that the transit 

agencies pay over the value of the tax 

benefits that the investor will lose as a 

result of the premature unwinding of