Of Windmills, Cattle and Form 1040

By John S. DeMott

Booming tax shelters give rise to demands for reform

To millions of American taxpayers, the only big tax shelters are the ones they live in: they can deduct the interest they pay on their mortgages from their income. But to those who can afford the high price of getting in, tax shelters can be anything from Holstein cattle to windmills and even roadside billboards.

Such deductible investments have become a headache for the Internal Revenue Service. In all, they represent investments of an estimated $50 billion and can cost the Government billions of dollars annually in uncollected revenue. They help swell the federal deficit, enrich tax lawyers and arouse the ire and envy of less-well-to-do taxpayers. Asked what his four biggest problems are, Roscoe L. Egger Jr., commissioner of the Internal Revenue Service, is fond of saying, "Tax shelters, tax shelters, tax shelters and tax shelters."

Not all tax shelters are unproductive. Some in energy exploration encourage drilling. Others in real estate provide incentives to rehabilitate old buildings in downtown areas. Reason: the 1981 tax law, in addition to cutting everyone's taxes, allows landlords to write off the cost of their buildings over 15 years, instead of the 40 to 50 that had been usual. That permits them to recoup their investment faster.

But the same so-called accelerated cost-recovery feature of the 1981 law has helped to spark an explosion in new and untested tax-shelter schemes. They range from the blatantly illegal to the legal but outrageous, and they are peddled like cars. About 260 shelter promoters displayed their wares last year in, appropriately enough, Las Vegas.

The shelters have one thing in common: for a relatively small investment, often much of it borrowed, a large tax deduction is generated. Under the 1981 law, most of the write-off can usually be taken in the first year. An investor, for example, might put up $20,000, or 20%, of a $100,000 real estate deal and borrow the rest. The law then allows claims for depreciation, tax credits and everything else associated with a $100,000 investment. Also deductible is the interest on the borrowed money. In the end, a $20,000 stake could result in write-offs of possibly $90,000. For a person in the 50% bracket, that means a tax saving of $45,000.

Such shelters are widespread and legitimate. Many others apply similar principles and are also legal, but they serve ends that in the eyes of critics seem at odds with the spirit of public policy. Among them:

BILLBOARDS. In 1982 Bear, Stearns, a New York brokerage firm, acted as agent for the sale of 45,000 billboards to 534 wealthy investors for $485 million, nearly all of it borrowed. The investors promptly leased them back to the original owner, Broadcaster Metromedia. They are now in the process of rapidly writing off the costs of the billboards. At the end of five years, the plan is to resell them to Metromedia for $645 million, a 33% profit. The outcome: for individual cash investments of $150,000, each investor stands to gain a return in tax savings of $169,550, plus $355,000 in cash. And Metromedia can start writing off the billboards all over again as newly acquired assets.

HOLSTEINS. Dairy cattle graze on some of America's lushest farm land. Investors buy cattle from places like Stookey Hoisteins, Inc., in Leesburg, Ind., which advertises in publications like Wealthbuilding. Then gains start flowing. First, the investment, over a five-year depreciation period, counts as an "off the top" deduction in the same way as savings in an Individual Retirement Account. It thus lowers the investor's taxable earnings. Next, 10% of what the investor pays for the livestock comes directly off his taxes. Also, through embryo transplants, each cow becomes a factory for calves, which can be sold profitably at auction.

Such methods can enable an initial $50,000 investment in cattle raising to yield eventually up to $75,000 in tax benefits, plus whatever money is made on the Holsteins. The irony is that the benefits encourage dairy breeding at a time when the Government is spending $2.5 billion annually on milk-price supports.

WINDMILLS. California's coastal mountain passes contain 65 sprawling, power-producing windmill "farms," most of which are the result of the past decade's search for alternatives to oil. They are heavily financed by private investors, who .get generous tax benefits from the state and federal governments--no matter that the price of oil has fallen or that power from windmills is vastly more expensive than that from other types of energy plants. Moreover, while most of the wind devices do produce electricity, all of them generate tax benefits of some sort even when they do not produce power. Says California Congressman Pete Stark, who is leading a House effort to dismantle some of what he considers to be the more abusive shelters: "They're not wind farms. They're tax farms."

Other questionable shelters abound. Precious jewels can be donated to charity and then two or three times their presumed value deducted from the donor's income. Luxury cars can be bought ostensibly for business purposes and provide large tax savings. BMW once advertised itself as "the car that shelters you from boredom as well as taxes."

The Reagan Administration wants to close some tax-law loopholes to recoup $12 billion over the next three years. But since all deductions have strong and vocal constituents, that plan could prove as difficult to achieve as any other revenue-raising scheme. --By John S. DeMott. Reportedby Jay Branegan/Washington

With reporting by Jay Branegan