The Tax Shelter That Keeps Old Rail Cars On Metro Tracks

WASHINGTON, DC (WUSA) -- In the wake of last week's Metro rail tragedy that killed 9 people, a complex tax shelter deal between the transit agency and 16 banks backed by AIG is getting new scrutiny.

The tax shelter was used by Metro as one excuse for not pursuing early replacement of the aging 1000-series railcars after an accident in 2004.

A 2006 Metro memo to the National Transportation Safety Board refusing early replacement has been seized on by Iowa Senator Chuck Grassley as a possible example of Metro "disregarding passenger safety" in the name of a tax shelter.

When two trains collided last week on Metro's Red Line, it was one of the 35-year-old 1000 series car that folded up. All the victims who died were riding in the old car.

The financial arrangement with 16 banks that encourages Metro to keep the old cars on the tracks until at least 2014 is a complex tax shelter called a "lease back."

In the deals, Metro sold the cars to the banks who lease them back for the agency to use. As owners of the cars, the banks can depreciate the cars as they age and take a loss on paper to write off on their taxes.

The longer the cars stay on the rails, the more money the banks make.

If Metro tries to back out of the deals before 2014, it would have to pay a penalty of at least $250 million, according to Metro spokesperson Candace Smith.

The deals came to light after a 2004 train collision in Woodley Park.

After an investigation, the NTSB recommended that Metro accelerate its plans to replace the 1000-series cars.

Metro refused, writing in a 2006 response to the NTSB:

"WMATA is constrained by tax advantage leases, which require that WMATA keep the 1000 Series cars in service at least until the end of 2014."

Now Sen. Grassley complains in a letter to colleagues last week: "It appears .... that WMATA disregarded risks to passenger safety in order to fulfill a contract entered into as an accommodation party to a tax shelter."

In an interview Monday, Metro spokesperson Candace Smith said the lease backs were a complicating factor in the decision not to pursue early replacement, but not the primary reason.

"Replacement of those rail cars would require $800 million," Smith said. "We didn't have the money then, and we still don't have the money now."

Smith added that Metro is depending on Congress for the bulk of funding.

Since 2006, 5 of the 16 lease back deals with banks have been "unwound", Smith said, allowing the agency to pursue early replacement of a percentage of its older cars. She said METRO would like to come to similar agreements to undo the rest of the lease backs.