For years, three large players in the computer leasing business, General Electric Credit Corp, Comdisco Inc and Computer Leasing Inc, have reduced their cost of money by participating in complex tax shelters. These deals, which have multiple manifestations, are variously called FOL (forward operating loss) transactions or NOL (net operating loss) transactions. The US Internal Revenue Service calls this class of transaction a strip, because the taxable income associated with the transactions is stripped away from the cash flow and tax deductions. The deals work because one party in the transaction serves as a lightning rod for the tax hit, giving the other players tax-free income. Who are these tax-prone leasing partners? Sometimes they are Indian tribes, sometimes offshore individuals or business entities. They could be religions, we suppose, and in the secretive world of 10-digit finance (these are very big deals indeed) they may well be. In any event, there will be no more of these shenanigans, according to the Revenue Service, which on Friday the 13th of October ruled that the tax liability for players in such strips will fall on the heads and shoulders of the parties who seem to be making the big money. The newly liable are not, we hasten to add, the Indians. Old deals (and the leasing arrangements packaged within them) will remain unchallenged. Only future transactions will be subject to the scrutiny and, now, disdain of the IRS. The financiers are out scouting for new angles, but some damage may have already been done. Insiders say that the firms that had expected to sell off these tax shelters in the waning months of 1995 had accumulated leases and were rounding up appropriate investors. Now the warehoused transactions will not be funded at the low costs made possible by strips and it is entirely possible that the portfolios held in anticipation of year-end deals are slightly under water. The total value of all the unwrapped leases nationwide is probably not more than a few hundred million dollars and the potential exposure of the packages, if any, is a small percentage of that. Nonetheless, we expect the cost of some leases bid at corporations with very good credit – mandatory in strip transactions – will rise by a few points.
Taken from the November 1995 edition of Infoperspectives, published by TechnologyNews Ltd, 110 Gloucester Avenue, London NW1 8JA, telephone 0171 483 2681, fax 0171 4834541.Copyright (C) 1995 Technology News Ltd. All rights reserved
