Taxes Again

So, there was a tragic train crash in Washington DC. This was somewhat interesting regarding that accident (written by Sarah Lawsky, a law professor):

The [Washington] City Paper reports that the National Transportation Safety Board repeatedly recommended that Metro (more formally known as the Washington Metropolitan Area Transit Authority, or WMATA) retrofit or replace these older cars, but Metro refused. Why? Because “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.”

What are these “tax advantage leases”? They appear to be standard sale-leaseback transactions, in which WMATA sold equipment, including train cars, to another party and now leases it back. The other party gets various tax advantages (depreciation, credits and so forth) associated with owning the equipment, and WMATA, which as a tax-exempt organization cannot use these advantages, gets cash. But apparently the leases did not include language that permits WMATA to break the leases if newer, safer equipment comes along.

Thus sale-leasebacks, which are purely tax-motivated transactions, may have locked Metro into using outdated and unsafe equipment and thus made this crash even more deadly than it might otherwise have been.

Taxes can do all sorts of things. Wow.