Of Windmills, Cattle and Form 1040

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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.