The Navy has guaranteed up to $2.7 billion in special tax breaks for three companies supplying 13 cargo ships through controversial "lease" transactions, Sen. Howard M. Metzenbaum (D-Ohio) disclosed yesterday.
"The whole idea of the Navy leasing ships instead of buying them has raised some eyebrows on the Hill, but discovering that we would subsidize these companies if the Internal Revenue Service rules against these questionable tax breaks is absolutely unbelievable," Metzenbaum said.
The Navy quickly issued a statement defending the deal: "The Navy has executed a charter program for cargo-carrying services based on sound business practices, mindful of current tax laws and the best interests of the American people, in full and public view with the express permission of Congress."
The dispute centers on the decision of the Navy to acquire 13 cargo ships through what are known as "service contracts." The ships are to act as "floating warehouses" in the Indian Ocean carrying supplies, vehicles, arms and other equipment for the Rapid Deployment Force.
If the contracts are allowed to stand as service contacts, the three private companies will be able to use, or sell to investors, all the tax breaks that are available when a company buys equipment, including a 10 percent investment tax credit and the depreciation write-offs.
This practice is similar to the buying and selling of corporate tax breaks that was allowed under the administration's 1981 tax bill and severely restricted by Congress last year.
The three companies involved are General Dynamics, Maersk Lines Ltd. and Waterman Steamship Corp.
The Navy contract anticipates, however, the possibility that the IRS will successfully challenge the contracts.
In that event, the Navy has agreed to make up for any lost tax benefits, to pay any interest and penalty charges and to pay legal costs of fighting the IRS.
"I have seen a lot of 'sweetheart' deals in my life," Metzenbaum said, "but none to surpass this one."
Metzenbaum said the cost of each ship is $184 million, but the tax breaks over the life of the 25-year service contract amounts to $210 million, for a potential loss to the Navy of $2.7 billion in the event the IRS successfully attacks the scheme. Other tax experts suggested that Metzenbaum's estimate may be too high.
The Navy deal has provoked widespread interest on Capitol Hill. The Joint Committee on Taxation is expected to release a report today on the transaction, and the House Ways and Means oversight subcommittee will hold a hearing Monday.