How many people in San Francisco are involved in multimillion-dollar illegal tax shelters? Would you believe: more than 200,000?
That's how many commuters each day ride the San Francisco Municipal Railway's system of rail cars and buses, which in 2002 were leased to investors for 27 years as part of a $1 billion tax avoidance scheme. Through a series of sham Cayman Islands contracts, tax-dodging investors have pretended to own the Muni fleet so they can write off wear-and-tear "depreciation" from their tax bill. In exchange, Muni was paid $33 million.
Last month, the IRS announced a crackdown on sham tax shelter deals like San Francisco's that were cut by many public agencies in the early years of the new millennium. "These deals stank when they were happening," said Joseph Bankman, Ralph M. Parsons professor of law and business at Stanford Law School. "They were in a class of deals that stank, and the IRS has gone through them all."
So far, though, it looks as if it will be just the tax-shelter investors who will take a financial hit because of the IRS crackdown. Those investors, who had hoped to glean tens of millions of dollars in artificial write-offs, will now probably have to pay more taxes than they'd hoped to.
Bankman says it's unlikely that officials at Muni or BART, or other public dealmakers, will suffer significant consequences for their actions. The IRS is aggressively going after tax evaders, but not necessarily all of their abettors. And San Francisco's deal doesn't appear to include language putting the city on the hook for guaranteeing the tax shelter would always be approved by the IRS.
After Bankman analyzed of a portion of the Muni deal I faxed him, he said it's likely the agency will get to hang on to its $33 million payoff, because the deal never included a San Francisco guarantee that the tax shelter would pass muster. "Actually, in a sick way, maybe it's not so bad" for complicit city officials, he said.
Early last month, the IRS announced that 45 investors involved in Muni–style sham tax shelters would be offered a form of amnesty where they would be allowed to keep 20 percent of their tax benefits. An IRS spokesman told me the agency would not reveal the names of the investors, nor comment on what would happen to the deals.
In response to my inquiry, the San Francisco Municipal Transportation Agency issued this statement: "It is still not clear what the implications to the SFMTA would be if the investors reached a settlement with the IRS."
If Bankman is correct, Muni officials have found that, in this instance at least, crime pays. Lesson in hand, our ambitious mayor should establish offices dedicated to money laundering, kickbacks, extortion, robbery, check kiting, and other such lucrative deeds.
Confirming that August 2008 was the month in which no bad deed went unrewarded, Ralph Alldredge, the attorney who represented the San Francisco Bay Guardian in its anticompetitive pricing lawsuit against SF Weekly, was hired by the billionaire proprietor of the Eureka Reporter in a similar suit. The twist here is that the Reporter — the locally owned paper — is accused of trying to put Eureka's other daily newspaper, the Eureka Times-Standard — owned by a national chain — out of business.
So this time Alldredge is representing the alleged predator. It's like the bizarro version of the Guardian's lawsuit against us.
To reprise: This May a San Francisco Superior Court judge awarded $15.9 million to the Bay Guardian, based on Alldredge's argument that SF Weekly had sought to harm its rival by selling below-cost ads. Guardian editor Tim Redmond claimed at the time that the suit was "about whether independent, locally owned media can survive."
More sober observers saw the lawsuit as an example of America's unusual system of allowing for-hire expert witnesses to sway juries by making biased scientific claims. The Guardian's legal team paid an accountant to state that San Francisco would have been a marvelous place to make money in the newspaper business during the early-to-mid-2000s, if not for allegedly low advertising prices offered by SF Weekly. The consensus among legitimate experts, meanwhile, was that Bay Area newspapers have been devastated by a national industry downturn.
The success of the Guardian's argument seemed to portend a tidal wave of similar lawsuits in which money-losing newspapers could sue their rivals. Using the Guardian and Alldredge's logic, any newspaper that's losing money technically sells advertising below cost and therefore might meet the legal standard of "predatory pricing." All that's needed is an appealingly folksy expert witness willing to take money for peddling junk science, topped off with a warm appeal to jurors' sympathy for whomever is being portrayed as the little guy.
As it happens, though, a newspaper chain known as one of the most relentless predators in the business is playing the victimized little guy in the Eureka dispute. MediaNews, the owner of the Times-Standard, is headed by media mogul Dean Singleton, who entered a venture with Hearst Corp. two years ago to scrape up the remnants of the Knight Ridder chain in the Bay Area. Prior to that Singleton shuttered the Houston Post, gutted the Trenton Times, and became known as a "bone-picker publisher," according to the Columbia Journalism Review.
On the receiving end of the Singleton lawsuit is Reporter owner Robin P. Arkley II, a property developer and tax attorney who is also the head of Security National Holding Co., which specializes in creating securities out of underperforming home loans. A year ago the company held more than $2 billion of such debt. The Times-Standard famously failed to endorse Arkley's wife when she ran for Eureka mayor in 2002, and rivals accuse him of using his fortune to start the Reporter in 2005 with the aim of putting the Times-Standard out of business.
The Eureka newspaper lawsuit represents a fascinating alternate-universe version of the Weekly-Guardian case. In San Francisco, Alldredge sought to portray the Guardian as locally owned and thus morally deserving of financial success. Alldredge's new client, The Reporter, is likewise locally owned. But its conservative viewpoint ill fits the Guardian's left-leaning moral universe. (Arkley's family has donated hundreds of thousands of dollars to Republican campaigns, according to the Federal Election Commission. And on Aug. 14, the paper reprinted an editorial from the Sacramento Union Web site dedicated to bashing San Francisco for being too liberal. "A laboratory for degeneracy, it has devolved into an America-hating sanctuary for criminal aliens, drug abusers, panhandlers, and prostitutes — an embarrassment to the rest of the state," it read.)
In San Francisco, Alldredge argued that SF Weekly had an unfair competitive advantage because it was able to draw on the resources of its parent company, Village Voice Media. In Eureka, MediaNews argues that its rival enjoys an unfair competitive advantage thanks to financial support from Arkley.
In other words, the topsy-turvy Eureka lawsuit will highlight the bogusness of the arguments used in the winning side of the San Francisco case.
If anyone knows how to point out those arguments' speciousness, it's Alldredge.