Tax Attorney David Colker

GlobeSt.com: What does the ruling say about the future of synthetic leases?

Colker: Companies are clearly concerned about the perceptions created by such off-balance-sheet devices. Cisco Systems, for example, just announced that they were terminating their synthetics and putting that debt on their balance sheet.

GlobeSt.com: Is there an implication for the legality of synthetics going forward?

Colker: My job isn't to comment on the legality of such devices but to help companies minimize their tax costs. In this case, we're trying to let clients put property title back in their names without paying a documentary transfer tax.

GlobeSt.com: The transfers can be costly?

Colker: They can range from $1.10 to $6.10 per thousand dollars of value. In the transactions we're looking at, the tax savings can be as high as $1 million.

GlobeSt.com: What exactly was your role in the board of equalization ruling?

Colker: We were concerned about the imposition of that transfer tax and asked the board for guidance on whether a reconveyance of title in connection with the unwinding of synthetic leases was a beneficial transfer or a termination of a security device.

GlobeSt.com: What's the difference?

Colker: If it's a beneficial transfer, then one could argue that the taxes are due. If it's a termination, one could argue that no taxes are due.

GlobeSt.com: But even though there is no tax payment coming out of pocket, there is still an acquisition cost to deal with--like Cisco's $1.9 billion.

Colker: Yes, the company is paying off the financing associated with the initial acquisition of that property.

GlobeSt.com: And, getting back to the ruling, obviously, the board decided in your favor.

Colker: They determined that it was a termination of a security interest, which was the answer we wanted.

GlobeSt.com: To what extent is the current trend the direct result of the Enron scandal?

Colker: Enron is one cause behind the rash of unwindings we've seen, but economic conditions could be another. To blame it purely on Enron is simple speculation. Frankly, we've always thought that you shouldn't pay this tax when you unwind. The most you could say is that Enron may have accelerated the process.

GlobeSt.com: What are the implications for the ruling beyond this one case?

Colker: We've taken the ruling to the County of Santa Clara and asked that it be applied to local transfers. So we're working with just one county so far and some of the cities within. We're concerned with the cities as well as the county because some cities have their own taxing structure.

GlobeSt.com: Are there implications beyond California?

Colker: Many states have similar documentary transfer taxes. So the same issues concerning the tax consequences of unwinding a synthetic lease may well be addressed in many other states.

GlobeSt.com: And beyond a strict focus on tax issues, are there any implications?

Colker: Yes. The Accounting Standards Board is proposing changes that would make these transactions more difficult to put in place as well as facilitate the desire to unwind them.

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