Lobbying effort delays tax loophole’s end

WASHINGTON — In the span of 11 days this month, $1 billion in future payments vanished from federal tax legislation.

As congressional leaders were braiding together a tax and spending bill of more than 2,000 pages, lobbyists succeeded in adding 54 words that temporarily preserved a loophole sought by the hotel, restaurant and gambling industries, along with billionaire Wall Street investors, that allowed them to put real estate in trusts and avoid taxes.

They won key support from the top Senate Democrat, Harry Reid of Nevada, who responded to appeals from casino company executives, politically powerful play-

ers and big employers in his state. And the lobbyists even helped draft the language.

The small changes, and the enormous windfall for the companies involved, show the power of connected corporate lobbyists to alter a huge bill that is being put together with little time for lawmakers to consider. Throughout the legislation, there were thousands of other add-ons and hard-to-decipher tax changes.

Some executives at companies with the most at stake are also big campaign donors. For example, the family of David Bonderman, a co-founder of TPG Capital, has donated $1.2 million since 2014 to the Senate Majority Political Action Committee, a campaign fund with close ties to Reid and other Senate Democrats. TPG Capital has large holdings in Caesars Entertainment and helps run a Texas-based energy company, both of which stand to benefit from the last-minute change.

“For Sen. Reid, it was important, as he represents Nevada, to help the large employers in his state,” said Kristen Orthman, a spokesman for Reid. She noted that Caesars, MGM Resorts International and Boyd Gaming, all Nevada-based casino companies, could benefit.

A spokesman for Bonderman said the businessman played no direct role in pushing the cause but did not dispute that his company was involved in the discussions with congressional staff members.

Both Orthman and the spokesman for Bonderman said it would be wrong to presume that Bonderman’s contributions to Reid had played any role in the help his companies received.

The provision was among many in the $1.15 trillion spending plan and separate $622 billion tax plan that had an influential patron. Language inserted by Sen. Thad Cochran, R-Miss., into the federal budget over the objection of President Barack Obama’s administration directed the Coast Guard to build a $640 million National Security Cutter in Mississippi that the Coast Guard says it does not need.

The real estate provision is intended to close a loophole in federal law that has allowed casinos, hotels, restaurant chains and other businesses to raise billions of dollars in cash by spinning off the buildings they own into a separate real estate investment trust in a taxfree transaction.

Darden Restaurants, the corporate owner of Olive Garden, for example, maintained direct control over its thousands of restaurants, but the buildings themselves moved into the real estate investment trust, in a nearly $1 billion transaction completed last month.

Since 2010, this type of deal has been used at least 15 times, helping the companies avoid $21.7 billion in taxes, according to data collected by FactSet. Rep. Kevin Brady, R-Texas, and chairman of the House Ways and Means Committee, and others on Capitol Hill wanted to cut it off.

The proposal, a document stamped 9:18 p.m. Dec. 7, set off alarms among Wall Street executives and private-equity firms. Companies such as Caesars, MGM Resorts International, Hilton Worldwide and the Dallas-based Energy Future Holdings Corp. wanted to temporarily preserve the option to take advantage of the loophole on transactions they were already planning.

Lobbyists were mobilized, including David Lugar, who is a son of former Sen. Richard Lugar of Indiana and represents Hilton, and the lobbying firm run by Norman Brownstein, whose clients include Apollo Global Management, Caesars and the National Association of Real Estate Investment Trusts, all of which were either represent the investment-trust industry or were still trying to complete tax-free spinoffs.

The class of companies involved was relatively limited, so the lobbyists teamed up, holding a series of conference calls and devising a “fix.” They even came up with a draft of the proposed language that could be inserted into the tax bill, two lobbyists involved in the effort said, asking that they not be identified because they were not authorized to discuss confidential negotiations.

“We will not get two bites at the apple,” one of the participants recalled a lobbyist saying as the group worked to come up with a single solution that would benefit all of the investors, with hundreds of millions of dollars in tax benefits at stake. “We are doing one fix.”

They argued that it was wrong for Congress to close down such deals, particularly with so little notice. Energy Future Holdings, for example, had received bankruptcy court confirmation of its reorganization plan, including a tax-free real estate investment trust, just four days earlier.

But at least some on Capitol Hill, including certain advisers to House Speaker Paul Ryan, did not initially want to back down, lobbyists involved in the effort said.

Reid played a central role in getting the change made, participants in the process said. But the industry executives and their financial backers enlisted other lawmakers as well.

“They have someone in just about everyone’s district,” a lobbyist involved in the push said. “These people had a lot of political capital.”

And they used it. On Dec. 11, four days before a new draft of the tax legislation was made public, rumors started to circulate about the possibility that the House tax writers would back down and insert the “grandfather clause,” two Washington lobbyists said.

It was nicknamed by some involved the “Caesars-TXU carve out” — referring to the casino and the former name of Energy Future Holdings — even though it would potentially benefit about a half-dozen companies.

Confirmation came a few minutes before midnight Dec. 15, when the revised tax plan was released. It contained a new clause, granting companies that had already asked the Internal Revenue Service for its consent to do a tax-free spinoff the permission to go ahead, precisely the kind of language that the companies had pushed for, one of the lobbyists involved said.

Other words were sliced from the package that would have blocked certain types of property transfers to real estate investment subsidiaries, as MGM Resorts is planning to do with seven of its Las Vegas resorts, making it easier for the company to move ahead.

These and other changes related to real estate trusts meant that the tax deal would be $1.06 billion more expensive to the federal government over

the coming decade. Brady, in an interview Friday after the House passed the legislation, said the compromise ultimately made sense.

“We just weren’t interested, I think on both sides of the aisle, in disrupting transactions mid-transaction,” Brady said as he emerged from the House chamber after voting on the legislation.

The revised language drew little notice from members of Congress, who were given three days to review a 2,009-page spending plan and the 233-page list of tax breaks before they were asked to vote on the package with almost no debate. Three House lawmakers interviewed just after the vote said they had known nothing about it.

Senate Majority Leader Mitch McConnell, R-Ky., said he regretted the way Congress had handled the appropriations process — with ships and planes that the Obama administration did not ask for getting thrown in — though he determines how it is done.

“This is the kind of thing that can happen when you have an omnibus,” McConnell said, referring to the name for a single giant spending bill. Individual appropriations bills “are thoroughly vetted, done in the open and where everybody has a chance to see what is in the bill.”