MTA Rail Car Deal Under IRS Scrutiny : Transit: Review focuses on propriety of a $26.4-million bond issue. Complex transaction had been an attempt to avoid tax liabilities.

A complex international transaction put in place for the county’s purchase of 54 commuter rail cars is being examined by the Internal Revenue Service, a local transit official disclosed on Wednesday.

The IRS inquiry was described by the transit agency’s acting inspector general during a meeting of the budget committee of the county Metropolitan Transportation Authority. The official, Ernesto V. Fuentes, appeared before the committee to present an otherwise favorable review of the rail car transaction.

Fuentes’ internal review was undertaken in response to a Times article last March reporting that transit officials had gone ahead with the complex rail car transaction despite millions of dollars of potential tax liabilities. Based on a count of all existing and long-term potential costs, The Times reported that the transaction could cost the transit agency $3.9 million over the 16-year duration of the deal.

Fuentes--saying he relied exclusively on information supplied by transit staff and the outside lawyers and investment bankers who were involved with the transaction--said Wednesday that he believed the deal would show a profit of $4.5 million. The staff officials had said last spring that the deal would make $3.4 million. Fuentes said his review was not an audit and that he could not explain the $1.1 million disparity.

The transit agency entered the transaction in 1989 by selling its interest in the 54 rail cars, and leasing them back from anonymous Japanese investors. The deal was structured to provide financial benefit to the investors and to the transit agency by avoiding the imposition of taxes in both countries.

However, Fuentes said Wednesday that, pending the outcome of the IRS’s ongoing review, he does not think the MTA should enter another similar transaction.

“This is a very organic area of tax law,” Fuentes said in an interview. “I would say to the board, ‘Wait until they (the IRS) have completed their review and issue an opinion.’ ”

Franklin E. White, the MTA’s chief executive officer, said he agreed. “I would not do (a transaction) that is an exact mirror of the one that is under investigation,” White said in an interview.

Fuentes said the IRS began requesting documents related to the rail car transaction in August. In a letter to White made public on Wednesday, Fuentes said the IRS is scrutinizing the propriety of a $26.4-million bond issue that the transit agency is obligated to pay off over the next 16 years.

The bonds were issued in 1990 to accommodate the needs of the Japanese investors involved with the transit agency’s sale and leasing back of the final 22 of the 54 cars, all of which are in service on the Blue Line, running between Long Beach and Los Angeles. Transit officials authorized the bond issuance despite advice from lawyers that the securities might not be exempt from U.S. taxes.

Fuentes addressed the issue in his letter. “The only non-compliance issues in which (the transit agency) would appear to be vulnerable are those dealing with the tax-exempt status of the bonds . . . and the fact that tax was not withheld on lease payments,” he wrote.

Citing federal law, a spokeswoman for the IRS declined to comment.

Schuyler M. Moore, a tax law specialist who was consulted by The Times, said that Fuentes’ conclusion that the transaction would save the agency at least $4.5 million lacks credibility. “If they want to do this right,” Moore said, “they should have an independent review.”