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Suit claims American Airlines uses sham to duck millions in taxes
RTA alleges $23 million a year is lost to the trickery involving fuel prices

Wednesday, March 12, 2014
Crain's Chicago Business

The agency that oversees public transportation in Chicago sued American Airlines on Tuesday, alleging that the airline falsely claimed it buys “vast amounts of jet fuel” from a small office in a rural community in order to avoid paying tens of millions of dollars in taxes in the nation’s third-largest city.

The lawsuit comes a year after the Regional Transportation Agency also sued United Airlines for doing the same thing in the same small town.

The RTA oversees the Chicago Transportation Authority, the region’s Metra commuter line and the Pace suburban bus service. The agency has been making the allegations against American for more than a year, but said it was waiting for the airline to emergency from bankruptcy protection, which happened in December.

As it said when it sued United, the RTA believes American or its subsidiary, American Aviation Supply, could not possibly conduct the business of buying fuel for jets at one of the largest airports in the world, Chicago’s O’Hare International Airport, out of an office that’s less than a 1,000 square feet and has only one or two employees. The office is in City Hall in the town of Sycamore.

“We’re saying whatever work is being done there is a sham,” Jordan Matyas, the RTA’s chief of staff, said before the lawsuit was filed.

Matyas said that although the lawsuit also names American Aviation Supply, American Airlines is responsible for what is being done – or not being done – in Sycamore.

“This is clearly American Airlines doing the deal,” he said. “They set up a subsidiary in order to funnel the money and not pay the appropriate taxes.”

RTA alleges that under the arrangement between Sycamore and American, the city reimburses the airline for a portion of the sales tax it pays on the fuel. According to the RTA, the Sycamore office cost the city of Chicago, Cook County and RTA a total of more than $23 million last year.

Both American Airlines and Sycamore’s city manager declined to comment. But last year, American spokeswoman Mary Frances Fagan said: “What American is doing is permitted under Illinois law.”

The new complaint is part of a barrage of lawsuits filed by the RTA, the city of Chicago and Cook County against communities outside Cook County. The lawsuits allege that those communities’ tax incentive programs are costing other government agencies millions of dollars.

Matyas said he believes an Illinois Supreme Court ruling in November strengthens the RTA’s lawsuits. The court found in a case involving a fuel oil retailer that sales taxes must be paid by companies in communities where most of their business is conducted.

“The major point was these sham offices do not work, and you’ve got to pay taxes ... where you are actually conducting the business of selling,” he said.

Cook County Commissioner Larry Suffredin agreed, saying he hopes the ruling will persuade companies that have such offices to reconsider because, while the court decided that the companies should not be forced to pay Cook County for taxes they avoided before the ruling, it was clear in warning them that they will be on the hook for those taxes from now on.

“I think they’re going to be nervous, absolutely, because the court was saying ... don’t do it again,” Suffredin said.



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