(FORTUNE Magazine) – The Senate Finance Committee's tax reform plan rips apart tax shelters like a tornado racing through a trailer park. Like a tornado, the plan leaves some shelters untouched while it reduces others to rubble. Oil and gas shelters, for instance, would continue to spew tax savings under the system crafted by Senator Bob Packwood, the Oregon Republican who chairs the committee. But Packwood wants to raze others, including real estate shelters. The reform ! package pays for a big part of the sharp reductions in tax rates by depriving well-heeled investors of some $50 billion in shelter benefits over the next five years. The Packwood plan is particularly bad news for a company called Integrated Resources, a New York outfit that specializes in real estate shelters. Integrated's stock took a pounding on May 7, the day Packwood unveiled his package, falling from $36.50 a share to $30.75. The 16% drop made it the biggest percentage loser on the New York Stock Exchange that day. Within a week the stock was down to $25 a share. About one-third of Integrated's $440 million of revenues last year came from fees for organizing and managing shelter deals. The prospect of reforms that penalize existing shelters and make new ones impossible to build has made 1986 a harrowing year for Integrated, and for the 200,000 wealthy investors in shelters the company has created. The shelter deals that Integrated set up BP, or Before Packwood, as real estate executives have taken to saying, usually work like this: The company arranges to buy apartment houses, office buildings, and the like, and sells limited partnership interests to high-income investors who agree to put up as much as $150,000 each, usually over five to seven years. The deal is structured so that it produces heavy accounting losses from mortgage interest and depreciation allowances in the early years. The losses exceed the amounts partners put up by as much as two to one. Those are known as twofers because partners get two dollars of deductions for each dollar invested. Partners use the accounting losses to reduce taxes on other income. The deals are supposed to produce cash income for the partners around the fifth year. In the tenth year Integrated sells the building and divvies up the proceeds. If everything goes as planned, partners get back their investment plus a tidy capital gain. The Packwood plan would cripple those kinds of shelters in several ways, the most important being that investors could no longer use the accounting losses to reduce taxes on other income. They could only deduct losses from passive investments, as the plan calls limited partnerships, if they had taxable income from other passive investments. The Senate measure also lengthens the depreciation period for real estate from 19 years to 27.5 years for residential property and 31.5 years for commercial buildings. That reduces the depreciation write-offs and accounting losses in the early years of an investment. Real estate deals would suffer yet another blow from the proposed elimination of the special treatment of capital gains. When a project is sold, partners would pay taxes of 27% of any gains instead of 20% or less under the current rules. Such changes, which wipe out new real estate shelters, seemed politically unthinkable just a month ago. Now many Washington veterans are saying that the reform momentum has grown so strong that the changes are virtually certain to be part of the final tax reform bill. The only remaining question seems to be how the new rules will apply to existing shelter deals. The Packwood restrictions on deducting tax losses would be phased in over four years. Investors would be able to deduct 65% of their net losses from limited partnerships next year, 40% in 1988, 20% in 1989, and 10% in 1990. Integrated and other shelter promoters have been howling that even a gradual phase-in could clobber investors in existing shelters. Some legislators agree, including Congressman Richard A. Gephardt of Missouri, a leading Democratic advocate of sweeping reform. ''It's not equitable to change the rules on investors who are in the seventh inning of the game,'' he says. Gephardt would prefer to ''grandfather'' existing shelters so that investors get all the benefits that were written into the law when they put up their money. But if Congress doesn't penalize existing shelters, it probably will have to raise the tax rates in the reform package. Gephardt says it is unlikely that the Senate will go for a higher tax rate in order to save the rich, which would leave the grandfather issue for the House-Senate conference committee that will craft the final reform bill. Gephardt is not confident that the shelter lobby will prevail in the conference committee either. Packwood's plan would hurt current shelter investors in two ways. First, they would get fewer tax deductions than they planned on. Second, and possibly more important, the buildings could be worth substantially less when it comes time to sell them. Since buyers will get smaller depreciation write-offs than they do now and will not be able to use the write-offs to shelter other income from taxes, the values of all existing rental housing and commerical buildings could tumble. The folks at Integrated are trying to convince investors, and possibly themselves, that prices will not fall. Chairman Selig A. Zises (pronounced zy- sees) argues that tax reform could actually drive up the prices of existing ! buildings. The tax changes, he says, would decimate new construction. If that is true, demand for apartments and office space would eventually outstrip supply. But the process could take many years. Until then shelter investors might wind up with capital losses instead of gains when they sell. THE SENATE'S surprising assault on shelters -- most got by unscathed in the House reform bill -- comes at a particularly inopportune time for Integrated Resources. The company's business took off after the 1981 tax bill made real estate shelters much more attractive than they had been. But in 1984 Congress took away some of those benefits by putting a halt to super-leveraged deals, and Zises put the heat under efforts to diversify. Integrated beefed up its sales force with former stockbrokers, began advertising on TV, and expanded its basket of products, including mutual funds and life insurance, aimed at middle-income investors. The repositioning has not come cheap. The company has pumped hundreds of millions into operations and quintupled its long-term debt. Earnings slumped from $3.37 per share in 1983 to $2.04 last year. Zises had been predicting that Integrated's earnings would double this year, but no longer. Demand for new shelters is sure to plummet as investors wait to see the final tax package. The need to diversify is more urgent than ever, but this time the company may not have fresh shelter revenues to see it through. Says President Arthur H. Goldberg: ''In the past two years we changed the entire spectrum of our business. Now we're faced with that again.'' Integrated has already torn up its plans for one deal that was in the works. The company bought an aging office tower at 666 Fifth Avenue in New York City for $320 million nine days after the Packwood plan came out. Integrated had planned to raise $100 million from investors in a tax-shelter syndication, with the balance to come as mortgages. Now it is restructuring the deal as an income-oriented investment with no tax benefits. Integrated will need $150 million from investors to make that plan work. Zises is hoping that lower tax rates will spur demand for income-producing real estate partnerships.

Zises says Integrated Resources will prosper even if the Packwood tax reform becomes law, and predicts that the big earnings rebound will come next year. So far, the stock market seems unpersuaded.

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