Major US Banks Accused Of Sheltering Billions From Tax Man

by Leroy Baker, Tax-News.com, New York

08 August 2003

A report in the Wall Street Journal this week has named ten major US banks alleged to have taken part in a massive tax sheltering scheme which saw some $17 billion transferred into special funds set up between 1999 and 2000, according to records filed with the Securities and Exchange Commission.

The banks, including Bank of America and Washington Mutual, the country's largest savings and loan company, set up subsidiaries with the SEC as 'regulated investment companies' which are governed by the 1940 Investment Company Act designed to protect mutual fund investors. The banks then transferred some of their lending portfolio as well as other assets into these funds and paid themselves a tax advantaged dividend.

"What they're doing is they're creating this corporate structure that they're passing assets off to," Michael Bucci, spokesman for the New York State Department of Taxation and Finance told the WSJ, adding:. "If it is not set up as a mutual fund, 100% of the dividends would be subject to taxes. Essentially, they're getting 60% of the income tax-free."

According to the SEC records, the Bank of America alone transferred $8 billion into its fund, sheltering $750 million of income in the process.

It has also come to light that some of the banks were advised about the scheme by accounting firm KPMG which has been the subject of scrutiny by the IRS recently concerning other tax shelter advice it has given. However, the company defended its actions and spokesman George Ledwith told the WSJ: "California law (where many of the banks are headquartered) fully supports the tax results associated with the planning involving regulated investment companies. Ultimately the tax consequences associated with the transactions will be sustained."

The banks have also sought to downplay the tax advantages of the funds, highlighting their legitimate use as investment capital raising vehicles. Cary Walker, Spokesman for City National, another bank implicated in the scheme said the fund "was intended primarily to provide our company with capital enhancement opportunities [but it] also resulted in some tax-related benefits," reported the WSJ.

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