Wachovia Responds To US Tax Shelter Ruling

by Glen Shapiro, LawAndTax-News.com, New York

06 May 2008

Financial services firm, Wachovia Corporation has announced that, as a result of its analysis of the US government's recent court victory in a tax shelter case, it expects to record an after-tax non-cash charge of between USD800mn and USD1bn in the second quarter of 2008.

Wachovia revealed in a statement released on 30th April that it had entered into various leasing transactions between 1999 and 2003 involving lease-to-service contracts and leases of qualified technological equipment, which are widely known as sale-in, lease-out or "SILO" transactions. Wachovia stopped originating these transactions in 2003.

On April 29th, 2008, the US Court of Appeals for the Fourth Circuit issued an opinion in the BB&T case which disallowed tax benefits associated with certain of BB&T's lease-in, lease-out (LILO) transactions.

Although the BB&T decision involved LILOs, Wachovia believes some portions of the decision may also apply to SILO transactions. There has not yet been any judicial decision that directly involves SILOs, so the tax law as applied to SILOs remains unsettled.

However, applicable accounting standards require Wachovia to update the assessment of its SILO transactions in light of the BB&T decision. The decision has no impact on Wachovia's LILO transactions, which were settled in their entirety in 2004.

Although Wachovia continues to believe its SILO transactions comply with applicable laws, in light of the BB&T decision, under the principles established by Financial Accounting Standards Board (FASB) guidance in 2006, the non-cash charge to earnings is currently estimated to be in the range of USD800mn to USD1bn, and this approximate amount would be recognized as income over the remaining terms of the affected leases, generally 35 to 40 years.

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