more California mayhem

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California investigates US banks' tax shelters

David Teather in New York
Friday August 8, 2003
The Guardian

Some of the biggest banks in the US have avoided paying hundreds of millions of dollars in
state tax by shifting money into "investment funds" that did little more than provide shelters
from the taxman, it was claimed yesterday.

According to a report in the Wall Street Journal, at least ten large financial institutions in
1999 and 2000 moved more than $17bn into the funds that did not sell shares but paid tax-exempt
dividends back to the banks.

Bank of America transferred at least $8bn into one fund, protecting $750m of income, the report
said.

Funds of this kind need at least 100 shareholders, according to securities and exchange
commission rules. In an apparent effort to meet the obligation, the Bank of America subsidiary
distributed shares to 125 charities.

The banks argue that the funds were legitimate means of raising investment capital.

Many of the funds have been closed and state officials in cash-strapped California are looking
into whether they are owed back taxes.

The funds came under the microscope after California officials received complaints, including
an anonymous letter they believe came from within KPMG.

In all but one case, the funds were set up on the advice of accounting firm KPMG, which is
already under scrutiny by the inland revenue service for its tax shelter policies. A spokesman
yesterday stood by the investment vehicles.

"California law fully supports the tax results associated with the planning involving regulated
investment companies."

He said an audit by the state of the funds "is the appropriate forum to study the tax
consequences of these legitimate business transactions. Ultimately the tax consequences
associated with the transactions will be sustained."

The other banks named in the Journal include Washington Mutual, Summit Bancorp, Zions First
National Bank and East-West Bancorp. A spokesman for Bank of America said that its fund in
question had been liquidated in the normal course of business and it had been a legitimate
means of bank funding and a vehicle for public offerings.

He also noted that the bank's 2002 tax bill in California was $180m, one of the highest in the
state.

California revenue officials said a sampling of tax returns from just a handful of the banks
showed that the investment funds had cut their tax liability by $46m.

California controller Steve Westly told the Guardian: "We do not believe this is appropriate.
This is something we need to fix."