California Investigates Us Banks' Tax Shelters

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."