Wisconsin bankers look for answers on investment subs

Northwestern Financial Review, Mar 1-Mar 14, 2004 by Hilgert, Jackie

With Wisconsin's Department of Revenue conducting audits at dozens of financial institutions, bankers gathered Feb. 4-6 at the Madison Concourse Hotel for the Wisconsin Bankers Association's Executives Seminar looking for answers. Rose Oswald Poels, the association's legal counsel, gave bankers an update but many questions remain unanswered about the state's efforts to tax the income of out-of-state investment subsidiaries.

She said the state is in the process of conducting audits at about 60 banks. Based on her conversations with Department of Revenue personnel, she said she expects all institutions under audit to be assessed by March 15, a rollover date for a new tax year.

At issue is the state's right to tax income from investment subsidiaries owned by Wisconsin banks. Most of the subsidiaries are based in Nevada, with some in Delaware. Wisconsin is one of the few states that taxes income corporations derive by holding U.S. government bonds, a practice it began in 1988 when it applied a franchise tax to banks. Wisconsin banks set up subsidiaries out of state to avoid the tax. The strategy works because Wisconsin is one of 23 states that does not have "combined reporting," - a system of tax reporting that combines the income of all subsidiaries on a single form filed by the corporate headquarters.

The number of Wisconsin banks that have such subsidiaries is unknown, although Oswald Poels used an estimate of 150. The Federal Reserve reports that the state's 245 bank holding companies have 71 investment subsidiaries in Nevada or Delaware. There are 286 banks in Wisconsin. The investment subsidiaries would not show up in the Federal Reserve data if established as a unit of the bank, a structure preferred by many institutions.

Many of the banks affected by the audits hold letters issued by the Department of Revenue that clarify the tax status of these subsidiaries. Those letters, however, may not be sufficient to ward off new tax assessments, the 250 Wisconsin bankers at the conference were told. "The fact that they haven't revoked the letter rulings doesn't mean they think they're binding," said Chuck Jackson, an attorney with Michael Best & Friedrich, LLP, Milwaukee, a conference speaker. "We're not in the clear."

Oswald Poels said she didn't anticipate the department to lay down assessments before it ruled on those private letters.

Jackson explained that the position of the Department of Revenue is that it has a responsibility to allocate taxes according to activities.

Jackson offered bankers a bit of advice: If you're being audited, he said, stress that you provide services you'd have trouble providing or couldn't provide without the out-of-state subsidiary. "It may sound too obvious for words," he added, "but don't say the purpose of your subsidiary is to avoid taxes."

In the intervening weeks, bankers may have an ally at the Department of Financial Institutions - Secretary Lorrie Keating Heinemann. DFI has been able to clear the way for audited banks to access Department of Revenue Secretary Michael Morgan, Keating Heinemann said.

"What I encourage bankers to do," she added, "is work through WBA to put out a position paper to give us a clear idea of the issues at stake." In areas where a bank's safety and soundness is at risk, Keating Heinemann said, we'll discuss the issue with the Department of Revenue.

Expanded powers

Despite the storm brewing over taxation, Wisconsin's new Universal Bank charter, which lost some of its potency when the Office of the Comptroller of the Currency issued its preemption rules for national banks in January, held its spot as the conference headliner. Five banks had already applied to convert to the new charter in the first few days that the choice became available. Those banks are Acuity Bank, SSB, Tomah; Maritime Savings Bank, West Allis; Brill State Bank, Rice Lake; Peoples Bank of Wisconsin, Hayward; and Bank of Sun Prairie.

"It's hard not to find a downside," said Jackson, who with WBA General Counsel John Knight of Boardman Law Firm, Madison, discussed the new powers state banks, savings banks and state S&Ls gain if they choose to convert to a universal bank.

The universal charter is an operating authority imposed over a bank's existing charter, which stays in place with no change to governance. WBA put six years into developing the UBC, said WBA Executive Vice President Harry Argue. "It was meant to keep state charters relevant," Argue said, "which is especially interesting in light of the recent development by OCC."

Banks interested in applying for a universal charter can download the two-page application from the DFI web site, submit the completed form to the regulator with the required $1,000 fee and begin operating as a universal bank immediately. DFI has 60 days to insure the bank has:

* Been in existence for at least three years;

* Is well capitalized;

* Has a CAMELS rating of 1 or 2;

* Has not been subject to any enforcement action during the preceding 12 months with none pending;