Spotlight on tax law

Northwestern Financial Review, Mar 15-Mar 31, 2004 by Bengtson, Tom

Several Wisconsin banks are expecting to hear from the Department of Revenue this month about their tax liability related to their investment subsidiaries. While this issue is limited to banks in a single state, bankers everywhere would be wise to consider the risk associated with taxavoidance strategies.

The banks in Wisconsin have the law on their side. Although Wisconsin's franchise tax assesses revenue from U.S. Government securities held by corporations, banks figured out in the early 1990s they can avoid the tax by moving such securities to subsidiaries they set up in tax-free states such as Nevada and Delaware. The strategy works because Wisconsin does not have combined reporting which requires the earnings of all subsidiaries to flow through the corporate tax return.

Former Wis. Gov. Tommy Thompson was well aware of the situation and tried repeatedly to get his legislature to pass a law requiring combined reporting. The effort always failed. Now, Gov. Jim Doyle has said he opposes combined reporting but his revenue department is going after banks that have these out-of-state investment subsidiaries. Apparently, the department is conducting audits at selected banks to determine whether these subsidiaries were set up specifically to avoid taxation. If the Department of Revenue determines that to be the case, the fear is it will subject that subsidiary income to Wisconsin's tax. No word on how many years back the Department of Revenue might try to apply the tax. Nobody wants to use the word 'lawsuit,' but I think it is a reasonable assumption that the situation will end up in court.

No business should be faulted for attempting to minimize its tax liability. Unfortunately, tax law can be more gray than black and white. When differences arise about the interpretation of law, it is the responsibility of the legislature to quickly pass clarifying legislation. These matters should not tie up the courts. It is in the legislature where issues, such as combined reporting, can be discussed openly and all parties can have a say. With the courts, strategies can be based on settlements that are sealed from the public. The courts provide a poor mechanism for making law.

Of course, Wisconsin banks are not the only ones trying to minimize their tax liability. Banks in other states have been known to move their real estate loans into Cayman Island REITs to avoid paying state taxes on the income from those loans. This is legal, but it's a practice that could rub some people the wrong way. The line between a scheme and legitimate tax planning is a thin one. Lawmakers and the public should dialogue in an open forum about the exact location ofthat line. Light on the gray areas of tax law is always welcome.

By Tom Bengtson, Publisher