Wisconsin official responds to Straight Talk

Northwestern Financial Review, May 1-May 14, 2004 by Morgan, Michael L

I am writing to respond to the statements you made in your column of March 15 regarding Wisconsin Department of Revenue policy related to banks.

The Department of Revenue has the statutory authority under Wisconsin law (section 71.30(2), Wis. Stats.) to reallocate income between commonly controlled organizations, if necessary to prevent evasion of taxes or to clearly reflect the income of such organizations. This authority is a tool to prevent unfair avoidance of tax liabilities through corporate maneuvering and tax sheltering. Wisconsin courts have confirmed that tax avoidance is not a legitimate business purpose. It is not, as you suggest, a back door attempt to institute combined reporting.

While businesses can legally minimize their tax liability, they need to be careful not to slide beyond minimization into tax avoidance or tax evasion. As you note, "the line between a scheme and legitimate tax planning is a thin one." Suspicions are properly aroused, however, when a bank reports many millions of dollars of income for regulatory purposes but a large net operating loss for tax purposes only.

It is important to note that this investigation began before Gov. Doyle took office. In June 2002, the previous administration issued a "red flags" article to the banking industry pointing out a number of signals indicating tax avoidance is present, but those warnings appear to have gone unheeded by some.

For the health of the banking industry in Wisconsin, it is imperative that there be a level playing field. Numerous banks pay their fair share of taxes and help support the fabric of society that makes Wisconsin a great place to live. Other banks use investment subsidiaries to reduce or completely eliminate their tax contributions. Those banks playing by the rules are understandably not happy with this state of affairs.

The competitive marketplace requires the law to be enforced on an evenhanded basis. Artificial sheltering of Wisconsin income through the use of corporate shells and other schemes for tax avoidance are not consistent with a fair competitive environment.

Michael L. Morgan

Secretary of Revenue