According to a report in Thursday's Wall Street Journal, the SEC has discovered that at least 10 major U.S. banks are responsible for sheltering hundreds of millions of dollars from federal and state income taxes through private investment funds that paid tax-exempt dividends. So far the SEC has indicated that more than $17 billion was held in these funds in recent years, the purpose of the funds being solely to shelter income from taxation.
The SEC is pointing to Big Four firm KPMG as being responsible for setting up 10 of 11 such funds. It is possible that more of these funds exist, or existed in recent years. The Wall Street Journal reports that some of the funds have been shut down in the past two years to avoid scrutiny.
California officials looking into the deceptive investment funds refer to the use of the funds as "outrageous" and "egregious." Many of the banks under investigation are headquartered in California. The following banks are currently being examined for their shelter activities:
- Washington Mutual Inc.
- Bank of America
- Summit Bancorp, now part of Fleet Bank
- Zions First National Bank, now Zions Bancorp
- Cathay Bancorp
- East-West Bancorp
- City National Bank Corp.
- NBT Bancorp
- Imperial Bank, now part of Comerica Inc.
The banks registered subsidiaries with the SEC, then transferred some of their assets to the subsidiaries. Interest and other earnings of those assets were used to pay dividends to the banks. The banks argue that income passed from a subsidiary to a parent corporate is not subject to taxation.
Tax authorities in California, North Carolina, and New York are looking into the legality of the funds. "There are some valid concerns that these may not be proper entities," said Greg Radford of the North Carolina Department of Revenue.