WASHINGTON- While bankers continue to harp on credit unions' tax advantages, bankers may have some explaining to do on some of their creative methods of reducing their tax burden. The nation's foremost financial newspaper, The Wall Street Journal, put a bright spotlight on some of these practices in a recent front page article that named names. Apparently many of the largest banks created registered investment companies (RICs) to avoid state taxes in 1999 and 2000, WSJ reported. These investment funds did not publicly sell shares. The banks transferred some of their loan portfolios and other assets into the funds and used the interest and other income they generated to pay the parent bank tax-free dividends. In WSJ's review of Securities and Exchange Commission documents, a minimum of 10 major banks moved over $17 billion into these investment funds. Bank of America Corp. shifted at least $8 billion in this manner, shielding over $750 million from 1999 through May 2003, WSJ reported. Accounting firm KPMG LLP advised the 10 banks on 10 of the 11 known funds. These accounts have gradually been shut down and the SEC and California revenue officials are investigating the practice. New York officials are also beginning to look into it. KPMG is being sued by the Internal Revenue Service to disclose its tax-shelter clients. New York, California, and other states have beneficial tax treatment for transfers from subsidiaries to parent companies or for investment company dividends. California tax officials have reviewed a few banks' tax returns and estimated that those institutions' practices robbed the state of $46 million in 2000 alone. Federal tax implications are uncertain at this point, WSJ reported. According to the article, this was not the first time the issue has been raised. The SEC requested East-West Bancorp withdraw its registration when shares had not been publicly sold. East-West refused. The reason: it did not want to lose, "the state tax benefits that are currently being realized through the Fund," according to an SEC filing, the WSJ article read. Finally, in 2002, the bank converted the fund to a real-estate-investment trust. The article also quoted a lawyer who questioned the legality of the RICs when the bank he worked for determined not to enter into such practices. Zions Bancorp of Utah is one of the banks involved in the tax avoidance scheme, according to WSJ, as is Washington Mutual. Zions took the lead in the credit union taxation push in Utah during the last state legislative session. The bank actually had set up two RICs. The article spawned others in Los Angeles Times, The Salt Lake Tribune, and Deseret News (Utah). Banks' usage of these legal loopholes to avoid paying taxes comes at a time when states, particularly California, are facing significant deficits. The banks have defended their use of the registered investment companies as legitimate business strategies for raising investment capital. As CUNA has done in the past few months, its lobbying team plans to use the article to demonstrate banks' hypocrisy on the taxation issue on Capitol Hill. "I think it's useful to help once again show how on one hand ABA talks about credit unions not paying taxes and should pay taxes when some of their own members" are avoiding taxes, CUNA Vice President of Legislative Affairs and Senior Legislative Counsel Gary Kohn said. He noted that Zions Bancorp's usage of the tax avoidance measures should particularly ring a bell in Utah. "We think that it's helped educate people about what's going on and to see both sides of the story clearly," Kohn said. NAFCU Senior Vice President and General Counsel Bill Donovan echoed Kohn's remarks. "I don't see how anybody can't be struck by the irony in the bankers' behavior as they repeatedly press the case to repeal the nonprofit credit union tax exemption on Capitol Hill while at the same time the Wall Street Journal article clearly suggests their true motivation seems to be greed," he said. "We have no problem with banks getting additional tax breaks through public policy decisions instead of creative accounting practices," CUNA President and CEO Dan Mica added. [email protected]