Wisconsin CU League: DOR Investigation of Banks' Out-of-State Subsidiaries Not Our Doing

PEWAUKEE, Wis. – While not denying the Wisconsin Department of Revenue’s decision to examine the use by banks in Wisconsin of out-of-state subsidiaries as tax shelters as “being good for credit unions,” a Wisconsin Credit Union League spokesperson said the League did not “tip off DOR” about the possible misconduct. Chris Olson of the Wisconsin Credit Union League said The Capital Times, a Madison, Wis.-based paper, has been covering the issue in articles for the past several months. “They chose to investigate the practice,” said Olson, noting that she had no idea “how they got wind of it. They’re always looking in to issues.” According to an article in the newspaper and in the Milwaukee Journal Sentinel earlier this month, DOR intends to look in to about 30 banks with subsidiaries outside the state, as part of its annual audits. DOR Administrator Diane Hardt said the department wants “to see if we can learn anything from it and see if they’re complying with the law.” Olson said the staff at the DOR involved in policy “at the highest level” are the people questioning the banks’ practices. “They wouldn’t be looking in to it if they weren’t interested,” she said.. As far back as October 2002, DOR met with representatives of the Wisconsin Bankers Association and discussed with them some of the “red flags” that may result “in a Department determination that a bank investment subsidiary arrangement is improper.” The DOR stated that it recognized that “all banks are different, and not all of these items need apply for the Department to reallocate income between a parent and its subsidiary. However, if multiple items on the list are applicable, there is a significant possibility that the Department will make an adjustment.” The five red flags included, as stated by DOR: * the investment subsidiary is domiciled in a state without an income/franchise tax, or a state that does not tax the particular form of income being transferred to the subsidiary; * the parent manipulates the subsidiary’s income and/oor assets to significantly reduce or eliminate the Wisconsin taxable income of the parent; * the parent transfers a significant portion of its loan portfolio to the subsidiary, whether directly or via participation, mortgage-backed securities or other vehicles; * servicing of loans transferred to the subsidiary is retained in Wisconsin by the parent. (Servicing of loans transferred to unrelated third parties would not raise this red flag.) * large amounts of capital are transferred from the subsidiary to the parent by dividend, return of capital, loan or other means.