Eye on the states: Banks Win $60M Settlement From Conn. Over Bond Taxes

Connecticut has agreed to pay $60 million in cash and tax credits for the next six years to settle a lawsuit by 72 banks and insurance companies.

The settlement resolves claims stemming from taxation of interest earned on federal bonds and Treasuries from 1979 to 1994.

During that period, Connecticut had issued four bonds that were not subject to the state's corporate tax. The banks and insurance companies were claiming that federal law prohibited taxing of interest on federal bonds if any state bonds were tax-exempt.

The state was facing a potential liability of $122 million in refund claims.

"It was the kind of issue that could have gone on for many years in litigation," said Jack Haller, partner with Snyder & Haller, a Hartford accounting firm that represented five community banks.

Kristi Vaughan, spokeswoman for Bridgeport-based People's Bank, one of the claimants, said it considers the settlement fair. She declined to discuss it further, citing a confidentiality requirement in the agreement.

Under the settlement, the state will pay $22 million in cash to the claimants - mostly community banks, a few regional banks, and insurance companies. In addition, the state will provide $8.5 million in corporation business tax credits to apply in the 1996 income year, plus another $29.5 million in tax credits.

The companies can start using the credits in 1997 but are limited to how much they can use then and in each of the next four five years.

The issue arose in the fall of 1994, when several companies including People's Bank, Webster Financial Corp., Eagle Financial Corp., Fleet Credit, and Savings Bank of Manchester began requesting refunds.

The total was $84 million by January 1995, when the current administration came into office, and eventually reached $122 million, some of it for payments dating back to 1986.

State tax officials denied the requests, and last October 72 companies filed an appeal in Hartford Superior Court alleging discrimination in the state's one-sided taxation.

The state and the companies agreed to nonbinding mediation. Officials hammered out the current agreement.

Gene Gavin, state commissioner of revenue services, blamed the problem on "questionable services" of three law firms hired by the state treasurer as bond counsel. He also said the administrations of two former governors, William O'Neil and Lowell Weicker, should have acted on the matter.

"The prior administrations were tossing a hot potato," Mr. Gavin said. "O'Neil did it to Weicker, Weicker did it to (Gov. John) Rowland. And Rowland decided to deal with it."

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