KPMG Peat Marwick LLP is suing three Connecticut community banks, claiming they profited from tax advice without paying for it.
George Ledwith, a spokesman for the accounting firm, said the banks had a contractual obligation to compensate KPMG if they took advantage of a tax loophole it claims to have discovered.
"KPMG is not pleased that it has been forced to take legal action against those banks to obtain unpaid professional fees for providing these banks with a valuable and confidential tax refund strategy," Mr. Ledwith said in an interview Monday.
In a suit filed Nov. 25 in Hartford Superior Court, KPMG said it had discovered a loophole in Connecticut tax law that entitled banks to a refund.
In 1994, the firm says, it pitched the idea to an undisclosed number of banks, including the three defendants: Farmington Savings Bank, First National Bank of Suffield, and Putnam Savings Bank.
Officials at all three institutions declined to comment.
Hartford attorney David J. Wiese, who is representing Farmington Savings, said Monday that the three banks are discussing a coordinated defense.
Farmington Savings "plans to defend itself vigorously," he said. In a written statement responding to the lawsuit, Farmington called KPMG's claim "an expression of unadulterated greed."
The loophole, which closed July 1, 1996, was related to tax exemptions for bonds. Federal law says a state may not tax interest on federal bonds unless it also taxes interest on its own bonds. Because Connecticut was not taxing its own bonds, KPMG said, the state owed a refund of taxes collected on federal bonds in bank portfolios.
Connecticut state legislators enacted a law in 1995 removing the tax exemption for state bonds but gave companies a year to file claims for tax relief. According to the state's Department of Revenue Services, about 50 banks filed for refunds.
Farmington Savings says it took the advice of its own accountants, not KPMG. The bank got a refund of about $900,000, according to KPMG's suit. Soon after, the bank said, it got a letter from KPMG demanding a fee of $231,370.
It is rare for a dispute between an adviser and a bank to become so public.
"I think it is an awkward situation for both parties," said John Carusone, president of Bank Analysis Center in Hartford. "I am surprised it has come to this point and not been settled."
Gerald M. Noonan, president of the Connecticut Bankers Association, said the accounting firm's tactics have caught a lot of bankers off-guard. "Peat's approach to this issue was in contrast to traditional banking- accounting relationships," he said. "I think people were surprised at the approach and took offense at it. It led to confusion, and confusion almost always leads to litigation."
Mark E. Macomber, president and chief executive of Litchfield (Conn.) Bancorp, said his bank benefited from the tax refund without the help of KPMG. He said the refund's availability was public knowledge in Connecticut.
No date has been set for a hearing in the case.
