A tax-shelter crackdown by Wisconsin has banks headquartered there settling in droves, though a trade group insists they have done nothing wrong.
Last week the Department of Revenue said 26 of them had agreed to pay $23 million of back taxes, accrued interest, and penalties related to income generated in Wisconsin but improperly attributed to tax-exempt Nevada investment subsidiaries.
Nearly 200 other banks are negotiating such agreements, the department said.
It did not say which had settled, but two announced earlier that they had done so; the $37.1 billion-asset Marshall & Ilsley Corp. of Milwaukee and the $3.8 billion-asset Anchor BanCorp Wisconsin Inc. Neither said how much it would pay.
The state says they have been abusing a departmental decision from the mid-1990s not to levy taxes on income generated by the Nevada subsidiaries.
Banks balked last year when the state — under a new Democratic governor — started auditing to determine how the subsidiaries operate. The banks said they had set up the units because they had been told no taxes would be levied.
Kurt Bauer, the chief executive officer of the Wisconsin Bankers Association, said many banks have chosen to settle because fighting would not have been worth the hassle and expense.
“It was purely a business decision,” he said. “It was no means an indication that the institutions believed they did anything wrong.”
But Jason Helgerson, the executive assistant to the Department of Revenue’s secretary, said few if any of the subsidiaries have actually done business in Nevada. The banks have been crediting them with income generated in Wisconsin, he said.
Nevada has no tax on corporate profits; the Wisconsin rate is 7.9%.
“We’ve seen circumstances where the incomes from entire loan portfolios at banks were being moved, through accounting devices, into their Nevada subsidiaries,” Mr. Helgerson said. “In most cases there was nothing in Nevada other than a bank account and a post office box.”
The subsidiaries’ income is nontaxable only if out-of-state employees invest funds for the bank, Mr. Helgerson said.
Some of the banks paid $1,500 a year to the same Nevada resident, whom they listed as a part-time employee, Mr. Helgerson said. There was no evidence that this person did anything more than to collect mail or make transactions in the subsidiaries’ bank accounts, he said.
But Mr. Bauer said that bankers “believe that they’ve appropriately operated the subsidiaries under Wisconsin law,” and that some banks are considering whether to sue instead of settle. His group has established a legal defense fund of $330,000 to help those that want to fight.
“The Legislature has repeatedly rejected proposals that would have dissolved these type of operations in the past, which clearly validates our position,” Mr. Bauer said.
The state told bankers nearly a decade ago that they would not be taxed on such subsidiaries, he said. “Bankers are a conservative lot — they don’t tend to interpret law without seeking advice from a regulatory agency or another agency,” he said.
“Banks asked for permission from the Department of Revenue, and from our perspective, we received it.”
But Mr. Helgerson said the subsidiaries must have “a sufficient business purpose” to qualify for the tax exemption. Banks can properly exclude their income from Wisconsin tax returns only if it was “actually generated by these subsidiaries’ operations” in the other state, he said.
The department began auditing the banks after Gov. Jim Doyle took office. His administration contends that under Govs. Tommy Thompson and Scott McCallum, both Republicans, tax collectors largely ignored the abuses. Mr. Thompson is now the U.S. secretary of health and human services.
