Zions among banks accused of scheme

Zions Bancorp. was one of 10 national banks accused Thursday of sheltering hundreds of millions of dollars from state taxes in California investment funds.

The Wall Street Journal published a story Thursday saying Zions and nine other national banks shifted as much as $17 billion into investment funds called registered investment funds — funds that paid untaxed dividends to the banks but were not sold in shares to investors.

"The banks contend the funds were legitimate vehicles for raising investment capital, but many appear to have served little purpose beyond sheltering income, " wrote the story's author, Glenn R. Simpson. "In effect, the funds converted interest income from the banks' loan portfolios into tax-exempt dividends."

The Journal's review of documents filed with the U.S. Securities and Exchange Commission revealed that Bank of America Corp. transferred at least $8 billion into its RIC, called Amadeo Trust. Washington Mutual Inc. estimated its RIC, Snoqualmie Asset Fund, had an initial capitalization of $10 million. Zions Bank's RICs, ZFNB Asset Fund and NSB Asset Fund, did not disclose their initial capitalization.

As a result of Thursday's story, the Utah State Tax Commission has referred the issue to its auditors, commission spokeswoman Jodi Monaco said. California officials are also auditing several banks' tax returns (it is unknown whether Zions is one of them) to see if there is cause to demand recoupment for lost revenues, according to the Journal. Tax authorities in New York are looking into the matter as well.

Zions Bank established its two RICs in August 2000, through which it funded loans, according to Zions spokesman Robert A. Brough. They were operational in California (where Zions does a good bit of its business) for 11 months, and voluntarily deregistered in mid-2001. The RICs resulted in a net tax benefit of $1.9 million in 2000 and $2.6 million in 2001, Brough said. There was no state income tax benefit in Utah and no federal tax benefit as a result of the RICs, he said.

Zions defended its strategy Thursday, rejecting any implication that these funds were a means to secretly funnel money away from state tax coffers.

"These registered investment companies were established upon our receiving tax and accounting guidance from KPMG (an accounting firm) and the securities law counsel from the Washington, D.C., firm of Ropes & Grey," Brough said. "Zions believed at the time the RICs were established and continues to feel today that these were legal and appropriate entities through which to conduct business."