Gov. Deval Patrick
Maybe Gov. Deval Patrick – who earlier this month announced a thousand layoffs and $1 billion in cuts to government services were necessary to close a $1.4 billion deficit – should get an update on the $250 million in corporate tax disputes the state has outstanding with banks and financial institutions.
The cases involve between six and 10 financial institutions as defendants, said state Department of Revenue spokesman Robert Bliss. More than half, by dollar amount, are centered on Real Estate Investment Trusts, a strategy that about 70 Massachusetts banks once used to use to pay less in taxes.
Under the REIT structure, banks would transfer interest income from real estate loans to out-of-state entities that would then pay them back to the bank as income taxable at a lower rate.
In one recent decision involving a REIT, Bank of America was ordered to pay the state $53 million after the state’s Appellate Tax Board found that it and its predecessor, Fleet Bank, had improperly used the structure to avoid certain taxes. The bank is appealing the February judgment.
REIT Stuff
DOR General Counsel Kevin Brown said many banks adopted REITs because the structure was marketed to them by accountants. Since 2003, REITs are no longer allowed as a tax-avoidance strategy under Massachusetts code.
“Banks have engaged in some fairly extensive tax planning,” Brown said, while noting that strategies to minimize tax payments are not limited to the banking industry.
Tax-dispute litigation is more about how corporate income is tallied than rates, he added.
Massachusetts’ corporate tax code, recently restructured for the first time since 1966, restricts the ability of corporations doing business in Massachusetts to shift taxable income out-of-state, and requires Bay State corporations to file as such on both state and federal tax returns.
Anthony Paciulli, president and CEO of Meetinghouse Bank in Dorchester, said attempting to avoid taxes is next to impossible for banks, because their income is so transparent.
Stock-traded banks are governed by Sarbanes-Oxley and the Securities and Exchange Commission, which imposes serious consequences for less than full disclosure of a bank’s earnings, he said, while co-operative and mutual banks – the majority of Massachusetts banks – have their earnings checked regularly by eagle-eyed regulators during safety and soundness exams.
“You can’t hide your income as a bank,” Paciulli said.
Meetinghouse Bank, which has $55 million in assets, never used the REIT structure, he added.
Noah Berger, executive director of the Massachusetts Budget and Policy Center, a liberal watchdog group that tracks state tax and budget policies, laughed at the notion that all banks’ incomes are completely transparent – but said that smaller companies and banks, such as Meetinghouse, “generally don’t engage in the types of tax avoidance activities that big multi-state companies do.”
Brown said financial institutions, as a group, are neither better nor worse corporate taxpayers than their peers.
But, he agreed with Berger that “opportunities in tax planning are much greater if you have offices in many states.”
