NEW YORK - At least 10 large banks avoided state taxes on hundreds of millions of dollars by setting up investment funds that didn't offer shares to the public, but instead paid tax-exempt dividends back to the banks, according to a newspaper report.

The banks put more than $17 billion into the investment funds in 1999 and 2000, according to a review of Securities and Exchange Commission records by The Wall Street Journal, which reported on the funds in Thursday's editions.

Bank of America Corp. transferred at least $8 billion into its fund, sheltering more than $750 million from 1999 through last May from state income taxes, the newspaper said.

The banks contend the funds were legitimate ways to raise investment capital, but many appear to have served little purpose beyond sheltering income, the Journal said.

Most of the funds had few clients beyond the banks. To comply with SEC rules that such funds must have at least 100 shareholders, Bank of America's subsidiary distributed shares to 125 charities. California officials told the Journal other bank funds distributed shares to their own employees.

With the funds, the banks were able to transfer interest income from their loan portfolios into dividends that were not taxable.

California officials began examining the practice - advocated in 10 of the 11 known cases by accounting firm KPMG LLP - after receiving complaints. New York State tax officials also are examining the issue, but the newspaper said it is unclear how many other states might be affected.

The funds have been shut down over the past two years, the Journal said.

California revenue officials said a sampling of tax returns from just a handful of banks showed that the maneuver trimmed those institutions' levies by a total of $46 million in 2000.

According to SEC records, the following 10 banks created investment fund subsidiaries under the federal law that governs mutual funds:

Washington Mutual Inc., the nation's eighth largest bank; Bank of America, the third largest; Summit Bancorp, now part of Fleet Bank; Zions First National Bank, now Zions Bancorp, which had two funds; Cathay Bancorp; East-West Bancorp; City National Bank Corp.; NBT Bancorp; Imperial Bank, now part of Comerica Inc.; and Chinatrust.

City National spokesman Cary Walker said the fund was begun "primarily to provide our company with capital enhancement opportunities (but it) also resulted in some tax-related benefits."

A spokesman for East-West told the newspaper its fund qualified for investment-grade interest rates on loans while the bank itself didn't.

Washington Mutual said "various tax, accounting and legal advisers" had approved the fund and that "neither the SEC nor any other governmental agency has contacted us." Several other banks had no immediate comment, the newspaper said.

© 2003 The Associated Press

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