KeyCorp, Fifth Third and making mistakes on SILO's and LI-LO's about Tax deductions, dividend cuts ... slaughter on Wail Street
On Friday, May 30, 2008 the US Department of Justice (DOJ) issued a statement .
Key Bank (NYSE:KEY) and PNC Bank (NASDAQ :PNC) had a partnership which operated a Sale-In/Lease-Out (SILO) transaction on German municipal utility in Wuppertal - to whit , one trash disposal and energy generation plant. The banks claimed their partnership acquired the plant for US$423Mn. and leased the plant back to the utility for at least 25 years on the same day- December 7, 1999. The utility continued to use and operate the plant without interruption, while the banks claimed depreciation deductions on the plant and interest deductions on loans used to finance the SILO transaction.
Judge James Gwin ruled these paper transactions did NOT represent a purchase and that the US$100 plus US Tax deductions were improper and that his court ,"held the partnership was liable for penalties for substantial understatement of tax." The Court DENIES the Plaintiffs’ claimed depreciation deductions under § 168, interest expense deductions under § 163(a), and amortization of transaction costs deductions. The Court also upholds the IRS’s imposition of accuracy-related penalties at the partnership level for substantial understatement of tax liability under § 6662(a). Slam Dunk.
This decision, says the DOJ marks the first time a federal court has addressed the propriety of tax deductions from a SILO transaction. Earlier this year, a jury in Cincinnati ruled in favor of the government in a case involving several Lease-In/Lease-Out (LILO) transactions executed by Fifth Third Bank. (see IRS Press Release from 1999)
A consequence is that Cleveland based KeyCorps Board has decided to halve the dividend on KeyCorp's common shares by 50 % starting Q3 2008 dividend, to an annualized dividend of $0.75 per common share. The dividend reduction will result in Key retaining approximately $200 million of capital annually. The Directors also issued stock (dilution) in order to raise US$1.65B (gross) in fresh capital on Friday the 13th. KeyCorp , the Directors explained will take an after-tax accounting charge to earnings and capital in the range of $1.1 billion to $1.2 billion for the leveraged lease tax litigation and all of KeyCorp's other contested leveraged lease transactions.(The Directors declared a Qtrly regular cash dividend of $0.375 per share of its common stock on 15th May)
Which if you look at KeyCorps share price - it took a nosedive and halved and it looks like someone took out some mighty big sell orders last week.
Now how many more SILO's / LI-LO's are out there with their accompanying fancy Federal Tax deductions and "penalties for substantial understatement of tax"? How many dividends were earned by "tax deductions" , how many handsome "bonuses" paid ? How many tax lawyers took their fees ? Keep an eye on Comerica (NYSE: CMA ) and Fifth Third Bancorp (NASDAQ: FITB )still declaring good yields at 8.3% and 12.0%. Comerica down 26.7% and Fifth Third's stock down 41.5% since January .....
To those interested in how banks minimise their liabilities here is a remarkable tale ....
Lilia Odhner was employed by Pittsburg based PNC Bank in Doylestown, Pennsylvania, as a Customer Service representative on September 28, 2006 when Lilia suffered a traumatic brain injury at her workplace and became permanently disabled. Her employment was terminated by PNC Bank after 90 days of her disability for allegedly "abandoning her work." Her full and permanent disability was confirmed by a Federal Judge in her Social Security Disability decision in November 2007.
Her disability Workman's Compensation insurance coverage was denied by PNC Bank and Zurich American, a unit of Swiss insurance giant Zurich Financial Services.
Even so Lilia doesn't have memory of immediate events resulted in her brain injury, the alarming circumstances around Lilia Odhner's injury were recorded by the bank branch surveillance video camera. However, PNC Bank and Zurich Insurance Company refuse to surrender the videotape to the court despite of Lilia's attorney requests to the Workman's Compensation Judge Michael Rosen and to the Commonwealth of Pennsylvania Department of Labor & Industry Workers' Compensation Appeal Board presiding by the Commissioner Joseph Hoeffel.
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