Reeling from an unfavorable court decision on its tax strategy, banking giant KeyCorp said it would take an after-tax accounting charge of between $1.1 billion and $1.2 billion in the second quarter, cut its dividend in half and raise another $1.5 billion by issuing shares.
The court rejected a leveraged-lease, or sale in/lease out, tax strategy that Key had used in a case involving AWG Leasing Trust (see IRS Prevails in German Tax Shelter Case). The strategy involved Key and PNC Bank setting up a partnership in which they paid $423 million in December 1999 to buy a waste-to-energy facility in Wuppertal, Germany, which they then leased back to the original owner.
The banks said they should be allowed to depreciate the plant, and to deduct interest on $368 million in loans. The court decided that the banks never obtained a sufficient ownership interest in the facility to allow them to claim depreciation, and that they were not entitled to deductions for interest paid or accrued on the loans because "the loans did not constitute genuine indebtedness."
Key said the adverse ruling forced the company to seek other measures to raise money. "If it had not been for the adverse court ruling on our tax treatment of a leveraged-lease transaction, we probably would not have considered the capital-raising actions," CEO Henry Meyer said in a statement.
KeyCorp and its counsel are evaluating whether to appeal the court decision, as the company continues to believe that the tax treatment it applied to its leveraged-lease transactions complied with all the applicable tax laws and was consistent with industry practice. Nevertheless, other bank companies, such as BB&T, have also been taking charges after the IRS disputed their leveraged-lease strategies.
Even if KeyCorp decides to appeal the trial court tax decision, the company said its management believes that the applicable accounting guidance requires it to recalculate the lease income recognized on its entire portfolio of contested leveraged leases - not just the single leveraged lease subject to the court decision.
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