Wachovia May Face $1 Billion Charge after U.S. Court Tax Ruling

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Wachovia Corp. expects to take a charge of $800 million to $1 billion in the second quarter because of a federal appeals court decision over the taxation of leveraged lease transactions, the bank said on Wednesday.

The fourth-largest U.S. bank said the charge follows a ruling Tuesday by the U.S. Court of Appeals for the Fourth Circuit in a case involving the bank BB&T Corp.

Wachovia said the decision and applicable accounting standards require it to reassess transactions it entered into from 1999 to 2003 involving lease-to-service contracts and leases of technological equipment. It said it stopped originating these transactions in 2003.

The after-tax, non-cash charge will not materially affect future earnings, it said.

The ruling came two weeks after Wachovia posted a first-quarter loss and cut its dividend, as nonperforming assets in a $121.2 billion portfolio of option adjustable-rate mortgages, which let borrowers pay less than the interest due, quintupled to $4.62 billion.

Meanwhile, The Wall Street Journal said federal prosecutors are investigating Wachovia in a probe into alleged laundering of drug proceeds by Colombian and Mexican money-transfer companies. Wachovia declined to confirm the investigation but said it has a strong program to thwart money-laundering.

Wachovia raised $8.05 billion of capital earlier this month. On Wednesday it declined to say if it plans to raise more following the appeals court ruling.

“From a capital perspective, even after the impact, we’ll still have one of the strongest capital positions in the industry,” spokeswoman Christy Phillips-Brown said.

In its decision, the appeals court panel disallowed rent and interest deductions that BB&T had claimed on transactions that the bank characterized as leases financed by loans. The court said BB&T in fact “did not in substance acquire a genuine leasehold interest or incur genuine indebtedness.”

The Fourth Circuit includes North Carolina, home to Wachovia and BB&T. Wachovia is based in Charlotte, and BB&T in Winston-Salem.

BB&T spokesman Bob Denham said his bank was evaluating an appeal to the U.S. Supreme Court. He also said BB&T has set aside reserves for the affected transactions and paid applicable taxes, and will thus not incur a charge.

In morning trading, Wachovia shares fell 27 cents to $29.13 on the New York Stock Exchange.

(Editing by Gerald E. McCormick and John Wallace)