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SunTrust fires new salvo
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July 3, 2001: 11:48 a.m. ET
Bank says First Union uses 'outlawed' tax shelter; First Union 'disgusted'
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NEW YORK (CNNfn) - SunTrust Banks Inc. accused rival First Union Corp. Tuesday of using a questionable tax shelter to build up capital, in what is the latest move by SunTrust to acquire Wachovia Corp.
SunTrust alleged First Union used a tax shelter known as a lease-in/lease-out deal that was outlawed by the Treasury Department in 1999.
The allegation was made by SunTrust in a letter to the Federal Reserve System. SunTrust is engaged in hostile takeover bid of Wachovia.
"SunTrust believes First Union has significant exposure to a type of tax shelter that the Internal Revenue Service has identified as a 'tax avoidance' transaction," SunTrust said in the letter.
First Union shot back Tuesday saying that the tax position is used by numerous other financial institutions. In fact, multiple outside counsel advised the bank to use the tax shelter which was reviewed by external auditors, First Union said in a statement.
"We are disgusted to learn that SunTrust has stooped to such levels in its attempt to regain what the market has denied," First Union said. "In its desperate effort to obscure the market's conclusion, SunTrust has been willing publicly to place in question the tax positions of a number of America's leading financial and non-financial companies."
Atlanta-based SunTrust (STI: down $0.71 to $65.04, Research, Estimates) and Charlotte, N.C.-based First Union have been engaged in a two-month bitter battle to acquire Wachovia. SunTrust made a hostile $14.7 billion bid in late May, which Wachovia (WB: down $0.95 to $70.24, Research, Estimates) rejected, choosing instead to stay with First Union.
First Union's response lacks specificity and raises questions of their risk profile, SunTrust spokesman Barry Koling told CNNfn.com. "What is their exposure and what are their reserves," he said.
According to SunTrust, First Union should be questioned about its ability to complete the Wachovia merger. SunTrust cited "excessive loans" to struggling telecommunications companies, the bank said.
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First Union (FTU: down $0.45 to $34.54, Research, Estimates) is pursuing a $14.5 billion offer for Wachovia. Wachovia shareholders are set to vote Aug. 3 on the First Union bid.
SunTrust claims First Union has about $20 billion in the tax vehicle, the Wall Street Journal reported Tuesday, and estimates the value of First Union's tax deferrals at between $3 billion to $4 billion, dating back to 1994.
"We believe our financial statements accurately reflect the status of our income-tax obligations," the WSJ quoted First Union spokeswoman Mary Eshet as saying. Eshet said First Union's tax attorneys approved the banks use of tax shelters and said the practice had been widespread. 
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