For the second time since buying $12.1 billion of credit card receivables in February 1998, FleetBoston Financial Corp. is suing the seller, Advanta Corp., over the deal.
It claims that Advanta took advantage of a $508 million bad-debt tax deduction for chargeoffs in the portfolio when FleetBoston itself should have gotten the benefit of the deduction. The suit, filed in Rhode Island Superior Court, further charges that Advanta was misleading in how it took the deduction.
An Advanta executive said the Spring House, Pa., company complied with tax code and that the Internal Revenue Service will ultimately decide which side prevails.
“They will figure it out, but Fleet is trying to protect itself” by suing, said David Weinstock, Advanta’s chief accounting officer and vice president for investor relations. FleetBoston representatives would not talk about the suit.
Mr. Weinstock said FleetBoston is making a two-point argument: To the IRS, its position is that it should be entitled to the $508 million of bad-debt deductions; meanwhile it is asking the court to decide a separate matter, that of whether Advanta should have to reimburse it for the value of the deduction if the IRS sides with Advanta. In other words, FleetBoston argues that it should get the money one way or the other, either by claiming the deduction or getting reimbursed by Advanta, he said.
The tax issue is under consideration by the IRS’ Philadelphia appeals office, Mr. Weinstock said. “My expectation is that the court will just rule on whether or not the partnership requires indemnification” for the tax deduction, he said. “The IRS will rule on who gets the deductions.”
Mr. Weinstock said that he was confident that Advanta will win both disputes. “There are specific rules that say [the $508 million in losses] gets allocated 100% to Advanta because it contributed the assets that led to those losses.”
The losses in the portfolio actually totaled around $800 million, but $292 of that amount is not in dispute, and Fleet took the deduction for about 95% of those losses with Advanta getting the other 5%, as their partnership provided, he said.
Filed on Jan. 15, the suit states FleetBoston’s position this way: “Unbeknownst to Fleet, Advanta took an inconsistent tax position on its own corporate tax returns and claimed that it — not the partnership — was entitled to deduct $508 million of the $800 million bad-debt losses reported by the partnership. Advanta filed a notice of inconsistent treatment with the Internal Revenue Service and claimed this deduction on its corporate tax returns without first notifying Fleet of its position or attempting to resolve the issue with Fleet.”
In an 8K filing, Advanta described the suit as “frivolous” and “having no legal basis whatsoever.” It said it does not expect the suit or the tax issues to have a “material adverse effect” on its financial condition. Since shedding its consumer card portfolio and mortgage business, Advanta has remade itself exclusively as an issuer of small-business credit cards.
The previous tussle between the two companies resulted in a Delaware Court of Chancery trial that finished last year, but a judgment is still pending.
At issue were eight days during which Advanta collected payments on the card accounts in the portfolio before handing it over entirely. Though the sale closed Feb. 20, 1998, Advanta continued to operate the portfolio until the end of the month to streamline bookkeeping. Doing so gave it an extra $87.2 million over the agreed-upon sale price, FleetBoston argued in asking the court for damages of $141 million.
In its third-quarter earnings report, Advanta said it expected that a $70.1 million reserve account it set up to cover the litigation would probably be adequate.
The court issued a preliminary judgment favorable to FleetBoston in October 2001, declaring that “Fleet owned and funded the business, but Advanta continued to operate it.”
Advanta is no stranger to deals gone bad. It was also sued over the sale of its mortgage business to Chase Manhattan Corp., now J.P. Morgan Chase & Co. The case is expected to go to trial in September.
