Wells Fargo & Co. won’t be able to claim $115 million in tax deductions from 2002 based on an appellate court’s ruling that its leases with public transit agencies and technology companies amount to “abusive tax shelters.”
The U.S. Court of Appeals for the Federal Circuit today upheld a lower court decision that found the bank’s leases with 26 entities, including New Jersey Transit and the Washington Metropolitan Area Transit Authority, “lack economic substance.” The leases were structured as so-called sale-in, lease-out -- or SILO -- deals that allow tax-exempt entities to bestow their tax benefits to a taxpayer for a fee.
The tax benefits include deductions for depreciation of assets. The appeals court rejected the Wells Fargo leases as little more than a money-making strategy for all the entities involved.
“These transactions were win-win situations for all the parties involved because free money -- in the form of previously unavailable tax benefits utilized by Wells Fargo -- was divided among all parties,” Judge William C. Bryson wrote in the opinion. “The money was not entirely ‘free,’ of course, because it was in effect transferred to Wells Fargo from the public.”
Mary Eshet, a spokeswoman for San Francisco-based Wells Fargo, said the bank was “disappointed” by the decision.
“Wells Fargo continues to believe in the merits of the litigated transactions,” she said in an e-mailed statement today. “Wells Fargo will abide by the court’s decision.”
Wells Fargo fell 26 cents to $29.89 at the 4 p.m. close of New York trading.
The U.S. Court of Federal Claims in Washington rejected the deductions in January 2010.
The court focused on a sample of five SILO deals between Wells Fargo and tax-exempt entities. In addition to the New Jersey and Washington transit systems, the samples included the California Department of Transportation, the Metropolitan Transit Authority of Harris County, Texas, and Brussels-based Belgacom Mobile.
New Jersey Transit agreed in 2001 to lease 20 light-rail cars to Wells Fargo for 50 years. The bank at the same time leased the vehicles back to the agency for about 25 years.
The California transportation department leased six locomotives and 12 passenger rail cars to Wells Fargo for 70 years. The bank leased the vehicles back to the state for just over 27 years, according to court records.
In its ruling against Wells Fargo, the lower court said the bank never took ownership of the assets it leased. The court said the “circular flow of funds” did nothing other than “produce more claimed tax deductions.”
Bryson agreed with that finding and said the transactions “elevate form over substance.”
“From the tax-exempt entity’s point of view, the transaction effectively ended as soon as it began,” Bryson wrote. “The benefits to Wells Fargo continued to flow throughout the term of the sublease, however, in the form of deferred tax payments.”
Tax Law Change
Wells Fargo may have sought to limit the taxes it paid in other instances as well. In 2008, the bank revised a bid for Wachovia Corp. in part to take advantage of a change in tax law that occurred two days earlier and allowed tax breaks for banks acquiring other lenders, the Financial Crisis Inquiry Commission said.
Federal Deposit Insurance Corp. Chairman Sheila Bair told the panel that Richard Kovacevich, who at the time was Wells Fargo’s chairman, informed her that IRS Notice 2008-83 -- which gave tax breaks to acquirers of struggling banks -- “had been a factor leading to Wells’s revised bid,” according to the report, released in January.
The bank has said the rule change didn’t alter the amount, though it may have accelerated deductions associated with loan losses.
The case is Wells Fargo & Co. v. U.S., 2010-5108.