Federal Judge, IRS Put Kibosh On Wells Fargo Sale Leaseback Scheme; Bank Took Improper $115M Tax Deductions On Deals Lacking Economic Substance: Court

USA Today reported last week on another way that a sale leaseback transaction can be employed in an abusive manner. Were it not for the Federal judge slamming the door shut on this attemped scam by recharacterizing the transactions as an attempt to buy tax deductions in exchange for an upfront fee, the victims of this type of sale leaseback ripoff would have been the American taxpayers. The failed "evil-doer" in this case - none other than the somewhat less-than-beloved alleged "ghetto loans" peddler, Wells Fargo:

• Wells Fargo has lost a lawsuit over more than $115 million in tax deductions based on complex transactions that a Court of Federal Claims ruling said lacked "economic substance." In a ruling issued Friday, the court sharply criticized the large, California-based bank's use of 26 sale and lease transactions with public transit agencies and other tax-exempt entities in 2002.

• The transactions involved assets such as rail cars, locomotives, buses or telecommunications equipment the agencies sold, then leased back from Wells Fargo. The agencies got fees from the deals, and the bank got the opportunity to seek tax deductions on the assets. But the court ruled the bank wasn't entitled to the deductions because the transactions didn't give Wells Fargo the "burdens and benefits" of true ownership.(1)

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• If the court approved the transactions, "the big losers would be the Internal Revenue Service, deprived of millions in taxes rightfully due from a financial giant, and the taxpaying public, forced to bear the burden of the taxes avoided by Wells Fargo," the judge wrote.

For the story, see Wells Fargo loses tax case on dubious sale-leaseback deals.

For the court ruling, see Wells Fargo & Co. v. U.S. (Tax Refund Suit; Sale In/Lease Out (SILO) Tax Shelters; Depreciation and Interest Deductions; Substance Over Form Doctrine; Genuine Indebtedness; Economic Substance).

(1) In his ruling, Judge Thomas C. Wheeler made this observation in recharacterizing the alleged sale leaseback transactions involved in this racket involving "phantom payments" that purportedly circulated back and forth between the lessor (Wells Fargo) and the lessees, which took place in 2002:

• Although well disguised in a sea of paper and complexity, the SILO [sale in/lease out] transactions essentially amount to Wells Fargo’s purchase of tax benefits for a fee from a tax-exempt entity that cannot use the deductions. The transactions are designed to minimize risk and assure a desired outcome to Wells Fargo, regardless of how the value of the property may fluctuate during the term of the transactions. Indeed, nothing of any substance changes in the tax exempt entity’s operation and ownership of the assets. The only money that changes hands is Wells Fargo’s up-front fee to the tax-exempt entity, and Wells Fargo’s payments to those who have participated in or created the intricate agreements. The equity and debt “loop” transactions simply are offsetting accounting entries not involving actual payments, or pools of money eventually returned to the original holder. If the Court were to approve of these SILO schemes, the big losers would be the Internal Revenue Service (“IRS”), deprived of millions in taxes rightfully due from a financial giant, and the taxpaying public, forced to bear the burden of the taxes avoided by Wells Fargo.