Wells Fargo & Co. And Subsidiaries v. United States
2011 U.S. App. LEXIS 7740
Fed. Cir.2011Background
- Wells Fargo claimed $115 million in 2002 deductions from 26 SILO transactions with tax-exempt entities; the Court of Federal Claims denied the deductions and Wells Fargo appeals.
- SILO involves a head lease treated as a sale and a back-end sublease that is a net lease, with the tax-exempt entity retaining title to the asset.
- Tax benefits claimed by Wells Fargo include depreciation, interest deductions on the debt portion, and deduction of certain transaction costs; at end of sublease, taxes may offset these benefits.
- The four transit agency SILOs (NJT, Caltrans, Houston Metro, WMATA) and a Belgacom QTE SILO were representative transactions examined at trial.
- In the Court of Federal Claims, the court found the transactions to be abusive tax shelters, lacking economically substantive ownership or economic benefit, and disregarded for tax purposes under substance-over-form and economic-substance doctrine.
- On appeal, Wells Fargo challenged the trial court’s methodology, the discount-rate analysis, and the non-tax business-purpose reasoning, but the Federal Circuit affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Substance-over-form ownership test applied? | Wells Fargo argues improper ownership analysis. | United States contends proper ownership analysis shows lack of ownership benefits. | Yes; ownership determined by benefits and burdens; transactions lack substance; affirmed. |
| Discount rate used to compare options? | Lys’s discount-rate methodology appropriate; challenged by appraisers. | Discount rate is a factual issue, within trial court's discretion. | Court allowed Lys’s methodological framework; no clear error; still upholding abuse finding. |
| Likelihood of repurchase option exercised? | Evidence did not prove high likelihood of exercise. | Economic and industry testimony showed high likelihood of exercise. | Trial court did not err in finding virtually certain exercise of repurchase options; affirmed. |
Key Cases Cited
- Frank Lyon Co. v. United States, 435 U.S. 561 (U.S. 1978) (discount-rate questions; fixed purchase options not controlling)
- Stobie Creek Invs., LLC v. United States, 608 F.3d 1366 (Fed. Cir. 2010) (substance; evaluate structure and probability to avoid tax shelter)
- BB&T Corp. v. United States, 523 F.3d 461 (4th Cir. 2008) (disallowance of LILO/SILO transactions between taxpayer and tax-exempt entity)
- Consolidated Edison Co. v. United States, 90 Fed. Cl. 228 (Fed. Cl. 2009) (LILO-like analysis; uncertain exercise of option; factual determination)
- Rothschild v. United States, 407 F.2d 404 (Ct. Cl. 1969) (earlier approach to artificial tax advantages)
- Minnesota Tea Co. v. United States, 302 U.S. 609 (U.S. 1938) (substance over form principle cited)