WFC Holdings Corporation v. United States
2013 U.S. App. LEXIS 17566
| 8th Cir. | 2013Background
- In 1996 Old Wells Fargo (OWF) acquired First Interstate and inherited many leased properties and associated rent liabilities, some "underwater." OWF later merged with Norwest to form WFC.
- The Bank (WFC subsidiaries) held the leases and, as a national bank, was subject to OCC rules requiring disposition of other real estate owned (OREO) within prescribed periods and limiting certain lease/sublease actions.
- KPMG marketed a three-step "contingent-liability/economic liability" tax strategy: (1) create a controlled subsidiary (Charter), (2) transfer valuable assets plus tax-deductible future liabilities to Charter in a §351 exchange so stock basis stayed high while market value was low, and (3) sell the low-value, high-basis stock to a third party to recognize a large capital loss.
- WFC executed the plan in 1999: the Bank transferred securities and 21 leases to Charter; Charter issued preferred stock that was sold ultimately to Lehman; WFC claimed a ~ $423 million capital loss on its 1999 return and sought a $82,313,366 refund (carryback to 1996). IRS disallowed; WFC sued.
- The district court found the multi-step transaction lacked both objective economic substance and a subjective nontax business purpose; the Eighth Circuit affirmed, holding WFC failed to prove either prong.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the LRT/stock transfer had objective economic substance (real potential for profit) | WFC: transfers (esp. Garland lease) freed leases from OCC constraints and had real profit potential; stock sale was a mere recognition event | U.S.: Any profit potential from lease transfers could be achieved without the stock-creation/sale; the full multi-step plan lacked realistic profit potential near the claimed loss | Held: LRT/stock transaction lacked objective economic substance when viewed as a whole; modest or isolated profit kernels insufficient |
| Whether WFC had a subjective nontax business purpose motivating the transaction | WFC: business purposes were avoiding OCC regulation, strengthening negotiating position with "good bank customers," and incentivizing managers | U.S.: These reasons were pretextual or unsupported by contemporaneous documentation and conduct | Held: WFC failed to prove by a preponderance that a legitimate nontax business purpose motivated the overall transaction |
| Whether isolated lawful components (e.g., lease transfer) justify tax characterization when combined with contrived steps (stock sale) | WFC: court should respect transaction as a whole but may consider profitable components like Garland to support substance | U.S.: One profitable component cannot cure lack of substance in an otherwise contrived multi-step scheme | Held: Cannot isolate a profitable kernel to validate the entire, multi-step tax-motivated scheme; the transaction must be assessed in full |
Key Cases Cited
- Frank Lyon Co. v. United States, 435 U.S. 561 (1978) (transaction respected where genuine multi-party deal is compelled/encouraged by business or regulatory realities and not shaped solely by tax avoidance)
- Gregory v. Helvering, 293 U.S. 465 (1935) (taxpayer may arrange affairs to minimize taxes but form must reflect substance)
- Commissioner v. Court Holding Co., 324 U.S. 331 (1945) (transactions must be viewed as a whole; each step is relevant)
- IES Indus., Inc. v. United States, 253 F.3d 350 (8th Cir. 2001) (economic substance and business purpose analyses and treating the transaction as a whole)
- Rice's Toyota World, Inc. v. Commissioner, 752 F.2d 89 (4th Cir. 1985) (two-part sham test: business purpose and economic substance)
- Shriver v. Commissioner, 899 F.2d 724 (8th Cir. 1990) (discussion of Rice's Toyota test and whether both prongs are required)
- Coltec Indus., Inc. v. United States, 454 F.3d 1340 (Fed. Cir. 2006) (lack of economic substance can invalidate transaction despite other motives)