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WFC HOLDINGS CORPORATION v. U.S.
WFC HOLDINGS CORPORATION, Plaintiff,
v.
UNITED STATES OF AMERICA, Defendant.
Civil No. 07-3320 (JRT/FLN).
United States District Court, D. Minnesota.
September 30, 2011.
Philip Karter, Jonathan Prokup, and Herbert Odell, CHAMBERLAIN, HRDLICKA, WHITE, WILLIAMS & MARTIN, 300 Conshohocken State Road, Suite 570, West Conshohocken, PA; Jeffrey A. Sloan and Mark A. Hager, WELLS FARGO & COMPANY, 90 South Seventh Street, MAC N9305-164, Minneapolis, MN 55479, for plaintiff.
FINDINGS OF FACT, CONCLUSIONS OF LAW, AND ORDER FOR JUDGMENTJOHN R. TUNHEIM, District Judge. Plaintiff WFC Holdings Corporation ("WFC" or "Wells Fargo"1) brought this action against the United States seeking a refund of federal income taxes in the amount of at least $82,313,366 for the tax year ending December 31, 1996. (Compl. ¶ 1, Docket No. 1.) According to the government, WFC's refund demand is based on capital losses accruing from a sham transaction intended to operate as a tax shelter. A trial on the merits was conducted by the Court without a jury on October 4, 5, 7, 8, 12, 13, 14, 20, 22, 25, and November 3, 2010. The parties presented closing arguments on February 18, 2011. Having considered each party's evidence, exhibits, and arguments of counsel, the Court enters its Findings of Fact, Conclusions of Law, and Order for Judgment, pursuant to Rule 52(a)(1) of the Federal Rules of Civil Procedure. FINDINGS OF FACT1. All of the Findings of Fact set forth herein are undisputed or have been proven by a preponderance of the evidence. 2. To the extent that the Court's Conclusions of Law include what may be considered Findings of Fact, they are incorporated herein by reference. I. CORPORATE STRUCTURE
1. Unless further specificity is required, the Court will refer to WFC or "Wells Fargo" interchangeably as the entire family of Wells Fargo corporations including both Wells Fargo & Co. and plaintiff WFC Holdings Corporation. The differences between these two entities are not relevant for the disposition of this case. "The bank" or "Wells Fargo Bank" will refer to WFC's banking operations, including but not limited to one of the transferring banks discussed below.
2. The Court will refer to leased former banking premises and owned former banking premises as ORE.
3. This document is offered as Dx. 23 in the government's pdf exhibit submissions.
4. WFC asserts that since the LRT would continue to comply with the tax code even after amendments, enacted after the LRT, which prohibit certain economic liability transactions, it is entitled to the deduction it claims. Literal compliance with the tax code as it existed during the relevant period or as it was subsequently amended, however, does not entitle a taxpayer to deduct a capital loss based on a sham transaction.
5. The Court notes, however, that Congress has recently mandated the application of the two-prong test, which will require taxpayers to prove that "the transaction changes in a meaningful way (apart from Federal income tax effects) the taxpayer's economic position, and. . . the taxpayer has a substantial purpose (apart from Federal income tax effects) for entering into such transaction." Health Care Educational Reconciliation Act of 2010, P.L. 111-152, § 1409(a) (to be codified at 26 U.S.C. § 7701(o)(1)) (emphasis added).
6. WFC points to the testimony of its CEO, Kovacevich, who stated that he approved the LRT based on Dana's presentation of the non-tax business purposes for the transaction, and that his decision excluded any consideration of tax advantages. Any CEO presented with KPMG's estimate of the prospective millions of dollars in savings associated with the transaction would likely have no reason to disapprove of it. Yet, as explained below, both KPMG's base case and calculation of lease improvements are dubious and the proffered non-tax justifications for the transaction appear pretextual upon closer inspection. Kovacevich's approval, based on faulty and misleading information, does not disrupt the Court's conclusion that, as a whole, the LRT had neither a non-tax business purpose nor economic substance.
7. The creation of a non-bank subsidiary to conduct a particular transaction does not, in itself, suggest that only tax advantages motivated a particular transaction. For example, WFC created Crocker to develop the Sacramento project. As discussed below, however, the LRT is readily distinguishable from the Sacramento project. There is compelling evidence that WFC used Crocker's structure for the non-tax business purposes for which it purported to create it. In the case of Charter, by contrast, WFC created a straw entity and did not use it as its non-tax business purposes indicated it was intended to be used.
8. The presence of Lehman and the sale of the Preferred Stock can only be justified by the "good bank customer" business purpose, which, as discussed below, the Court finds pretextual.
9. These subleases were of course among those counted by KPMG as attributable to the LRT. They are but two specific examples undermining the validity of KPMG's base case and subsequent improvement calculations.
10. The government argues that the good bank customer business purpose must fail as a matter of law, because Nevada corporate law would not preclude consideration of the bank's interest when making decisions on Charter's behalf. In the Court's view, the facts in evidence establish that WFC did not conduct the LRT with the purpose of de-leveraging good bank customers, regardless of whether its representations to such customers were or would have been legally permissible or misleading. Accordingly, the Court finds it unnecessary to resolve this issue of Nevada corporate law.
11. Far from facilitating administrative efficiencies, the LRT seems to have imposed significant administrative burdens. Indeed, when asked why CPG did not simply place all bank properties at risk of ORE designation into a non-banking subsidiary like Charter to avoid problems associated with the OCC disposition period, Dana testified:
[T]here is an administrative burden that I can avoid by not doing that. . . . [I]nstead of just having one lease on a leased property, we would have two leases, one lease from the landlord to an entity like Charter and then another lease from Charter back to the bank. It's a higher administrative burden, and then every month it means that cash has to be moved around and reconciled. It's just more expensive. . . . You would have to have a good reason to do it, . . . [to] offset[] the burden of the additional administration and the set-up costs. . . .
(Tr. 79-80 (emphasis added).)
12. The Court does not agree with WFC's assertion that in IES, the Eighth Circuit concluded that actual profit in and of itself satisfies the "economic substance" prong of the Rice's Toyota World test. See 253 F.3d at 354 ("Because the entire amount of the ADR dividends was income to IES, the ADR transactions resulted in a profit, an economic benefit to IES."). Rather, the IES Court considered the transaction as a whole — including but not limited to the fact that "these were not transactions conducted by alter-egos of IES or straw entities created by IES simply for the purpose of conducting ADR trades" — to ascertain whether or not it was a sham. Id. at 355. The Eighth Circuit considered "all the facts and circumstances" in reaching its conclusion. Id. at 356.
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