Court Finds Wells Fargo Liable for Penalties for Engaging in Abusive Tax Shelter Scheme
Wells Fargo Engaged in an Abusive Tax Shelter Marketed by Barclays Bank to Generate $350 Million in Foreign Tax Credits
On Wednesday, a federal court in Minneapolis, Minnesota ruled that Wells Fargo is liable for a 20 percent negligence penalty in connection with $350 million of foreign tax credits that it claimed based on its participation in an abusive tax shelter known as Structured Trust Advantaged Repackaged Securities (STARS). This follows a Minnesota jury’s verdict on Nov. 17, 2016, that ruled Wells Fargo was not entitled to those foreign tax credits because the transaction lacked both economic substance and a non-tax business purpose.
After a three-week trial, the jury in this case was asked to determine whether Wells Fargo’s STARS transaction had economic substance, and the jury made some key factual findings. Wells Fargo contended that STARS was a single, integrated transaction that resulted in low-cost funding, but the jury found that in reality, the transaction consisted of two economically distinct and independent transactions: a loan and a trust. The jury found that the trust structure had no reasonable potential for pretax profit and that Wells Fargo entered into the trust structure solely for tax reasons. The jury also found that Wells Fargo entered into the loan solely for tax-related reasons.
In a prior decision in this case, the court noted that Barclays Bank PLC marketed the STARS transaction to American banks, which was designed to exploit differences between the tax laws in the United States and in the United Kingdom. Three other courts have rejected STARS tax shelters that Bank of New York, BB&T Bank and Santander Bank purchased. Santander Holdings USA, Inc. v. United States, 844 F.3d 15 (1st Cir. 2016), pet. for cert. filed, March 20, 2017 (No. 16‐1130); Bank of N.Y. Mellon Corp. v. Comm’r, 801 F.3d 104 (2d Cir. 2015), cert. denied, 136 S. Ct. 1377 (2016); Salem Fin., Inc. v. United States, 786 F.3d 932 (Fed. Cir. 2015), cert. denied, 136 S. Ct. 1366 (2016).
“The jury verdict is a resounding message to companies trying to exploit an abusive transaction that no matter how sophisticated the scheme, these sham tax shelters will not stand,” said Acting Assistant Attorney General David A. Hubbert of the Justice Department’s Tax Division. “The Court’s opinion is equally clear that taxpayers who engage in such transactions can be subject to significant penalties.”
Acting Assistant Attorney General Hubbert thanked the agents and attorneys at the Internal Revenue Service who assisted the Justice Department, as well as Tax Division Chief Senior Litigation Counsel Dennis Donohue, Trial Attorneys William Farrior, Harris Phillips and Viki Economides, who litigated this case. Mr. Hubbert also thanked Paralegal Joanna Lara for her assistance on the case.
Additional information about the Tax Division and its enforcement efforts may be found on the division’s website.