United States District Court, D. Minnesota
WELLS FARGO & COMPANY, on behalf of itself and the members of its affiliated group filing a consolidated return, Plaintiff,
UNITED STATES OF AMERICA, Defendant.
John Williams, Jr., Alan Swirski, and Nathan Wacker, SKADDEN,
ARPS, SLATE, MEAGHER & FLOM LLP; Walter A. Pickhardt,
Charles F. Webber, Deborah A. Ellingboe, and Blake J.
Lindevig, FAEGRE BAKER DANIELS LLP; Jeffrey A. Sloan, WELLS
FARGO & COMPANY, for plaintiff.
M. Donohue, William E. Farrior, Harris J. Phillips, and
Vassiliki Economides, UNITED STATES DEPARTMENT OF JUSTICE,
Patrick J. Schiltz United States District Judge.
long-running lawsuit is before the Court regarding one final
issue that must be resolved before judgment is entered: Can
plaintiff Wells Fargo & Company (“Wells
Fargo”), having been denied a credit for the
foreign taxes that it paid in connection with a transaction
called “Structured Trust Advantaged Repackaged
Securities” (“STARS”), instead
deduct those taxes? For the reasons that follow, the
Court holds that (1) Wells Fargo waived this issue by failing
to raise it sooner and (2) in any event, Wells Fargo is not
entitled to deduct the foreign taxes.
stated, STARS was an extraordinarily complex transaction that
Wells Fargo engaged in with Barclays, a British
financial-services company. The STARS transaction included
four key elements: (1) Wells Fargo would voluntarily subject
some of its income-producing assets to U.K. taxation by
placing them in a trust with a U.K. trustee; (2) Wells Fargo
would offset those U.K. taxes by claiming foreign-tax credits
on its U.S. returns; (3) Barclays would enjoy significant
U.K. tax benefits as a result of Wells Fargo's actions;
and (4) Barclays would compensate Wells Fargo for engaging in
STARS by making a monthly “Bx payment.”
Fargo claimed foreign-tax credits for the U.K. taxes that it
paid in connection with STARS. The Internal Revenue Service
(“IRS”) disallowed the credits on the ground that
STARS was a sham. Generally speaking, “a transaction
will be characterized as a sham if ‘it is not motivated
by any economic purpose outside of tax considerations'
(the business purpose test), and if it ‘is without
economic substance because no real potential for profit
exists' (the economic substance test).” IES
Indus., Inc. v. United States, 253 F.3d 350, 353 (8th
Cir. 2001) (quoting Shriver v. Comm'r, 899 F.2d
724, 725-26 (8th Cir. 1990)).
case was tried to a jury, which ultimately adopted the
government's view that STARS consisted of two separate,
independent transactions-a trust structure and a loan. ECF
No. 630 at 1. As instructed, the jury then determined whether
each transaction had a business purpose and economic
substance. The jury found that the trust structure had
neither a non-tax business purpose nor a reasonable
possibility of pre-tax profit. ECF No. 630 at
There is no dispute, then, that under the jury's
findings, the trust structure (which generated the
foreign-tax payments) was a sham.
being notified that the jury had reached a verdict, the Court
informed the parties that it intended to give them about an
hour to discuss the verdict “and see if we can figure
out what our next steps are based on what the jury
does.” Trial Tr. 2293 [ECF No. 648]. The Court then
published the verdict and recessed for an hour. Trial Tr.
the hearing resumed, the Court asked the parties, “What
do we have to do to get to entry of a judgment[?]”
Trial Tr. 2299. The Court reiterated this point several
times. See Trial Tr. 2301-02 (“What I am
trying to do is identify what do I need to decide to get to
the point where I can enter a judgment.”); Trial Tr.
2304 (“the question isn't trying to talk me out of
something I've decided; the question is what additional
things do I have to make an initial decision on so I can get
the judgment entered”); Trial Tr. 2307 (“I'm
hoping to identify here's the kind of legal decisions you
need to make, Judge, before you can enter a judgment. When
you make these legal decisions, we can go and figure out the
numbers, and we can come back to you with a proposed
some discussion, the parties identified two remaining issues
that had to be resolved prior to judgment: (1) whether Wells
Fargo was subject to a negligence penalty under 26 U.S.C.
§ 6662(b)(1) in connection with its claim of foreign-tax
credits; and (2) whether the loan portion of the STARS
transaction should be disregarded as a sham. Trial Tr.
2303-05. When asked by the Court whether there was
“anything else that needs to be briefed before I can
enter judgment, ” Wells Fargo mentioned an undisputed
issue that was the subject of a stipulation and then agreed
that the Court had “identified the issues.” Trial
Tr. 2307-08. The Court then issued a briefing order, ECF No.
629, and, after receiving that briefing, issued an order
resolving the issues of penalties and the treatment of the
STARS loan, ECF No. 650.
order directed the parties to submit a proposed form of
judgment no later than June 30, 2017. ECF No. 650 at 19. On
June 29, the parties filed a joint motion for an extension of
time until July 31 to complete their calculations, obtain
approval through the appropriate channels, and finalize the
proposed judgment. ECF No. 651. Based on these
representations, the Court granted the motion. ECF No. 653.
On July 31, rather than submitting a proposed form of
judgment, Wells Fargo filed a letter asserting that there
remained one final legal issue to be resolved: whether Wells
Fargo can deduct the foreign taxes that it paid, despite the
fact that it cannot receive a credit for them. ECF No. 655.
In response to Wells Fargo's letter, the government
contended that Wells Fargo had waived this issue and that, in
any event, Wells Fargo is not entitled to a deduction. ECF
Court agrees with the government that Wells Fargo has waived
this issue. As recounted above, after trial the Court asked
the parties to identify every remaining legal issue that had
to be resolved before the Court could enter judgment. The
Court repeatedly emphasized that it wanted to identify all
remaining issues so that it could resolve those issues and
enter judgment. Wells Fargo and the government explicitly
agreed that the only remaining issues were (1) ...