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Wells Fargo & Co. v. United States

United States District Court, D. Minnesota

September 15, 2017

WELLS FARGO & COMPANY, on behalf of itself and the members of its affiliated group filing a consolidated return, Plaintiff,

          B. 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.

          Dennis M. Donohue, William E. Farrior, Harris J. Phillips, and Vassiliki Economides, UNITED STATES DEPARTMENT OF JUSTICE, for defendant.


          Patrick J. Schiltz United States District Judge.

         This 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.

         A. Background

         Briefly 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.”

         Wells 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)).

         This 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 2.[1] There is no dispute, then, that under the jury's findings, the trust structure (which generated the foreign-tax payments) was a sham.

         After 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. 2298.

         When 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 judgment.”).[2]

         After 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.[3]

         The 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 No. 656.

         B. Waiver

         The 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) ...

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