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The IRS alleges that Wells Fargo's public infrastructure SILO deals are merely a tax dodge, but the bank says they are legitimate investments
Why would a major bank want to buy U.S. municipal rail systems or public phone networks in Belgium?
Wells Fargo (WFC), the nation's fourth-largest bank, says it made these unlikely purchases as investments. Among the 26 properties it bought and then rented back to public authorities: commuter trains in California and New Jersey, city buses in Houston, and government phone equipment in Belgium.
The Internal Revenue Service contends that these deals are a complicated and unlawful tax dodge that saves Wells Fargo nearly $40 million a year. The two sides are hashing out their disagreement in federal court in Washington, D.C.
IRS Goes After Loopholes
"It's like ping-pong," says Scott Schroeder, treasurer of the San Francisco Bay Area Rapid Transit District, which in 2002 sold Wells Fargo some train-switching and communication equipment in one of the disputed deals. "You have private-sector lawyers trying to find new loopholes and the IRS attorneys trying to close the loopholes."
The deals are known as SILOs, for "sale-in, lease-out." Generally, banks or other companies buy government equipment and then lease it back to the seller. Buyers can reduce their taxes by deducting depreciation of the assets and interest on loans used to make the purchases.
But the IRS views most SILOs as having no purpose other than to avoid taxes, meaning that they are unlawful shelters. Courts have often endorsed the IRS view. In 2008 the agency offered SILO buyers amnesty, and 45 companies so far have agreed to give up claims for tax benefits in exchange for avoiding penalties.
Wells Fargo has refused to compromise. In court papers, it notes that the 26 deals in dispute "represent a small proportion" of lease transactions it has entered into in recent years. If the bank loses this case, it could face additional liability on other transactions. Neither Wells Fargo nor the IRS will comment on the pending case as they await a decision from the federal judge who presided over a five-week trial earlier this year.
SILOs were developed at the beginning of the decade. Public authorities aren't taxed and therefore can't take advantage of the depreciation of their assets. Tax planners came up with SILOs as a way to shift the assets to companies that could squeeze tax advantages out of municipal equipment.
Caltrans Deal: On Paper Only
The California Transportation Dept. (Caltrans) agreed to three SILO deals with Wells Fargo in 2001 and 2002, according to court filings by the U.S. Justice Dept. The bank allegedly purchased locomotives and commuter rail cars with cash and proceeds from a loan. William Bassett, a retired Caltrans lawyer who arranged the transactions, says in an interview that Caltrans received a fee of about $27 million from Wells Fargo for the three deals, which valued the assets at $230 million. Caltrans agreed to lease back the locomotives and cars.
The IRS contends, however, that Caltrans never actually received any proceeds from the sale and never made the lease payments. In other words, the deal was merely a paper arrangement aimed only at letting the bank enjoy a tax benefit, the IRS alleges.
In its court filings, Wells Fargo argues that the transactions were legal and that the Federal Transit Administration encouraged them. FTA documents filed in the case show that the federal agency did indeed approve of the deals.
Bassett, the former Caltrans lawyer, says he foresaw legal questions about the deals he arranged. That's why he says he refused to sign an agreement that would have required Caltrans to pay Wells Fargo lost tax benefits should the IRS contest the transactions. "I sold [Wells Fargo] the Brooklyn Bridge," he quips.