The Court of Federal Claims has rejected Wells Fargo & Co.’s attempt to claim a $115 million tax deduction stemming from 26 sale-in, lease-out transactions, 17 of which involved public transit agencies, saying that the deals lacked economic substance.
In a decision filed Jan. 8, Judge Thomas C. Wheeler ruled that Wells Fargo is not entitled to depreciation, interest and transaction cost deductions for the 2002 tax year, concluding that the so-called SILO deals did not substantively change anything for either the bank or the tax-exempt entities engaging in the transactions and were done simply to transfer the tax benefits from the tax-exempt entities to the bank.
“If the court were to approve of these SILO schemes, the big losers would be the Internal Revenue Service ... deprived of millions in taxes rightfully due from a financial giant, and the taxpaying public, forced to bear the burden of the taxes avoid by Wells Fargo,” Wheeler wrote in a 76-page opinion. “No rational person would engage in these transactions absent the tax benefits.”
“We are disappointed that the court did not find merit in the transaction. As with the other transit properties, we examined the situation closely before entering into the transactions,” said Carol O’Keeffe, general counsel for the Washington Metropolitan Area Transit Authority, one of the 17 transit agencies. “We respect the rulings of the courts on this matter and in deference to these opinions and other economic circumstances, we have unwound transactions where appropriate and feasible.”
In SILOs and lease-in, lease-out deals, or LILOs, transit authorities sell or lease transportation equipment to banks or other private entities. The authorities then lease back the equipment from the banks, repaying them over time and often exercising an option to purchase the equipment at the end of the leases. The banks or other investors obtain depreciation, interest and transaction cost deductions.
In 1999 the Treasury Department amended the Internal Revenue Code to effectively eliminate the market for LILOs, at which point SILOs came into popularity. Then, concerned about tax shelter issues, Congress enacted legislation, which amended the code to eliminate the tax benefits of SILOs as well.
In his ruling, Wheeler cited the fact that Wells Fargo stopped pursuing SILO deals once the tax deductions were disallowed as proof that the transactions offer no economic incentive beyond tax benefits.
Although Wells Fargo was engaged in 26 SILO transactions in 2002, only five transactions were examined during its trial, with the court’s ruling providing guidance on how to handle the remaining deals.
Of the five selected, four are domestic transit agencies, and the fifth is qualified technological equipment. The transit agencies are the New Jersey Transit Corp., the California Department of Transportation, the Harris County Metropolitan Transit Authority, and WMATA. The bank agreed to purchase and lease back the equipment to a Belgian company, Belgacom Mobile SA.
The IRS offered in Aug. 2008 to settle with any corporate taxpayers who had participated in LILO and SILO transactions, which required companies to agree to return 80% of the tax savings they realized under lease-back transactions. Thirty of the 45 companies targeted agreed to settle.