Court Penalizes Wells Fargo For Abusive Tax Shelter

Tom Burroughes

1 June 2017

, the US banking group, has been penalized by a federal court in Minneapolis, Minnesota for using an abusive tax shelter marketed by Barclays Bank to create $350 million in tax credits. The shelter had sought to exploit differences between US and UK tax rules.

The court ruled that Wells Fargo is liable for a 20 per cent negligence penalty for the tax shelter, known as Structured Trust Advantaged Repackaged Securities, or STARS, the US Department of Justice said in a recent statement. The ruling followed 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 pre-tax 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, the DoJ said.

In a prior decision in this case, the court noted that Barclays Bank marketed the STARS transaction to American banks, which was designed to exploit differences between UK and US tax laws. Three other courts have rejected STARS tax shelters that Bank of New York, BB&T Bank and Santander Bank purchased, the statement continued.

“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,” Acting Assistant Attorney General David A. Hubbert of the Justice Department’s Tax Division, said.