Monday, January 11, 2010

Court Finds Tax Motivated Transactions are Bullshit (1/11/10)

In Wells Fargo & Company v. United States, 91 Fed. Cl. 35 (2010), the Court of Federal Claims shot down another SILO transaction. In the smoke and mirrors scheme, the Court denied depreciation and interest deductions. In lay terms, the court found that the transaction was just bullshit, meaning also, I guess, that the arguments to sustain the transaction were also bullshit. (Sort of like Vincent LaGuardia Gambini's (aka Vinny) pithy argument in My Cousin Vinny - "Uh... everything that guy just said is bullshit... Thank you.") For the audio, click here.

Now, the Court of Federal Claims could not dispense of the case on that articulated basis, but it did the legal equivalent in more legalese (and words). The legalease is that the transaction lacks economic substance (the recognized way to say that transactions are bullshit). So that is what the court did.

I don't think that these transactions are materially different than the transactions involved in the KPMG prosecutions; indeed at some level they may be worse. As I have said, criminal tax cases are all about the lie. And, there appears to have been lies in these transactions. As the Wells Fargo Court said in concluding its analysis of the depreciation deductions denying the depreciation (quoting the Fourth Circuit in BB&T Corp. v. United States, 523 F.3d 461, 477 (4th Cir. 2008).):

The IRS was entitled to view these SILO transactions for what they are, not what they purport to be. As the Fourth Circuit observed in BB&T, citing an Abraham Lincoln riddle from Rogers v. United States, 281 F.3d 1108, 1118 (10th Cir. 2002), "How many legs does a dog have if you call a tail a leg?"

The answer is 'four,' because 'calling a tail a leg does not make it one.' Id. Here, BB&T styled the LILO as a lease financed by a loan, but did not in substance acquire a genuine leasehold interest or incur genuine indebtedness. Accordingly, . . . whether it has 'reached the point where the tax tail began to wag the dog,' Hines, 912 F.2d at 741, we conclude that the Government was entitled to recognize that tail for what it was, not what BB&T professed it to be.
BB&T, 523 F.3d at 477. The Court agrees fully with the Fourth Circuit's analysis in BB&T, and concludes that, looking at the substance of the SILO transactions, Wells Fargo did not become the owner for tax purposes of the SILO equipment, and is not entitled to the depreciation amounts claimed.
The Court also registered its disgust for this attempted stealth raid on the Treasury:

The SILO transactions here are offensive to the Court on many levels. A cadre of company executives, in concert with teams of well known legal and accounting firms and other consultants, regularly constructed and participated in these tax schemes for Wells Fargo, apparently blind to professional standards of care. Representatives from the Federal Transit Administration ("FTA") encouraged transit agencies to participate in SILO transactions as a way to raise additional funds, without seriously considering the probable adverse tax treatment of the transactions. Even when the IRS issued a 1999 Revenue Ruling disallowing tax deductions from LILO transactions, the participants continued on with only slight adjustments to create the SILO transactions. The Court has little sympathy for those who have lost out as a result of this decision.
Update on 1/12/10 at 11:50am:  I have corrected this blog to make bullshit a single word rather than two.  (I should note that I had it right in the quote from Vinny; that guy knows how to spell.)  For more on bullshit, there are two good Wikipedia entries -- one is general on bullshit here and the other is on Harry Frankfurt's "On Bullshit" here.  For the published version of Franfurt's landmark thoughts, see here; for the earlier non-published version of Frankfurt's landmark essay on bullshit, see here.

Update on 8/20/11:  The trial court's decision was affirmed in Wells Fargo & Company v. United States, 641 F.3d 1319 (Fed. Cir. 2011).


  1. Interesting blogpost. I like the bullshit references. However, this bullshit really just stems from the fact that those transactions were only done for the purpose of saving taxes (saving money), which I believe they consider as lacking economic substance (business purpose) or just being bullshit. Sometimes, I think that saving money is enough of a business reason to participate in a transaction, but I guess not. Isn't that why most people/businesses enter into a transaction - to either make money or save it. Consider the home buyer credit of 8k. I had friends who were timing their home purchase around the 8k federal credit (also favorable state credits) to simply save money, but I guess in that case it is legal. Anyway, thanks for posting.

  2. Fantastic result. VERY interesting blog post. Thank you!


Please make sure that your comment is relevant to the blog entry. For those regular commenters on the blog who otherwise do not want to identify by name, readers would find it helpful if you would choose a unique anonymous indentifier other than just Anonymous. This will help readers identify other comments from a trusted source, so to speak.