United States: Wells Fargo Petitions Supreme Court To Review Economic Substance Decision

On February 26, 2014, Wells Fargo ("WFC") petitioned the Supreme Court to review the Eighth Circuit's decision in WFC Holdings Corp. v. United States,¹ where it held that a lease restructuring transaction lacked economic substance even though it produced nontax economic benefits. The transaction was intended to facilitate a transfer of commercial real estate leases from two WFC subsidiaries to Charter Holdings, Inc. ("Charter"), a non-bank subsidiary. WFC argued that banks are subject to stricter federal regulations on holding interests in real estate than non-banks, so this transfer allowed WFC to earn millions of dollars in additional revenue. Despite these nontax benefits from the lease restructuring transaction, the Eighth Circuit held that Charter's issuance of a new class of preferred stock and WFC's subsequent arm's-length sale of that stock made the entire transaction lack economic substance.

WFC argued that certiorari is warranted because the Eighth Circuit's decision exceeds the limits of the economic substance doctrine in Supreme Court precedent, deepens the split between the circuit courts over whether a transaction that objectively changes a taxpayer's economic position can still lack economic substance, and implicates a question of critical importance to taxpayers. With its decision in WFC Holdings, the Eighth Circuit joined the Sixth and Tenth Circuits in holding a transaction to lack economic substance even when the transaction was profitable. WFC also argued in its petition that, if a profitable transaction can be disregarded for tax purposes on the grounds that some aspects were designed solely to make it tax efficient, then all tax planning would become subject to IRS challenge in the Eighth Circuit.

At least eight amicus briefs have been filed with the Supreme Court urging the court to grant the appeal.

Footnote

1 728 F.3d 736 (8th Cir. 2013)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.