(Original Post)
Written by Clark Kauffman 10:27 PM, Nov. 5, 2011
Report: Wells Fargo BENEFITS FROM $18 billion in tax breaks
Seventy-eight of the nation’s most profitable corporations paid no federal income tax at some point over the past three years, according to a new study.
The Citizens for Tax Justice and the Institute on Taxation, a nonprofit advocacy group that says it fights against “the armies of special interest lobbyists for corporations and the wealthy,” profiled 280 of America’s most profitable companies in a report issued last week. The report shows that 30 of those companies enjoyed a negative income tax rate over the three-year period despite combined profits of $160 billion.
The report comes at a time when corporations are lobbying for lower state and federal corporate tax rates and an exemption for any profits they shift offshore.
Among the report’s findings:
Wells Fargo tops the list of 280 U.S. corporations receiving the most in tax subsidies, collecting nearly $18 billion in tax breaks from the U.S. Treasury in the last three years.
The average effective tax rate for all 280 companies in 2009-10 was 17.3 percent, about half the “official” corporate rate of 35 percent that’s spelled out in federal law.
Some companies within a specific industry have fared better than others in terms of their tax bill. The tax rate for FedEx, for example, was less than 1 percent over the three-year period, while its competitor, UPS, paid 24 percent.
Wells Fargo executive Don Dana stood smiling in the ballroom of Philadelphia’s Sheraton Society Hill Hotel. He was there to accept an award from the federal government.
After shaking hands with a top administrator from the Environmental Protection Agency, Dana gripped a plaque naming Wells Fargo the federal agency’s 2007 Green Power Partner of the Year, then posed for a photo.
At the same time, lawyers working for the federal government were gathering evidence for a case involving what they would later call a “raid on the federal treasury” as they argued that Dana engineered a way for Wells Fargo to avoid $80 million in taxes.
To hear the Justice Department lawyers tell it, Dana had falsified records and constructed a “sham real estate company” that was designed to “hoodwink” regulators and effectively eliminate any federal income tax on the $400 million in capital gains Wells Fargo posted between 1996 and 1998.
Dana, the top real estate executive in Wells Fargo’s San Francisco headquarters, later acknowledged he helped structure the real estate company to include an executive officer bonus plan, even though the company had no employees. Under that plan, Dana personally collected a $3.4 million bonus.
A four-year legal battle ended in September when a federal judge ruled that Wells Fargo was not entitled to claim an $80 million reduction in its tax bill due to what the bank claimed was a loss from the sale of stock.
“The purported $423 million loss on the stock sale is fictitious,” ruled U.S. District Judge John Tunheim. Wells Fargo’s claim had no real purpose “other than tax avoidance,” he added.
Spokesman Ancel Martinez said Wells Fargo is disappointed with the decision because the company believes it engaged in a legitimate business transaction and the government owes it a tax refund.
“Wells Fargo and its executives, including Don Dana, acted appropriately and in the best interest of the company’s shareholders,” Martinez said. He added that Dana’s bonus was the result of five years of work and was “a small percentage of the cost savings realized by Wells Fargo and its shareholders.”
Tunheim’s decision against Wells Fargo was handed down in Minneapolis the same day a federal judge in Iowa disallowed $21 million in tax credits claimed by Principal Life Insurance. Wells Fargo employs about 13,000 workers in metro Des Moines, but the tax credit case did not involve its operations that are headquartered in Iowa.
Dana declined to comment on the case. But during the trial, he argued that he and others at Wells Fargo had acted in good faith.
“Mistakes were made,” he testified. “I can’t represent here that we’re perfect.”
'99.9 percent chance' of failing an IRS audit
The tax shelter that Dana and Wells Fargo constructed had its seeds in the company’s 1996 acquisition of First Interstate Bancorp, another financial services company, according to court records.
Shortly after the deal was finalized, Wells Fargo realized that it had seriously underestimated the costs associated with combining the two companies’ real estate portfolios.
Wells Fargo had been saddled with an enormous supply of excess real estate it didn’t need but was obligated to continue renting. Many of the properties were underwater, meaning that the long-term expenses exceeded any revenue they might generate. Court records indicate the losses tied to those properties were projected to hit $1 billion — far more than the $360 million Wells Fargo had anticipated.
Dana, as the company’s real estate chief, was looking for ways to cut the company’s losses when the accounting firm of KPMG approached Wells Fargo with an offer to help — for a price.
In exchange for $3 million, KPMG’s Total Tax Minimization Group would design and implement a transaction that would help solve the real estate problem: The underwater leases would be transferred to a Wells Fargo subsidiary, creating — if only on paper — a capital loss of $423 million that would offset the company’s capital gains. That would reduce Wells Fargo’s tax burden by at least $80 million.
Court records show KPMG cautioned that Wells Fargo needed to have some legitimate business purpose for the transaction that would withstand IRS scrutiny.
Wells Fargo agreed to the deal in August 1998. Dana then drafted a memo stating a business purpose for the arrangement: more effective management of the real estate.
Another Wells Fargo executive, Dan Vandermark, dismissed the memo as “bull----,” court records show. A KPMG email from that time indicates Vandermark thought Wells Fargo had “a 99.9 percent chance of losing” a tax audit unless the company could bolster its claim of a legitimate business purpose to the deal.
Dana circulated a new memo in September 1998 that offered an additional rationale for the deal: With the real estate transferred to a subsidiary that operated under a different name, Wells Fargo could insulate itself from “greedy landlords” who, because they were good customers of the bank, felt they could charge the bank higher rent. The Department of Justice would later describe this as “nothing more than a subterfuge employed to deceive the bank’s own best customers.”
CEO didn't read documents he OK'd
Eventually, Dana’s memo describing the plan’s purported business purpose grew to 50 pages. It was signed and approved by Dick Kovacevich, Wells Fargo’s chief executive officer at the time. Kovacevich, who collected up to $38 million in annual pay as CEO, later testified the business plan was “unfamiliar” to him.
He explained that he signed documents that “most of the time” he never even read.
In 2005, the IRS audit that concerned Vandermark came to pass.
Court records show Dana emailed a colleague and indicated he was confident the company would prevail.
“If we win against the IRS, or even settle, it’s a lot of money directly to the bottom line,” he wrote. “I feel that the business case is strong and I’m prepared to defend it vigorously in any administrative or judicial process.”
When the IRS rejected the company’s arguments and sought payment of $80 million in taxes, Wells Fargo fought back by suing the federal government. The stakes were high and the outcome would have implications that extended far beyond Wells Fargo’s deal with KPMG.
But federal authorities told the judge the real estate deal was a “meaningless paper transaction designed to create a $100 million tax benefit.” They alleged that Dana had backdated some documents, and created a “phony” letter in which Wells Fargo agreed to hire KPMG — one that didn’t imply the deal was a tax dodge purchased from KPMG for $3 million.
Tunheim, the Minnesota-based judge, agreed. He ruled that Wells Fargo was not entitled to the tax refund it was seeking.
The bank says it’s now weighing its options. As for the allegedly “phony” written agreement with KPMG, the bank describes it as “a straightforward communication between the two parties.”
KPMG’s Total Tax Minimization business, meanwhile, is no more. After a series of congressional hearings and indictments, KPMG admitted to criminal wrongdoing in selling fraudulent tax shelters to its clients.
Those fraudulent tax shelters cost the U.S. Treasury $2.5 billion — the equivalent of $21.74 for every household in America.