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One of the Biggest Bailed Out Banks

Last week a federal court decided against Wells Fargo in an $80 million tax shelter case. In the challenged deal, which government attorneys called a “charade” and an attempted “raid on the federal Treasury,” Wells Fargo claimed a $420 million capital loss from the transfer of “underwater” leases to a subsidiary and a related sale of stock to Lehman Brothers. The transaction had no business purpose other than tax avoidance, the court said, and was a sham tax shelter purchased from the international accounting firm KMPG for $3 million.

Our corporate tax study found that the financial industry as a whole had an average effective federal income tax rate of 15.5 percent for the 2008-2010 period and Wells Fargo’s rate was -1.4 percent. Wells Fargo also topped the list of companies with the largest tax subsidies, receiving $17.9 billion in tax subsidies over that three-year period.

A significant factor in their low tax rate is the deduction of net operating losses (NOLs) that were bought in the Wachovia acquisition. Tax law normally limits the deductibility of acquired NOLs, in order to keep companies from acquiring other companies just to reduce their taxes, but the Bush Treasury Department gave Wells Fargo a one-time exception from those rules. Congress quickly passed a law to prohibit Treasury from granting those exceptions in the future, but the law does not apply retroactively, which means Wells Fargo continues to enjoy the tax savings from Wachovia’s NOLs.