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IRS defeats Principal, Wells-Fargo tax shelters

October 05, 2011

Two financial companies that are big in Des Moines have just come to grief in tax shelter litigation.

A federal judge in Des Moines struck down a complex foreign tax credit shelter of Principal Financial Group, giving the Des Moines-based insurance giant a tax hit in the neighborhood of $21 million. Judge Jarvey said:

As to the subjective business purpose, the Court strains to find any credible business purpose to the transaction not involving the FTCs [foreign tax credits]. Principal's arguments, inter alia, that it wanted higher yields on foreign bonds and an enhanced yield on the transaction itself are not persuasive. Principal claims it had multiple business purposes for entering into the transaction, but these purposes are very difficult to square with the reality...

As the Court has repeatedly noted throughout this opinion, Principal was incapable of answering how it could justify approving a near-certain negative NPV transaction if the FTCs were excluded from the calculus.

Meanwhile in Minnesota, a federal judge in St. Paul ruled against Wells-Fargo to the tune of $80 million in a "lease restructuring transaction" shelter. That judge was no kinder:

The question before the Court is whether the LRT — a three-step process involving twenty-one properties, the issuance of Preferred Stock, the sale of such stock from the transferring banks to WFC and from WFC to Lehman — had economic substance when viewed as a whole. The Court concludes it did not.

The TaxProf has more.


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