Wells Fargo Argues Court Erred on Foreign Tax Credits, Penalty

Wells Fargo & Co.,
Plaintiff-Appellant,
v.
United States of America,
Defendant-Appellee.

In the
United States Court of Appeals
for the
Eighth Circuit

ON APPEAL FROM
THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MINNESOTA
Civ. No. 09-CV-2764 (PJS/TNL)
Judge Patrick J. Schiltz

Appellant's Brief

FAEGRE BAKER DANIELS LLP
Walter A. Pickhardt
Charles F. Webber
Deborah A. Ellingboe
2200 Wells Fargo Center
90 South Seventh Street
Minneapolis, Minnesota 55402
(612) 766-7000

Attorneys for Appellant
Wells Fargo & Co.

SKADDEN ARPS SLATE
MEAGHER & FLOM LLP
Alan J.J. Swirski
Christopher P. Bowers
B. John Williams
Nathan P. Wacker
1440 New York Ave, N.W.
Washington, D.C. 20005
(202) 371-7000

Attorneys for Appellant
Wells Fargo & Co.

Summary of the Case and Statement Regarding Oral Argument

This is an appeal from a final judgment of the United States District Court for the District of Minnesota (the Honorable Patrick J. Schiltz presiding) in a federal-income-tax dispute. Wells Fargo & Company (“Wells Fargo”) claims that § 901 of the Internal Revenue Code (26 U.S.C. § 901) entitled it to a credit on its 2003 U.S. tax return for taxes it paid to the United Kingdom for that year. The government asserted that the financing transaction that caused Wells Fargo to incur foreign taxes (nicknamed the “STARS transaction”) had no economic purpose other than tax avoidance, so the non-statutory “sham-transaction” doctrine deprived Wells Fargo of the credit. The district court improperly let a jury decide this dispute, rather than deciding it as a matter of law. The jury sided with the government, and the district court denied Wells Fargo's credit. The government also sought to impose a “negligence penalty” on Wells Fargo for initially underpaying its 2003 taxes due to the claimed credit. The district court properly addressed this issue itself as a matter of law, but incorrectly decided it in the government's favor.

Given the significance of the federal-tax issues involved, Wells Fargo respectfully requests that the Court allow each side 30 minutes of oral argument.

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Table of Contents

Jurisdictional Statement

Statement of Issues

Statement of the Case

Summary of Argument

Argument

Conclusion

Table of Authorities

FEDERAL CASES

ACM P'ship v. Comm'r, 157 F.3d 231 (3d Cir. 1998)

Allen v. United States, 51 F.3d 1012 (11th Cir. 1995)

Bank of New York Mellon Corp. v. Comm'r, 801 F.3d 104 (2d Cir. 2015)

Beach v. Ocwen Fed. Bank, 523 U.S. 410 (1998)

Biddle v. Comm'r, 302 U.S. 573 (1938)

Burditt v. Comm'r, T.C. Memo. 1999-117 (2010)

Burnet v. Chicago Portrait Co., 285 U.S. 1 (1932)

Campbell v. Comm'r, 134 T.C. 20 (2010)

Centex Corp. v. United States, 49 Fed. Cl. 691 (2001)

Chai v. Comm'r, 851 F.3d 190 (2d Cir. 2017)

Chemtech Royalty Assocs., L.P. v. United States, 823 F.3d 282 (5th Cir. 2016)

Christensen v. Harris County, 529 U.S. 576 (2000)

Christopher v. SmithKline Beecham Corp., 567 U.S. 142 (2012)

Compaq Computer Corp. v. Comm'r, 277 F.3d 778 (5th Cir. 2001)

Custis v. United States, 511 U.S. 485 (1994)

Diedrich v. Comm'r, 457 U.S. 191 (1982)

Frank Lyon Co. v. United States, 435 U.S. 561 (1978)

Freeman v. Pittsburgh Glass Works, LLC, 709 F.3d 240 (3d Cir. 2013)

Helvering v. Gregory, 69 F.2d 809 (2d Cir. 1934)

Horn v. Comm'r, 968 F.2d 1229 (D.C. Cir. 1992)

IES Industries, Inc. v. United States, 253 F.3d 350 (8th Cir. 2001)

Ivan Allen Co. v. United States, 422 U.S. 617 (1975)

Jade Trading, LLC v. United States, 598 F.3d 1372 (Fed. Cir. 2010)

James v. Comm'r, 899 F.2d 905 (10th Cir. 1990)

Karczewski v. DCH Mission Valley LLC, 862 F.3d 1006 (9th Cir. 2017)

Knetsch v. United States, 364 U.S. 361 (1960)

Lewis v. Reynolds, 284 U.S. 281 (1932)

Loftin & Woodard, Inc. v. United States, 577 F.2d 1206 (5th Cir. 1978)

Lyerly v. United States, 218 F. Supp. 3d 1309 (N.D. Ala. 2016)

Matthies v. Comm'r, 134 T.C. 141 (2010)

Moskal v. United States, 498 U.S. 103 (1990)

NLRB v. Bildisco & Bildisco, 465 U.S. 513 (1984)

Old Colony Trust Co. v. Comm'r, 279 U.S. 716 (1929)

Park v. Thompson, 851 F.3d 910 (9th Cir. 2017)

Rice's Toyota World, Inc. v. Comm'r, 752 F.2d 89 (4th Cir. 1985)

Russian Recovery Fund Ltd. v. United States, 81 Fed. Cl. 793 (2008)

Sacks v. Comm'r, 69 F.3d 982 (9th Cir. 1995)

Salem Financial, Inc. v. United States, 786 F.3d 932 (Fed. Cir. 2015)

Santander Holdings USA, Inc. v. United States, 844 F.3d 15 (1st Cir. 2016)

Santander Holdings USA, Inc. v. United States, 977 F. Supp. 2d 46 (D. Mass. 2013)

Scherbart v. Comm'r, 453 F.3d 987 (8th Cir. 2006)

Senda v. Comm'r, 433 F.3d 1044 (8th Cir. 2006)

Sierra Club v. Robertson, 960 F.2d 83 (8th Cir. 1992)

Smoker v. Comm'r, T.C. Memo. 2013-56 (2013)

United Parcel Service of America, Inc. v. Comm'r, 254 F.3d 1014 (11th Cir. 2001)

United States v. Consumer Life Ins. Co., 430 U.S. 725 (1977)

United States v. Jicarilla Apache Nation, 564 U.S. 162 (2011)

UPMC-Braddock Hosp. v. Sebelius, 592 F.3d 427 (3d Cir. 2010)

West Plains, L.L.C. v. Retzlaff Grain Co. Inc., 870 F.3d 774 (8th Cir. 2017)

WFC Holdings Corp. v. United States, 728 F.3d 736 (8th Cir. 2013)

FEDERAL STATUTES

26 U.S.C. § 6751

26 U.S.C. § 901

26 U.S.C. § 2204

26 U.S.C. § 6662

REGULATIONS

26 C.F.R. § 1.901-2

26 C.F.R. § 1.901-2A

26 C.F.R. § 1.6662-3

26 C.F.R. § 1.6662-4

63 Fed. Reg. at 66433 (Dec. 2, 1998)

OTHER AUTHORITIES

Dolan, The Foreign Tax Credit Diaries — Litigation Run Amok, 71 Tax Notes 895, 905-07 (Aug. 26, 2013)

Owens, The Foreign Tax Credit 387 (1961)

Richard Lipton, BNY and AIG — Using Economic Substance to Attack Transactions the Courts Do Not Like, 119 J. Tax'n 40 (July 2013)

Yen & Sigmon, District Court's “AIG” Ruling Expands Application of Economic Substance Doctrine in Unexpected Ways for Transactions Generating Excess Foreign Tax Credits, Daily Tax Report (May 5, 2013)

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Jurisdictional Statement

The district court had jurisdiction under 28 U.S.C. §§ 1331 and 1346(a) because Wells Fargo's claim arose under federal laws (specifically 26 U.S.C. §§ 901 and 7422), and is a civil action against the United States to recover an internal-revenue tax that was erroneously assessed.

This Court has appellate jurisdiction under 28 U.S.C. § 1291 because this is an appeal from a final decision of the district court. The district court entered judgment on September 26, 2017, disposing of all claims. (App-1.)¹ Wells Fargo filed a timely Notice of Appeal under Fed. R. App. P. 4(a)(1)(B) on November 24, 2017.² (App-4.)

Statement of Issues

1. Wells Fargo was double taxed on some of its income in 2003, once by the United Kingdom and once by the United States. Section 901 of the Internal Revenue Code (“IRC”) (26 U.S.C. § 901) allows a U.S. taxpayer a dollar-for-dollar credit against its U.S. tax liability for taxes paid to foreign countries, to avoid double taxation. Yet the government denied Wells Fargo its foreign-tax credit under the non-statutory “sham-transaction” doctrine, claiming the financing transaction under which Wells Fargo paid U.K. taxes was a “sham” with no economic substance other than generating a tax benefit for Wells Fargo. Did the district court err by refusing to rule as a matter of law that the transaction was not a sham under the sham-transaction doctrine?

Apposite authorities:

• 26 U.S.C. § 901

• 26 C.F.R. § 1.901-2(f)(2)(i)

• Old Colony Trust Co. v. Comm'r, 279 U.S. 716 (1929)

• IES Industries, Inc. v. United States, 253 F.3d 350 (8th Cir. 2001)

• Compaq Computer Corp. v. Comm'r, 277 F.3d 778 (5th Cir. 2001)

• Salem Financial, Inc. v. United States, 786 F.3d 932 (Fed. Cir. 2015)

2. The government claimed Wells Fargo was subject to a “negligence penalty” under IRC § 6662 for claiming a foreign-tax credit — a penalty the government first sought only after Wells Fargo filed this lawsuit. The district court imposed the penalty. Did the district court err as a matter of law in imposing a negligence penalty on Wells Fargo under § 6662?

Apposite authorities:

• 26 U.S.C. § 6662

• 26 U.S.C. § 6751

• 26 C.F.R. § 1.6662-3

• 26 C.F.R. § 1.6662-4

• Old Colony Trust Co. v. Comm'r, 279 U.S. 716 (1929)

• IES Industries, Inc. v. United States, 253 F.3d 350 (8th Cir. 2001)

• Compaq Computer Corp. v. Comm'r, 277 F.3d 778 (5th Cir. 2001)

• Chai v. Comm'r, 851 F.3d 190 (2d Cir. 2017)

Statement of the Case

I. Overview

Wells Fargo is a U.S. citizen. The U.S. taxes all of its citizens' income, even when it the income is earned in international commerce and taxed overseas. Congress recognized that this regime could result in U.S. taxpayers earning foreign income being double taxed. Congress thus enacted 26 U.S.C. § 901 (“IRC § 901”), which entitles a U.S. taxpayer to a dollar-for-dollar credit against its U.S. tax liability for taxes paid to a foreign country. See Burnet v. Chicago Portrait Co., 285 U.S. 1, 7 (1932) (“[T]he primary design of [the foreign-tax credit] was to mitigate the evil of double taxation.”). For example, if a U.S. taxpayer earns $100 in the U.K. and pays $35 in U.S. tax and $22 in U.K. tax on that income, the foreign-tax credit generally entitles the taxpayer to a $22 reduction of its U.S. tax liability, to ensure the U.S. taxpayer is taxed only once on the income.

Wells Fargo entered into a financing transaction with Barclays Bank in England in 2002, which was called “STARS” (standing for “structured trust advantaged repackaged securities”). The transaction allowed Wells Fargo to borrow significant money at a very low interest rate — money it could then lend to its customers at a higher rate, thus earning a profit. Because of how STARS was structured, Wells Fargo earned income in the U.K. in 2003. Both the U.S. and the U.K. taxed that income; Wells Fargo paid approximately $70 million to the U.K., and more than $110 million to the U.S. (the U.S. taxed the income at a higher rate than the U.K.).

Ordinarily, Wells Fargo would have received a foreign-tax credit under § 901. But the government said no, invoking the “sham-transaction” doctrine (sometimes called the “economic-substance” doctrine).

The sham-transaction doctrine is at the heart of this case, and at the heart of the most important precedent for this appeal: this Court's decision in IES Industries, Inc. v. United States, 253 F.3d 350 (8th Cir. 2001). In IES, this Court held that a transaction is a sham for tax purposes if: 1) it is not motivated by any economic purpose outside of tax considerations (the “business-purpose” test), and 2) it lacks economic substance because no real potential for pre-tax profit exists (the “pre-tax-profit” test). Id. at 353. If a transaction is a sham, credits or deductions claimed in connection with that transaction may be disallowed.

The district court agreed with the government that the transaction was a sham and therefore disallowed Wells Fargo's tax credits. The government also asserted a 20% “negligence penalty” against Wells Fargo when Wells Fargo filed this lawsuit to recover the foreign-tax credits, and the district court upheld that penalty. Wells Fargo appeals both determinations.

II. The STARS financing transaction

Banks are known for lending money, but they also borrow money. Sometimes they borrow through traditional bond offerings, and sometimes they borrow from other banks. The primary goal is obvious: to make a profit by borrowing money at one rate and lending it at a higher rate.

In general, STARS allowed Wells Fargo to borrow $1.25 billion from Barclays at a very low net cost. As collateral, Wells Fargo pledged income-generating assets (like Treasury securities and loans to borrowers) that it already owned. (T-106-08, 110-11.)³ This financing had many benefits. In addition to being low-cost, the loan allowed Wells Fargo to diversify its funding sources (Barclays was a new lender for Wells Fargo), reduce its liquidity risk (i.e., the risk it would not have enough cash to meet its obligations), and provide stable funding that was expected to (and did) last for five years. (T-83-84, 92-94, 114, 124, 220, 501-02.)

Meanwhile, Barclays entered into the transaction because, if it loaned money to a bank like Wells Fargo, and structured the transaction a particular way, Barclays could obtain tax benefits from the U.K. (T-427-28, 1841-43.)

The details of the structure Barclays needed to get U.K. tax benefits are both undisputed and complicated. Here is a simplified version:

• Wells Fargo contributed about $6.7 billion of income-producing assets into a Trust and a company owned by the Trust, the trustee of which was another Wells Fargo entity that was a U.K. resident for U.K. tax purposes. (T-106-08, 198, 200.) Approximately $1.2 billion of those assets served as collateral for the loan. (T-110-111; Ex. P33 at 79939.)⁴

• Barclays made the loan to Wells Fargo by buying an interest in the U.K. Trust for $1.25 billion. (T-198-200; Ex. P20 at 137547-49.)

• Each month, Wells Fargo paid Barclays interest on the loan at a rate of LIBOR plus 20 basis points. (Ex. P119 at 752; T-642-43.) “LIBOR” is the average of interest rates that leading banks in London estimate they would pay to borrow from other banks, akin to the older term “prime rate.” (See T-88.) 20 basis points is the same as 0.2%.

• Also each month, Barclays gave Wells Fargo a fixed cash payment referred to as “Bx.” (T-650; Ex. P119 at 202-02 & 752.)⁵ The Bx payments totaled approximately $32 million per year for each of the five years STARS was in place. (T-588, 711; Ex. P119 at 201-02.) The parties negotiated the Bx amount in advance, setting it equal to approximately 47.5% of the U.K. tax credits Barclays expected to receive. (Ex. P119 at 193.) But Wells Fargo did not receive 47.5% of Barclays's U.K. tax credits, it received cash payments that equaled that amount. (T-445, 731.) And Barclays was obligated to pay Bx regardless of whether Barclays obtained the U.K. tax benefits it expected. (T-223-24, 721-24.)

• The parties viewed Bx as effectively reducing (and in some months exceeding) the monthly interest payments Wells Fargo made on the loan. (T-87-88, 465-66.) Bx was a big part of why Wells Fargo viewed STARS as an attractive financing — i.e., it provided a low “effective” interest rate. (T-656.)

• During STARS's five-year term, Barclays (because it formally held an interest in the Trust) received monthly income distributions from the Trust, and then re-contributed them to the Trust. (T-202-03, 909-10; Ex P20 at 137555-56.) Those distributions and subsequent re-contributions allowed Barclays to claim a deduction that was key to its overall U.K. tax benefits. (T-202-03, 1841-42.)

• After five years, Wells Fargo was obligated to repurchase Barclays's ownership interest in the Trust, thereby repaying the loan. (T-1361.)⁶

In short, Barclays offered Wells Fargo an attractive financing deal largely made possible by the U.K. tax savings Barclays expected to realize by virtue of this structure.

III. The U.K. taxation of the transaction

Both U.K. tax law and a U.S.-U.K. treaty provided that because the Trust had a U.K. trustee, the income its assets produced was taxable first by the U.K. The U.K. taxed that income at 22%. (T-200-01, 230.) Wells Fargo timely paid approximately $70 million in U.K. taxes for 2003. (T-213, 217; Exs. P69 & P70.) The U.K. government kept the money that Wells Fargo paid; neither the Trust nor Wells Fargo ever received from the U.K. a refund or “rebate” of those tax payments. (T-222-23.)

To understand Barclays's U.K. tax treatment, assume the Trust receives $100 of income. Barclays was subject to a 30% U.K. corporation tax (or, here, $30) on its Trust distributions. (T-1840-41.) This tax liability was offset by three tax benefits: (i) a $22 credit for taxes the Trust already paid on this $100, thus preventing double taxation; (ii) a $23.40 deduction that U.K. law gave to Barclays for re-contributing monthly distributions back to the Trust; and (iii) a $3.30 deduction for Barclays's payment of Bx. (T-1840-42, 1971.) The result was a net U.K. tax benefit for Barclays. (T-427-28.)

Barclays agreed to pay Wells Fargo Bx because it expected to receive these U.K. tax benefits. (T-428-31.)

IV. The U.S. taxation of the transaction

As mentioned above, Wells Fargo paid U.K. tax on the income the Trust assets generated, but Wells Fargo also had to pay U.S. tax on the same income. (T-212-13.) Wells Fargo expected to avoid this double taxation by receiving foreign-tax credits on its U.S. tax return.⁷ Wells Fargo did not expect the transaction to reduce its worldwide tax liability; it would simply pay more tax to the U.K. and less to the U.S., as illustrated below (assuming, again, that the Trust earns $100 of income):

Without STARS	Under STARS
$100 Asset Income	$100 Asset Income
($35 U.S. Tax)	($22 U.K. Tax)
	($35 U.S. Tax)
	$22 U.S. Foreign-Tax Credit
$65 Net Income	$65 Net Income

(T-222, 433-34.) Indeed, Wells Fargo expected its worldwide tax liability to increase because of the additional income it made by lending the low-cost funds it borrowed through STARS. (T-208, 222.)

Wells Fargo reported STARS on its U.S. tax returns in accordance with its substance — i.e., as a secured borrowing — and not its form, as U.S. tax law required. (T-203-04, 323-25.) Thus, Wells Fargo ignored (appropriately) many of the complex formalities of STARS (for example, the cash flows between the Trust and Barclays) for U.S. tax purposes. (T-203-04.)

V. The government denies Wells Fargo's foreign-tax credits

In 2004, Wells Fargo filed its 2003 income-tax return. It claimed a foreign-tax credit for the approximately $70 million U.K. taxes it paid. (T-214.) The IRS disallowed the credit, and claimed that Wells Fargo owed additional taxes for 2003. Wells Fargo paid the additional amount, and started this refund action. (T-214-15.)

VI. Proceedings below

The Department of Justice responded to Wells Fargo's refund lawsuit on behalf of the government by reiterating the government's view that STARS was a sham, but unlike the IRS, it also asserted a negligence penalty under IRC § 6662 for Wells Fargo's initial underpayment of its 2003 tax liability. (Dkt. 36 at 41.)⁸ The government asserted the negligence penalty only as a setoff.

In fall 2010, the district court told the parties it believed it necessary to appoint a special master to address pretrial matters, given the complexity of the case and the court's caseload. (Dkt. 57.) The parties jointly moved to appoint Charles H. Gustafson, a tax professor from Georgetown University Law Center, as special master, and the district court so appointed Professor Gustafson. (Dkt. 102.)

In 2013, Wells Fargo moved for summary judgment, asking the Special Master to decide (among other things) that: 1) Bx was an item of pre-tax profit for purposes of applying the sham-transaction test, and 2) Wells Fargo was not subject to a negligence penalty.

The Special Master, in a 124-page report, decided for Wells Fargo on both issues. (Add-124.)⁹ He concluded Bx was pre-tax because it came to Wells Fargo from a private party (Barclays) as payment for establishing the Trust. (Id. at 48.) The Special Master rejected the government's argument that Bx was a post-tax item because it was effectively a “rebate” to Wells Fargo “of the economic incidence of the U.K. tax.” (Id. at 48-49.) The Special Master noted the government cited no authority “to support the view that payments from one bank to another constitute tax rebates or tax refunds.” (Id. at 63.) The Special Master also concluded that, though Bx was quantified “by reference to anticipated U.K. tax benefits,” that did not “convert the private payment into some kind of government disbursement or refund.” (Id.) And the Special Master found Wells Fargo could not be penalized for initially claiming foreign-tax credits because even if STARS were eventually determined to be a sham, there were four “permissible sources of authority” that supported Wells Fargo's claim for tax credit, so “there was reasonable basis for reporting the results of the complicated transaction in a way that reflected its financial realities, as Wells Fargo endeavored to do.” (Id. at 113.)

The government objected to the Special Master's recommendation on both points. The district court elected to defer judgment until after trial. First, regarding Bx, the court acknowledged “that there is a certain logic to Wells Fargo's [and the Special Master's] characterization of the Bx payment” as pre-tax revenue that impacts whether Wells Fargo could make a pre-tax profit from STARS. (Add-138.) But the court ultimately was “not persuaded,” and concluded that the Bx issue “may be better left for trial.” (Id. at 138, 153.) Second, regarding the negligence penalty, the court held it was “not prepared to rule that Wells Fargo's return position had a reasonable basis,” but also was “not prepared to rule that Wells Fargo lacked a reasonable basis.” (Id. at 178 (original emphasis).) The court set the case for trial.

At trial, the district court remained uncertain on these two central issues. The court stated that whether Bx constituted pre-tax-profit “probably is a matter of law,” but sent the question to the jury “in case the Eighth Circuit disagrees.” (T-2093.) The penalty issue did not go to the jury, because Wells Fargo agreed to ground its “reasonable-basis” defense solely on the adequacy of supporting legal authorities and its position that this defense did not require proof of actual reliance on those authorities. During the pre-trial conference, the district court indicated its “preliminary research [indicated that] Wells Fargo's position is correct” that the “reasonable-basis” standard is “an objective standard” such that Wells Fargo need not prove actual reliance on legal authorities supporting its defense. (Dkt. 635 at 6.)

The government argued at trial that STARS was actually two separate transactions — a “Trust transaction” and a “loan transaction” — that had to be analyzed separately under the sham-transaction doctrine. Wells Fargo pointed to undisputed evidence that Barclays would not have offered the “loan transaction” without the “Trust transaction,” and that Wells Fargo would not have entered into the Trust transaction without the loan. (T-111, 425, 435, 724-25, 1218.) Thus, STARS was commercially viable only as an integrated transaction. The district court nevertheless allowed this issue to go to the jury.

The jury agreed with the government that STARS was really two separate transactions. (App-46.) The jury then decided the “loan transaction” had a reasonable possibility of pre-tax profit (which meant that it was not a sham), but that the “Trust transaction” had neither a reasonable possibility of pre-tax profit nor a non-tax business purpose. (App-47.) The jury also decided that Bx was a “tax benefit,” meaning it could not be considered an “economic benefit” or pre-tax profit under the sham-transaction doctrine. (Id. at 48.)

After trial, Wells Fargo again challenged the district court's decision to allow the jury to decide whether Bx payments were pre-tax or post-tax, noting this was an issue for the court. (App-54-59.) The court stated that if the nature of Bx was a legal issue for the court, the court would have concluded it was post-tax (i.e., a tax benefit), and not pre-tax revenue. (Add-185 n.1.) Regarding the negligence penalty, the district court concluded that “in order to establish the reasonable-basis defense, Wells Fargo would have to prove that it actually relied on the authorities that form the basis of that defense,” retreating from its earlier suggestion to the contrary. (Add-201.)

The district court entered judgment on September 26, 2017, reflecting a determination that: 1) the “Trust portion” of STARS, but not the “loan portion,” was a sham, and 2) Wells Fargo was subject to a negligence penalty. (App-1.) The judgment required the government to pay Wells Fargo a net amount of approximately $13.65 million, mainly restoring an interest deduction Wells Fargo claimed for the “loan portion” of the transaction. (Id.)

Summary of Argument

1. The district court erred as a matter of law in holding that STARS was a sham — and therefore that Wells Fargo was not entitled to a foreign-tax credit — because STARS was not a sham under this Court's two-part “sham-transaction” test in IES Industries, Inc. v. United States, 253 F.3d 350, 353 (8th Cir. 2001). The transaction satisfied the “pre-tax-profit” test because Barclays's contractual obligation to pay Bx was a pre-tax economic benefit to Wells Fargo of approximately $160 million over the life of STARS, while the pre-tax expenses of the Trust portion totaled less than $9 million, thus making the transaction profitable pre-tax. Id. And it passed the “business-purpose” test primarily because the potential pre-tax profit alone provided an “economic purpose outside of tax considerations.” Id.

2. The district court also erred by upholding the government's imposition of a negligence penalty under IRC § 6662. That decision was based on two legal errors: (1) holding that the reasonable-basis defense requires proof of actual reliance on authorities supporting its tax-return position¹⁰ and (2) disregarding the government's admitted failure to obtain the written approval that the Code requires.

Argument

Supreme Court precedent and this Court's decision in IES require reversal of the judgment below as a matter of law. IES compels rejection of the district court's conclusion that STARS was a sham, because the transaction passed both parts of IES's sham-transaction test. IES also compels rejection of the negligence penalty, because IES alone provided more than a “reasonable basis” for Wells Fargo to claim foreign-tax credits on its 2003 return. Thus, the Court should reverse and remand for entry of judgment in favor of Wells Fargo.

The outcome of the district court's erroneous decision is simple: Wells Fargo has been taxed twice on the same income, and charged a 20% penalty on top of it. Wells Fargo paid approximately $110 million in U.S. taxes in 2003, and another $70 million in U.K. taxes in 2003, on the same income—an effective tax rate of 57%. (T-212-13.) Avoidance of this “evil of double taxation” is precisely the reason Congress created the foreign-tax credit in 1918. Burnet, 285 U.S. at 7. And the foreign-tax credit is implemented in part through the U.S.-U.K. Treaty that gave the U.K. the primary right to tax the income at issue. If this Court reverses the district court's decision, Wells Fargo will not have dodged any taxes or received any “tax break.” It simply will have avoided being taxed twice on the same income. Compaq Computer Corp. v. Comm'r, 277. F.3d 778, 785-86 (5th Cir. 2001) (allowing foreign-tax credit “does not give Compaq a windfall,” for “[w]ithout the tax credit, Compaq would be required to pay tax twice”).

Three circuits that have addressed other STARS transactions have denied foreign-tax credits (thus imposing double taxation), but as Wells Fargo discusses below, all of them had to depart from IES, with two expressly declining to follow this Circuit's law. This Circuit's rule (which the Fifth Circuit also follows) is the correct one, and the Court should continue to follow it.

Finally, because the transaction was not a sham under this Circuit's law, the penalty imposed on Wells Fargo must be reversed automatically, as there is no underpayment on which to impose a penalty. But even if the Court concludes that

Wells Fargo is not correct on this score, Wells Fargo had a “reasonable basis” (and then some) to claim the foreign-tax credits, which precludes imposition of a penalty.

I. STARS was not a sham under this Circuit's law, so Wells Fargo was entitled to a foreign-tax credit.

In applying the sham-transaction doctrine, this Court asks: (1) did the transaction have a “real potential for profit” pre-tax (the “pre-tax-profit” test)?, and (2) was the transaction “motivated by any economic purpose outside of tax considerations” (the “business-purpose” test)? IES, 253 F.3d at 353 (emphasis added, citation omitted). The Trust transaction here passes both of these tests, and thus was not a sham.¹¹

The government argued below (Dkt. 500 at 3) that the “linchpin” of the case is how to characterize the Bx payments — i.e., were they pre-tax economic benefits to Wells Fargo, or post-tax items that do not count as profit in the sham-transaction calculus? The “characterization of a transaction for tax purposes is a question of law.”

Frank Lyon Co. v. United States, 435 U.S. 561, 581 n.16 (1978); cf. Senda v. Comm'r, 433 F.3d 1044, 1048 (8th Cir. 2006). This is especially true when, as here, the parties agree on the factual elements of the transaction, and dispute only how the law applies to those facts. This Court reviews de novo the application of law to undisputed facts, Sierra Club v. Robertson, 960 F.2d 83, 85 (8th Cir. 1992), and did so in IES, reviewing de novo the district court's assessment of whether a particular payment was pre-tax revenue includible in the pre-tax-profit test. IES, 253 F.3d at 351 (quoting Frank Lyon). De novo review also applies to the district court's denial of Wells Fargo's motion for judgment as a matter of law. West Plains, L.L.C. v. Retzlaff Grain Co. Inc., 870 F.3d 774, 782 (8th Cir. 2017).

A. Bx gave Wells Fargo a reasonable possibility of earning a pre-tax profit under IES.

The first element of this Court's sham-transaction test is whether the Trust had a “real potential for profit” pre-tax. IES, 253 F.3d at 353. The answer is yes because, properly characterized, the Trust generated economic income that exceeded pre-tax expenses.

Wells Fargo will separately discuss the income and expense sides of the Trust. It will demonstrate that the income side encompasses the Bx payments (which were non-tax economic benefits that the Trust generated) totaling more than $160 million over the life of STARS. The expense side, by contrast, totaled less than $9 million over that period. Thus, the Trust patently reflected a “real potential for profit” pre-tax under IES.

The government's argument to the contrary is a strange one. On the income side, the government argues Bx should not be counted as a pre-tax economic benefit to Wells Fargo because it somehow constituted post-tax revenue, or a “tax effect.” On the expense side, the government argues the U.K. taxes Wells Fargo paid on account of the Trust somehow constituted a pre-tax expense that counts against Wells Fargo in determining the possibility of pre-tax profit. This is exactly backward on both counts: Bx was pre-tax income to Wells Fargo under Supreme Court precedent and IES, and the U.K. tax payments were not pre-tax expenses, as they were obviously tax expenses.

1. The income side: Barclays's Bx payments were pre-tax income and an economic benefit to Wells Fargo.

Bx represented a non-tax economic benefit (i.e., pre-tax income) to Wells Fargo because Wells Fargo received Bx from Barclays, a private party (a point addressed in more detail below), independent of any taxes assessed against the Trust or Barclays. The Bx payments were steady monthly payments in a fixed amount, not contingent on the value of any tax benefits Barclays actually received. (T-223-24, 721-24.) The Bx therefore was income to Wells Fargo. Those payments totaled $32 million in 2003 and $160 million over the five-year life of STARS.

The government argues that Bx was not pre-tax income because it constituted Barclays “reimbursing” Wells Fargo for a portion of Wells Fargo's U.K. tax costs. But even if Bx constituted “reimbursement” of Wells Fargo's U.K. tax payments, the legal conclusion is wrong, for three main reasons. First, long-standing Supreme Court precedent holds that payments to reimburse a party's tax expenses represent income — i.e., a non-tax economic benefit to the recipient. Second, case law precludes treating Bx as post-tax income or a “tax effect” because it was a payment by a private party, not by the U.K. or any other government. Third, the government's theory contradicts long-standing judicial and regulatory interpretations of IRC § 901.

a. Payments to reimburse a party's tax expenses represent income to that party as a matter of law.

The Old Colony principle and its application in this Court.

Decades of precedents hold that a party whose tax liability is discharged by someone else has economically benefitted, and therefore must include the tax reimbursement in its income. The leading case is Old Colony Trust Co. v. Comm'r, 279 U.S. 716 (1929), in which an employer agreed to pay its employee's federal income taxes. The Court held the taxpayer received an economic benefit (on which the IRS could and should collect tax), because a third party's payment of one's taxes “is equivalent to receipt by the person taxed.” Id. at 729; see also Diedrich v. Comm'r, 457 U.S. 191, 197 (1982) (“[T]he donor realizes an immediate economic benefit by the donee's assumption of the donor's legal obligation to pay the gift tax.”). And because such an economic benefit — like Bx here — is taxable, then consistency requires that economic benefit be recognized as pre-tax under IES.

Indeed, this is the reasoning in IES, which relies on Old Colony. In IES, the taxpayer (IES) purchased “American Depository Receipts” (ADRs) that represented shares of a foreign corporation. IES bought these investments just before the foreign corporation issued a dividend. When the dividend was paid, the issuing company withheld 15% to pay foreign taxes due on the dividend and remitted the remaining 85% to IES. (IES paid U.S. taxes on the full amount of the dividend.) IES then sold the investments just after the dividend was paid, resulting in a capital loss, because the investments' value dropped after the dividend was paid.

When IES claimed a foreign-tax credit for the 15% foreign tax withheld from the dividend, the United States objected, claiming the ADR transactions were shams because they did not result in a profit. The investments were profitable if the 15% of the dividend withheld to pay foreign taxes counted as income to IES, but not if it didn't count. The district court agreed with the government that only the 85% that IES actually received counted as income, and held the transactions were shams. This Court reversed, concluding that the entire dividend — including the withheld amount — counted as a pre-tax economic benefit to IES, which made the transactions profitable:

The foreign corporation's withholding and payment of the tax on IES's behalf is no different from an employer withholding and paying to the government income taxes for an employee [as in Old Colony]: the full amount before taxes are paid is considered income to the employee. Because the entire amount of the ADR dividends was income to IES, the ADR transactions resulted in a profit, an economic benefit to IES.

IES, 253 F.3d at 354 (citing Old Colony). Indeed, this Court appeared troubled by the inherent contradiction of the government's position that the 15% withheld portion of the dividend had to be excluded from pre-tax income for purposes of the sham-transaction test, but included as pre-tax income for U.S. tax purposes. Id. (“[T]he government would have us regard only 85% of the dividends as income to IES, notwithstanding that the IRS treats 100% as income for tax purposes.”). Thus, under IES, payment of a taxpayer's tax obligations confers a permanent “economic benefit” on the taxpayer that must be treated as pre-tax income both for U.S. income taxation and the sham-transaction test.

So too here. The government insists that Bx represented payment of a portion of Wells Fargo's U.K. tax liability. If so, Bx was an economic benefit (i.e., income) subject to tax under Old Colony. Thus, under IES, Bx must also be included as income under the pre-tax-profit test.¹² Yet, when applying the sham-transaction test, the government insisted (and the district court agreed) that Bx did not constitute income, but was instead a post-tax payment, or “tax effect” (an argument other courts have rejected, as described below). This Court rejected such inconsistency in IES, and should do so here.

Shortly after this Court decided IES, the Fifth Circuit adopted this Court's reasoning in reversing the Tax Court's conclusion that the investments there were a sham. Compaq, 277 F.3d at 784. In that case, Compaq entered into ADR transactions materially identical to those in IES. The Fifth Circuit “agree[d] with the IES court,” relying on the “venerable principle” of Old Colony in concluding that “the payment of Compaq's [foreign] tax obligation by [a third party] was income to Compaq.” Id. at 783-85. Accordingly, the underlying transaction had a possibility of a pre-tax profit and was not a sham. Id.

Application of Old Colony in other STARS cases.

Two other federal courts considering STARS transactions have relied on Old Colony in holding that Bx must be treated as pre-tax income. In Salem Financial, Inc. v. United States, 786 F.3d 932 (Fed. Cir. 2015), the Federal Circuit considered the government's argument that the Bx “reimbursed BB&T for half of its U.K. tax expense.” Id. at 944. The court responded: “Like the taxpayer in Old Colony, BB&T realized an immediate economic benefit by receiving the Bx payments from Barclays. . . . ” Id. at 945. Because BB&T received Bx “in consideration of BB&T's services rendered under the STARS transaction,” the court concluded that “[u]nder the principle of Old Colony, the reimbursements that BB&T received from Barclays must therefore be treated as income to BB&T, not tax effects.” Id.

The government cannot dispute that, under Old Colony, Bx would have been income to Wells Fargo if Barclays paid it directly to the U.K. government to satisfy the Trust's tax obligations. That Barclays paid it directly to Wells Fargo does not make it less income to Wells Fargo. The Federal Circuit recognized this exact point, remarking that under Old Colony, the distinction between direct and indirect receipt of reimbursement is “a distinction without a difference.” Salem, 786 F.3d at 944.

The other federal court to reach the same conclusion was the District of Massachusetts in Santander Holdings USA, Inc. v. United States, 977 F. Supp. 2d 46 (D. Mass. 2013), rev'd on other grounds 844 F.3d 15 (1st Cir. 2016). The court there also relied heavily on Old Colony in holding the Bx in another STARS transaction was pre-tax revenue. Like the Federal Circuit, the court accepted the government's view that “Barclays[ ] assum[ed] of part of Sovereign's tax liability” through Bx, but concluded that Old Colony is “still vital” and dictated that Bx was pre-tax revenue. Santander, 977 F. Supp. 2d at 52. Although the First Circuit reversed the district court on appeal, it did not disturb this conclusion regarding Bx. Santander Holdings USA, Inc. v. United States, 844 F.3d 15, 23 (1st Cir. 2016). Rather, the First Circuit reversed because it held that foreign tax should be treated as a pre-tax expense — a holding that is inconsistent with IES, as Wells Fargo explains below. Id.

Wells Fargo recognizes that in yet another STARS case, the Second Circuit affirmed a Tax Court determination that Bx was not pre-tax revenue. Bank of New York Mellon Corp. v. Comm'r, 801 F.3d 104 (2d Cir. 2015) (“BNY”). But the Second Circuit reviewed the Tax Court's characterization of Bx as a question of fact, and deferred to it. Id. at 121-22. In addition, neither the Second Circuit nor the Tax Court addressed Old Colony. In fact, the Second Circuit did not cite a single case in support of its analysis of Bx. Id. The Second Circuit's analysis is inconsistent with Supreme Court law and this Court's precedent, under which the characterization of Bx is a question of law. Frank Lyon, 435 U.S. at 581 n.16; IES, 253 F.3d at 351.

The government stubbornly recycles the same arguments this Court rejected in IES, the Fifth Circuit rejected in Compaq, and the Federal Circuit and District of Massachusetts rejected in other STARS cases. This Court should reject them here.

b. The Bx payments were not post-tax income or “tax effects” because they were payments by a private party, and not by any government.

There is an additional reason why Bx was pre-tax under IES: it came from a private party (Barclays), and benefits conferred by a private party are not “tax effects.”

The district court supported its holding that Bx should be ignored in assessing pre-tax-profit with a single sentence: it held “as a matter of law that the Bx is a tax benefit (and not an item of pre‐tax revenue) because it is simply the means by which the parties split the tax benefits that STARS generated out of economically meaningless activity.” (Add-185 n.1.) The district court appeared to find it significant that the Bx amount was quantified by reference to a component of Barclays's expected tax benefits, which led the court to hold that Bx was a “tax effect.” (Dkt. 500 at 14.) That is incorrect as a matter of law.

In Salem, the Federal Circuit rejected the government's novel “tax-effect” theory, declaring it was “aware of no authority, and the government has provided none, in which courts have treated private payments as 'tax effects' rather than income simply because the amount of the payments was calculated based on a tax-based formula.” 786 F.3d at 946. The Federal Circuit held it did not matter if “the Bx Payments were designed as a way for Barclays to reimburse [Wells Fargo] for 50 percent of its U.K. tax expenses.” Id. at 945. This is because “tax effects” that are excluded from the pre-tax-profit test must come from taxing authorities, not from private parties.

Indeed, the Federal Circuit expressly rejected the idea — which the district court adopted here — that any link between Bx and Barclays's tax benefits transformed the private-party Bx payments into a “tax effect.” The government argued in Salem — as it does here — that Bx was part of a “circular” cash flow in which “money merely changed hands from BB&T to the U.K. government, then to Barclays, and finally back to BB&T.” Id. at 945. Certainly, Barclays was willing to provide Bx because of the tax benefits it expected to receive (legitimately) from the U.K. government. Id. But money is fungible, so the Bx “could just as well be said to have been derived from the portion of Barclays's tax benefits that was independent of BB&T's U.K. tax payments,” thus breaking the government's “circle.” Id. at 946. The Federal Circuit concluded: “[i]t is thus impossible to identify the exact source of the Bx payments, much less to link the Bx payments directly to BB&T's payments of U.K. taxes.” Id. Substitute “Wells Fargo” for “BB&T” in the discussion above, and you have this case.

In contrast, the government's authority for its argument “is nil.” Santander, 977 F. Supp. 2d at 52. There is nothing abusive, or uncommon, about reflecting tax burdens or benefits in the pricing of transactions. “[T]he reality [is] that the tax laws affect the shape of nearly every business transaction,” and “[t]he fact that favorable tax consequences were taken into account” by parties to a transaction “is no reason for disallowing those consequences.” Frank Lyon, 435 U.S. at 580. The government itself has agreed to split tax benefits accruing to private taxpayers. See, e.g., Centex Corp. v. United States, 49 Fed. Cl. 691, 708 (2001) (government and taxpayer agreed to fifty-fifty split of tax benefit). The consideration of tax consequences in a private-party transaction thus “does not convert income into a tax effect.” Salem, 786 F.3d at 946.

c. Wells Fargo's position is consistent with the foreign-tax-credit regime.

Treating Bx as pre-tax income is also consistent with the foreign-tax-credit regime, as set forth in the Code, regulations, and relevant case law. The foreign-tax-credit rules recognize that taxpayers may claim credits under IRC § 901 for reimbursed foreign-tax expense. Under those rules, “[t]ax is considered paid by the taxpayer even if another party . . . agrees . . . to assume the taxpayer's foreign tax liability.” 26 C.F.R. § 1.901-2(f)(2)(i); see Biddle v. Comm'r, 302 U.S. 573, 580-82 (1938). Thus, in the foreign-tax-credit system, “no attempt is made to trace the economic incidence of a creditable tax beyond the technical taxpayer.” Owens, The Foreign Tax Credit 387 (1961); see also C.F.R. § 1.901-2(f)(2)(ii), Example 3 (where foreign government pays U.S. taxpayer's foreign-tax liability, U.S. taxpayer considered to have paid the tax under foreign-tax-credit rules); id., Example 1 (loan counterparty pays taxes); 26 C.F.R. § 1.901-2A(e)(8), Example 3 (foreign government pays taxes).

The foreign-tax-credit rules also counter the government's argument below that Bx was a device to funnel “rebates” of Wells Fargo's U.K. taxes from the U.K. to Barclays and back to Wells Fargo. Under the Code and Treasury Regulations, a payment is a “rebate” of foreign taxes only if it comes from the foreign government. IRC § 901(i); 26 C.F.R. § 1.901-2(e)(3)(ii) (“subsidy” includes “any benefit conferred, directly or indirectly, by a foreign country”) (emphasis added).

The district court held that these “rebate” rules were irrelevant because they do “not have anything to do with whether the underlying transaction that gave rise to the foreign taxes has economic substance.” (Add-148.) That is incorrect. Although mere compliance with statutes and regulations is not sufficient to claim a foreign-tax credit, the non-statutory sham-transaction doctrine “cannot be used to preempt congressional intent” expressed through a statute. Horn v. Comm'r, 968 F.2d 1229, 1236 (D.C. Cir. 1992). If Bx did not constitute a “rebate” of taxes under the Code and regulations, the non-statutory sham-transaction doctrine cannot change that.

* * * * *

Even if the $160 million in Bx payments are characterized as “reimbursement” of some portion of Wells Fargo's foreign-tax liability, they still represent income to Wells Fargo, and thus had to be counted on the income side of the transaction in assessing whether the transaction presented a reasonable possibility of a pre-tax profit for Wells Fargo.

2. The expense side: Wells Fargo's payment of U.K. taxes was by definition a post-tax expense, and not a pre-tax expense.

The government's experts testified that the Trust's non-tax expenses totaled $8.4 million over five years, or less than $1.7 million allocable to the 2003 tax year at issue. (T-1359.) The $160 million in Bx payments obviously far exceeded the $8.4 million in expenses, so the Trust transaction was profitable in fact, and presented a reasonable possibility of pre-tax profit when evaluated ex ante.

The government's argument to the contrary assumes that Wells Fargo's U.K. tax liability was a pre-tax item that must be counted as an expense in assessing the possibility of a pre-tax profit. But the district court correctly rejected that argument, consistent with IES and common sense.

Wells Fargo concedes that an appellant normally should not spend time defending a lower court's decision in its favor, but there is a reason to do so here. The government argued below — and likely will argue to this Court — that all three federal appellate courts that considered other STARS transactions affirmed denial of the taxpayer's foreign-tax credits. See Salem, 786 F.3d at 954-55; Santander, 844 F.3d at 26; BNY, 801 F.3d at 123. It is crucial to understand why they did so: each of them departed from the law of this Circuit and the Fifth Circuit (two of them expressly) by rejecting the Court's holding in IES that foreign-tax expenses are post-tax and not pre-tax. If those courts had followed this Circuit's law, all three would have concluded that the foreign-tax liability was a post-tax expense, and would have ruled as the district court did in this case. Commentators — including Kevin Dolan, a former IRS Associate Chief Counsel (International) — have criticized the decisions in the government's favor, and explained why IES and Compaq were right. See Dolan, The Foreign Tax Credit Diaries — Litigation Run Amok, 140 Tax Notes 895, 905-07 (Aug. 26, 2013); Richard Lipton, BNY and AIG — Using Economic Substance to Attack Transactions the Courts Do Not Like, 119 J. Tax'n 40 (July 2013).¹³

The Court should adhere to its conclusion that foreign-tax liability is a post-tax expense that is not considered in determining whether a transaction presented a reasonable possibility of pre-tax profit. It makes eminent sense: a tax liability is by definition not a pre-tax expense, and the pre-tax-profit test focuses solely on the pre-tax features of a transaction.

At least one of the circuits that denied foreign-tax credits to the taxpayer in a STARS transaction based its decision in part on the fact that the taxpayer “voluntarily subject[ed] the Trust income to U.K. taxes,” which increased the U.K.'s receipt of taxes “at the expense of the U.S. Treasury.” Salem, 786 F.3d at 951. The district court here expressed some sympathy for that sentiment. But the sentiment is legally invalid. A taxpayer “is not bound to choose that pattern which will best pay the Treasury.” Helvering v. Gregory, 69 F.2d 809, 810 (2d Cir. 1934) (Hand, J.), aff'd, 293 U.S. 465 (1935). Even the Treasury Department agrees with that proposition, and specifically with regard to foreign-tax credits: its regulations state that a “taxpayer is not required to alter its form of doing business, its business conduct, or the form of any business transaction in order to reduce its liability under foreign law for tax.” 26 C.F.R. § 1.901-2(e)(5)(i). A taxpayer may choose to subject all of its assets to foreign taxation if it wishes — even for the express purpose of reducing its tax liability — and is not subject to sanction just because the move results in a shift of tax revenue away from the U.S. to the foreign country. As the Fifth Circuit recognized in Compaq, “[t]hat the Government would get more money from taxpayers [if a transaction were not done] does not suffice” to make the transaction a “sham.” Compaq, 277 F.3d at 785.

* * * * *

Under this Circuit's law, STARS had a real potential for pre-tax profit because of the $160 million in Bx income compared to less than $9 million in expenses before taking taxes into account. The transaction accordingly was not a sham as a matter of law.

B. The Trust transaction does not need to satisfy the “business-purpose” test in IES, but satisfies the test nonetheless.

The discussion above demonstrates that the Trust transaction satisfied the“pre-tax-profit” test. The second part of the sham-transaction inquiry in IES is whether the transaction is “motivated by any economic purpose outside of tax considerations,” sometimes called the “business-purpose” test. 253 F.3d at 353 (emphasis added).

1. The “business-purpose” test is not a separate test that must be satisfied in addition to the “pre-tax-profit” test.

This Court has never decided whether the two tests in IES are separate tests that must be satisfied, or two considerations in a single analysis. See WFC Holdings Corp. v. United States, 728 F.3d 736, 743-44 (8th Cir. 2013). The district court concluded that the sham-transaction doctrine is properly applied as “a single flexible analysis rather than as two separate, rigid tests.” (Add-188.) Wells Fargo agrees with that approach. The Supreme Court's decision in Frank Lyon, from which IES's two-part sham-transaction standard is derived, treats potential profit and non-tax business purpose as factors among a list of potential indicia of economic substance. Frank Lyon, 435 U.S. at 583-84. Accordingly, this Court should join the numerous other circuits that have held that potential profit and non-tax business purpose should be considered together as part of a flexible sham-transaction analysis. See, e.g., ACM P'ship v. Comm'r, 157 F.3d 231, 247 (3d Cir. 1998); James v. Comm'r, 899 F.2d 905, 908 (10th Cir. 1990); Sacks v. Comm'r, 69 F.3d 982, 985 (9th Cir. 1995); cf. Rice's Toyota World, Inc. v. Comm'r, 752 F.2d 89, 91-92 (4th Cir. 1985) (transaction is a sham only if it fails both the pre-tax profit and business-purpose tests).

If the Court agrees that STARS presented a reasonable possibility of pre-tax profit, then it is not a sham, regardless of why Wells Fargo entered into STARS. The sham-transaction doctrine exists mainly to identify transactions where “[t]here was nothing of substance to be realized . . . beyond a tax [benefit].” Knetsch v. United States, 364 U.S. 361, 366 (1960). Transactions that generate substantial non-tax profit cannot fail that standard.

2. Wells Fargo had at least one non-tax business purpose for entering into the transaction.

To the extent this Court determines that Wells Fargo must separately satisfy the “business-purpose test,” Wells Fargo satisfies it as a matter of law. The business-purpose test asks whether a taxpayer is “motivated by any economic purpose outside of tax considerations.” IES, 253 F.3d at 353 (emphasis added). A taxpayer does not fail the business-purpose test simply because it was motivated, in part, by taxes. Id. at 355. Indeed, “even a 'major motive' to reduce taxes will not vitiate an otherwise substantial transaction.” United States v. Consumer Life Ins. Co., 430 U.S. 725, 739 (1977) (citation omitted). Thus, to satisfy the business-purpose test, Wells Fargo need only demonstrate it had at least one business purpose for engaging in the Trust transaction.

The Bx payments gave Wells Fargo an economic benefit of $32 million per year. The government conceded that that was an “economic benefit” to Wells Fargo. (App-43.) And because Bx was pre-tax income and the Trust transaction was profitable (as discussed above), Wells Fargo was motivated by potential profit, universally recognized as a valid non-tax business purpose. See, e.g., Jade Trading, LLC v. United States, 598 F.3d 1372, 1377 (Fed. Cir. 2010); United Parcel Service of America, Inc. v. Comm'r, 254 F.3d 1014, 1019 (11th Cir. 2001); Compaq, 277 F.3d at 786.

* * * * *

In sum, the transaction at issue was not a sham as a matter of law because it presented a reasonable possibility of pre-tax profit under IES. And that possibility (indeed, a virtual certainty) of pre-tax profit was sufficient to provide a non-tax business purpose, if such a purpose were necessary.

II. A negligence penalty is improper as a matter of law.

After auditing Wells Fargo's 2003 tax return, the IRS disallowed the foreign-tax credits and interest deductions that Wells Fargo claimed in connection with STARS, which resulted in an underpayment of Wells Fargo's tax liability for 2003. The Code provides that the IRS may impose a penalty equal to 20% of any underpayment that is due to negligence. IRC §§ 6662(a) & 6662(b)(1). But the IRS did not assert a negligence penalty after its 2003 audit. Only after Wells Fargo filed this refund lawsuit did the government (through the Justice Department) assert for the first time that Wells Fargo was liable for a negligence penalty. (Dkt. 36 at 41.) The district court upheld the penalty.

If the Court holds that Wells Fargo is entitled to the foreign-tax credits, the Court must reverse the negligence penalty, as there would have been no “underpayment” upon which to impose a penalty. But even if the Court were to uphold the denial of foreign-tax credits, the Court still should reverse the negligence penalty for two reasons. First, the Treasury Regulations provide a defense to a negligence penalty if the taxpayer's return position had a “reasonable basis,” which the Congressional Joint Committee on Taxation quantified as a 20% or greater chance of success if challenged. Wells Fargo's return position had at least a 20% chance of success when Wells Fargo filed its return. Second, § 6751(b)(1) of the Code requires written approval of an IRS supervisor before the government can assert a negligence penalty, and it is undisputed the government did not obtain such written approval here. The statutory requirement is an essential element of the government's claim, and the government failed to meet it.

A. Wells Fargo had a reasonable basis for its return position as a matter of law.

“A return position that has a reasonable basis . . . is not attributable to negligence,” and therefore precludes imposition of a negligence penalty. 26 C.F.R. § 1.6662-3(b)(1) (emphasis added). A “reasonable basis” exists if a return position is “reasonably based on one or more of the authorities set forth in § 1.6662-4(d)(3)(iii) (taking into account the relevance and persuasiveness of the authorities, and subsequent developments).” 26 C.F.R. § 1.6662-3(b)(3). The “authorities set forth in § 1.6662-4(d)(3)(iii)” include the Code, Treasury Regulations, Revenue Rulings, Tax Treaties, IRS notices or announcements, and case law. The relevant inquiry is the state of the law at the time the taxpayer filed its return. Campbell v. Comm'r, 134 T.C. 20, 32 (2010), aff'd, 658 F.3d 1255 (11th Cir. 2011).

The Congressional Joint Committee on Taxation has quantified “reasonable basis” as a position having a 20% or greater chance of success if challenged. (App-198, Table 7.) Thus, the reasonable-basis standard is satisfied even if a taxpayer's position is 80% likely to lose.

Because the “reasonable-basis” standard considers legal authorities existing when the taxpayer filed its return, and involves no factual inquiries, its application is a matter of law that this Court reviews de novo. Chemtech Royalty Assocs., L.P. v. United States, 823 F.3d 282, 287 (5th Cir. 2016); see also Scherbart v. Comm'r, 453 F.3d 987, 989 (8th Cir. 2006) (interpretation of tax laws reviewed de novo); West Plains, 870 F.3d at 782 (de novo review of denial of motion for judgment as a matter of law).

1. Relevant authorities existing in 2004 provided a “reasonable basis” for Wells Fargo's return position.

Based on the authorities discussed in Section I above that existed in 2004 (when Wells Fargo filed its 2003 tax return), Wells Fargo's return position had well more than a 20% chance of success, and otherwise had a “reasonable basis.”. See, e.g., Old Colony, 279 U.S. at 729; IES, 253 F.3d at 353; Compaq, 277 F.3d at 785-86. Indeed, three judges of the Federal Circuit, one federal district judge, and the Special Master all agreed that Bx was pre-tax income, under IES and Compaq — authorities that existed when Wells Fargo filed its return. Salem, 786 F.3d at 944-45; Santander, 977 F. Supp. 2d at 52; Add-50-52, 65.) * * * Wells Fargo does not cite Salem, Santander, * * * as direct “authority” for the reasonable-basis analysis, but because all relied on authorities that existed in 2004 and concluded that Bx was pre-tax income (or could be found so), showing that reasonable people could have concluded in 2004 that Wells Fargo's return position was correct. And if Bx is treated as pre-tax income, the Trust transaction was not a sham as a matter of law, and Wells Fargo is entitled to the foreign-tax credits. IES, 253 F.3d at 353. Thus, Wells Fargo's return position had a “reasonable basis” in 2004, rendering the negligence penalty inappropriate as a matter of law.

2. The “reasonable-basis” standard is based solely upon the objective existence of legal support, not the taxpayer's subjective analysis or actual reliance on the legal support.

The district court did not appear to disagree that the existing authority in 2004 provided at least a “reasonable basis” for Wells Fargo's return position. Yet the district court upheld the penalty, concluding that Wells Fargo had to prove it actually relied on that authority. That conclusion was incorrect as a matter of law for several reasons.

First, the Code and the regulations never mention actual reliance on legal authority as a requirement of the reasonable-basis defense in § 6662. The Code only requires that “the tax treatment of [an] item” be reasonable, not that the taxpayer behave reasonably or actually rely on certain authorities. IRC § 6662(d)(2)(B)(ii)(II) (emphasis added).¹⁴ Similarly, the regulations state that “[a] return position that has a reasonable basis . . . is not attributable to negligence.” 26 C.F.R. § 1.6662-3(b)(1) (emphasis added). In defining “reasonable basis,” the regulations repeatedly focus on the legal support for the “return position,” asking whether “a return position . . . is merely arguable” and whether “a return position is reasonably based on one or more . . . authorities.” 26 C.F.R. § 1.6662-3(b)(3) (emphasis added). And the regulations provide it is “the return position” that will either “satisfy” or “not satisfy the reasonable basis standard.” Id. (emphasis added). Reliance is never required.

The absence of a reliance requirement in the Code and regulations is important, as Congress knows how to require taxpayer reliance to support a defense. For example, § 6404(f)(2)(A) provides for an abatement of any penalty resulting from erroneous advice given to the taxpayer in writing by an IRS officer or employee, but only if “the written advice was reasonably relied upon by the taxpayer” (emphasis added). And § 2204(d) excuses the executor of an estate from personal liability for any tax deficiency if the executor “in good faith relies on gift tax returns . . . for determining the decedent's adjusted taxable gifts” (emphasis added). That Congress required taxpayer reliance in some sections of the Code but not in § 6662(b) means that reliance is not required. See, e.g. Custis v. United States, 511 U.S. 485, 492 (1994) (Congress' omission of authorization for collateral attacks in one provision of statute, while other provisions contained such authorization, indicates that Congress did not intend to allow collateral attacks); NLRB v. Bildisco & Bildisco, 465 U.S. 513, 522-23 (1984).

The Treasury Department also knows how to require taxpayer reliance to support a defense, and it expressly did so in the section of the regulation right after the section at issue here. Under 26 C.F.R. § 1.6662-4(g)(1)(i), a particular defense (not at issue here) depends on whether “[t]he taxpayer reasonably believed” certain things. The regulations then say the taxpayer can establish that “reasonable belief” if he or she either: 1) actually “analyzes the pertinent facts and authorities . . . and in reliance upon that analysis, reasonably concludes in good faith” that the IRS more likely than not would uphold his or her treatment of the item, or 2) “reasonably relies in good faith on the opinion of a professional tax advisor.” 26 C.F.R. § 1.6662-4(g)(4)(i)(B) (emphasis added). This shows that the Treasury Department knew full well how to condition a defense on a taxpayer's actual reliance on legal authority when it wanted to, but it did not do so just one section earlier in § 1.6662-3(b)(1). That means that there is no reliance requirement in § 1.6662-3(b)(1). See, e.g., Karczewski v. DCH Mission Valley LLC, 862 F.3d 1006, 1015-16 (9th Cir. 2017) (absence of exception to regulation means there is no exception, given that nearby regulations contain express exceptions); UPMC-Braddock Hosp. v. Sebelius, 592 F.3d 427, 438 (3d Cir. 2010).

Second, if the reasonable-basis standard required proof of taxpayer reliance on legal authorities, the most natural way to meet it would be through evidence of reliance on the advice of a tax professional (e.g., an attorney or accountant) who interprets those legal authorities for the taxpayer. See 26 C.F.R. § 1.6664-4(f)(2)(i)(B)(2) (“belief requirement” for establishing “reasonable cause and good faith” defense to penalty is demonstrated through reliance on opinion of “professional tax advisor”). Yet the regulations expressly bar proof of reliance on advice of a tax professional to demonstrate the “substantial authority” necessary to support a reasonable-basis defense. 26 C.F.R. §§ 1.6662-4(d)(3)(iii) & 1.6662-3(b)(3). Knocking out the most likely source of proof of a taxpayer's actual reliance on legal authorities is inconsistent with the notion that the standard requires actual reliance.

Third, there is no apparent policy reason for an actual-reliance requirement to establish the reasonable-basis defense. If a taxpayer gets to a reasonable position, whether the taxpayer got there after much deliberation or by sheer luck should not matter. On the district court's rationale, two taxpayers that take the same position based on the same authorities applied to the same facts would be treated differently if one of them got to its position after a detailed analysis of legal authorities, while the other got there by engaging in the same analysis as the authorities but without having the authorities in front of it. It makes little sense to penalize a taxpayer for a reasonably supported (if ultimately incorrect) reporting position just because it did not subjectively analyze the supporting authority.

Thus, it is not surprising that courts applying the reasonable-basis defense have focused on the objective supporting authorities for a return position, and ignored whether the taxpayer actually considered those authorities. For example, in Matthies v. Comm'r, 134 T.C. 141, 154-55 (2010), the court did not consider what authorities the taxpayers actually considered when filing their returns, relying instead on the uncertain state of the law to hold that the taxpayers had a reasonable basis for their return position. See also Burditt v. Comm'r, T.C. Memo. 1999-117 (1999) (taxpayer had substantial authority and reasonable basis solely because law was unsettled at time of its return); cf. Smoker v. Comm'r, T.C. Memo. 2013-56, at *7 (2013)(under substantial-authority standard, “a taxpayer's belief about the weight of authority in support of his position is irrelevant”).

In sum, neither the Code nor the regulations support an actual-reliance requirement to qualify for the reasonable-basis defense.

The district court concluded otherwise, holding that the pertinent regulation (§ 1.6662-3(b)) “is ambiguous concerning whether a taxpayer must have actually relied on the authorities,” thus requiring the court to defer to the government's version of what it means. (Add-197-98.) The district court found ambiguity in the requirement that a return position be “based on” one or more authorities, which the court thought could require taxpayers to actually rely on the authorities. (Id.) But as discussed above, that language creates no ambiguity about reliance, because it refers only to the basis for the “return position,” and not the taxpayer basing its decision on certain authorities. One's position can have a basis in legal authority (i.e., be “based on” legal authority) even if she is not aware of it. And for reasons discussed earlier, the regulation's silence on the subject of reliance means that there is no such requirement.

The district court also believed the regulation's reference to the taxpayer's “return position” implicitly invokes the conduct of the taxpayer, because “[i]t is the taxpayer who adopts a 'return position' by determining its tax liability.” (Add-197-98.) The taxpayer does indeed adopt a return position, but that does not mean that the requirement that the return position be reasonable also requires that the taxpayer have behaved in any particular way. Again, one's view on a subject may be “reasonable” even if he had no idea that it turned out to have a basis in scholarly research. The Code and regulations regarding the reasonable-basis defense seek a certain outcome (i.e., “a return position . . . reasonably based on . . . authorities”), not a process (i.e., a return position resulting from a particular mode of analysis).

In contrast to the regulation at issue here, the regulation providing a defense to certain penalties if there is “substantial authority” for a return position comes closer to invoking the taxpayer's conduct, providing that “a taxpayer may have substantial authority for a position.” 26 C.F.R. § 1.6662-4(d)(3)(ii) (emphasis added). Even that does not specifically say that reliance is required, but it comes closer than § 1.6662-3(b)(3) does. Yet the district court conceded that “the taxpayer's subjective analysis is not relevant” under the substantial-authority standard. (Add-198.) If the taxpayer's analysis is not relevant under the substantial-authority standard, there is no reason why it would be relevant under the reasonable-basis standard.

The district court also appeared to suggest that because common-law negligence looks at a party's exercise of “due care,” the reasonable-basis defense should also focus on the taxpayer's exercise of “due care.” (Add-196-97.) But we deal here with a specific definition of “negligence” in a specific context, and not common-law negligence. Thus, the common-law definition of “negligence” does not apply. See, e.g., United States v. Jicarilla Apache Nation, 564 U.S. 162, 185-86 (2011) (declining to import common-law duties when statute and regulations specifically define applicable duties); cf. Moskal v. United States, 498 U.S. 103, 114 (1990) (courts interpret term in statute according to common-law meaning only when Congress does not define the term).

Finally, the district court cited a preamble to regulations governing penalties such as the negligence penalty, concluding that it indicated that the reasonable-basis standard requires inquiry into the taxpayer's subjective reliance. (Add-199.) The preamble states:

The final regulations do not rank the standards formally because such a comparison would change the focus of the reasonable basis regulations from the taxpayer's obligation to determine his or her tax liability in accordance with the internal revenue laws to the probability of the return position prevailing in litigation.

T.D. 87890, 63 Fed. Reg. 66433, 66433 (Dec. 2, 1998). But this passage is simply a response to some who had asked the Treasury Department to rank the various standards that govern defenses (e.g., is “reasonable basis” more stringent than “substantial authority”?); it does not impose a reliance requirement. The district court seized on the phrase “taxpayer's obligation to determine his or her tax liability in accordance with the internal revenue laws” as suggesting a reliance requirement, but that reads far too much into the phrase. Millions of taxpayers each year discharge their “obligation to determine [their] tax liability in accordance with the internal revenue laws” without reading the text of those laws. Thus, to say that a taxpayer has “determine[d] his or her tax liability in accordance with the . . . laws” is not to say that he or she relied on (or even knew about) those laws in determining his or her tax liability. So too here. If Wells Fargo's claim for foreign-tax credits was “reasonably based on [specified] authorities,” then Wells Fargo “determine[d] [its] tax liability in accordance with the internal revenue laws” regardless whether it subjectively relied on the specified authorities.

And even if the regulation were ambiguous (which it is not) and the preamble suggested a reliance requirement (which it did not), the preamble was not entitled to the deference that the district court gave it, for three reasons. First, as discussed above, the actual language of the relevant statute and regulation is unambiguous, so resort to the preamble to a regulation as an aid to construction is not necessary. See, e.g., Christensen v. Harris County, 529 U.S. 576, 588 (2000).

Second, the portion of the preamble the district court relied upon is directly contrary to the regulations themselves. The preamble stated that the Treasury Department would “not rank the [reasonable-basis and substantial-authority] standards formally because such a comparison would change the focus of the reasonable basis regulations.” 63 Fed. Reg. at 66433. But the final regulations provide just such a ranking. 26 C.F.R. § 1.6662-4(d)(2) (“The substantial authority standard is less stringent than the more likely than not standard . . . but more stringent than the reasonable basis standard.”). As the Supreme Court has held, deference to an agency's interpretation of its own regulation is “undoubtedly inappropriate . . . when the agency's interpretation is plainly erroneous or inconsistent with the regulation.” Christopher v. SmithKline Beecham Corp., 567 U.S. 142, 155 (2012) (quotation omitted).

And third, deference to an agency's interpretation of its own regulation is unwarranted “when there is reason to suspect that the agency's interpretation 'does not reflect the agency's fair and considered judgment on the matter in question.'” Id. (citation omitted). A general reference to “the taxpayer's obligation to determine his or her tax liability” does not appear to reflect the Treasury Department's “fair and considered judgment” on the specific question at issue here: whether the reasonable-basis defense requires proof of actual reliance on authorities.¹⁵

* * * * *

In sum, the district court erred when it upheld the government's penalty on Wells Fargo under 26 U.S.C. § 6662. The Court should reverse that portion of the judgment and remand for entry of judgment in Wells Fargo's favor.

B. The government failed to prove that it satisfied the written-approval requirement of 26 U.S.C. § 6751(b)(1).

There is another reason to reverse the district court's imposition of a negligence penalty: the government failed to satisfy an essential statutory element of its negligence-penalty claim. The district court improperly refused to consider the government's failure, concluding sua sponte that Wells Fargo had waived the issue. But Wells Fargo raised the issue both before and after trial, and the government responded to Wells Fargo's argument on the merits, and never argued Wells Fargo had waived the issue. Thus, the district court's refusal to hold the government to its burden of proof was error. Because there are no factual issues involved in the district court's waiver determination, this Court's review is de novo.

1. The government did not prove that it complied with § 6751.

Subject to exceptions that do not apply here, § 6751(b)(1) provides: “No penalty under this title shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher level official as the Secretary may designate.” This written-approval requirement is “a mandatory, statutory element of a penalty claim.” Chai v. Comm'r, 851 F.3d 190, 222 n.26 (2d Cir. 2017).

The government presented no evidence at trial (or otherwise) that the penalty it sought was “personally approved (in writing)” by one of the people specified in § 6751(b)(1). Thus, the government failed to prove an essential statutory element of its penalty claim, and the district court should have held that the penalty claim failed as a matter of law.

The government argued below that the written-approval requirement does not apply because it asserted the penalty as a setoff, rather than as an affirmative claim. But nothing in the language of § 6751(b)(1) suggests it applies only when the government seeks to impose a penalty through an affirmative claim, but not through a setoff. Section 6751(b) applies to the “assessment” of a penalty; that does not limit its reach only to affirmative claims and not to setoffs. And the government conceded its setoff claim was limited to “any amount that the IRS could have assessed on audit.” (App-81 n.4 (original emphasis).) Thus, because § 6751(b) would have blocked the IRS from assessing a negligence penalty without senior approval on audit, it also blocked the government's setoff claim.

The purpose of § 6751(b) also indicates that it applies regardless whether it is asserted as an affirmative claim or a setoff. “The statute was meant to prevent IRS agents from threatening unjustified penalties to encourage taxpayers to settle.” Chai, 851 F.3d at 219. Requiring approval by an appropriate official ensures that penalties reflect the carefully considered view of the Treasury Secretary and are imposed only “'where appropriate and not as a bargaining chip.'” Id. (quoting S. Rep. No. 105-174, at 65 (1998)). Here, the IRS audited Wells Fargo but neither imposed nor approved any negligence penalty. (Dkt. 571 at 6.) It was only after Wells Fargo had the audacity to seek a tax refund that the Department of Justice sought the negligence penalty for the first time. Early in the proceedings, the Magistrate Judge correctly observed that the penalty looked like retaliation by the government for Wells Fargo pursuing a refund:

Well, you [the government] did look at [the penalty] fresh twice. You had the [IRS] examination team look at it once. There was no penalty imposed. The examination presumably was taken up by the IRS appeal. No penalties were imposed. The taxpayer has the temerity to come in and challenge its tax and then in reference to the answer you're saying, well, we're going to look at it a third time and you might be subject to penalties.

(Dkt. 50 at 26.) This type of game playing by the government is impermissible. “The IRS expects taxpayers . . . to turn square corners with it; the IRS owes the same duty in return.” Russian Recovery Fund Ltd. v. United States, 81 Fed. Cl. 793, 798 (2008). The government also argued below that Lewis v. Reynolds, 284 U.S. 281 (1932), and other cases allow the government to reduce a taxpayer's refund claim by asserting that the taxpayer owed previously unassessed taxes or penalties, even though the statute of limitations on those items had expired. See also Allen v. United States, 51 F.3d 1012 (11th Cir. 1995); Loftin & Woodard, Inc. v. United States, 577 F.2d 1206 (5th Cir. 1978); Lyerly v. United States, 218 F. Supp. 3d 1309 (N.D. Ala. 2016). But those cases illustrate only the general rule that a statute of limitations that would bar an affirmative claim does not bar a setoff defense asserting the same claim. See, e.g., Beach v. Ocwen Fed. Bank, 523 U.S. 410, 415-16 (1998). These cases do not relieve the government from proving the substantive elements of its claim. That should be especially so with respect to tax-penalty claims, as such penalties are “strictly construed.” Ivan Allen Co. v. United States, 422 U.S. 617, 627 (1975).

Because the government failed to satisfy an essential statutory element of its negligence-penalty claim, the district court should have denied the penalty.

2. The district court improperly concluded that Wells Fargo waived the § 6751 issue.

The district court refused to address the government's failure to satisfy the statutory requirement, concluding that Wells Fargo waived the issue. There are two problems with that conclusion.

First, the government twice responded to Wells Fargo's § 6751 argument on the merits and never argued that Wells Fargo had waived it. (App. 49-50, 81 n.4, 130-31, 172-78.) “[A] party can waive a waiver argument by not making the argument . . . in its briefs.” Freeman v. Pittsburgh Glass Works, LLC, 709 F.3d 240, 250 (3d Cir.  2013). By not arguing that Wells Fargo waived the § 6751 argument, the government waived any waiver argument, and the district court should not have raised it sua sponte.

Second, Wells Fargo raised the issue both before and after trial. Very early in the case, Wells Fargo moved to strike the government's negligence penalty defense, and observed that § 6751 “requires managerial approval for all penalties assessed after June 30, 2001 that are not automatically calculated.” (App-16 n.6.) Wells Fargo raised the issue again in a post-trial brief, stating on the first page of the brief that the government asserted a negligence penalty “without regard to the procedures set out in 26 U.S.C. § 6751 (which requires written approval from specified IRS or Treasury Department officials before a tax penalty can be assessed).” (App-49-50.) Wells Fargo raised the issue yet again in its motion for judgment as a matter of law or a new trial, stating that “[t]he United States has not proven [the written-approval] element” of its § 6751 claim. (App-108; see also App-130.) And after the government spent more than six pages responding to that argument on the merits (App-172-78), Wells Fargo addressed it again in a reply brief. (App-191-95.)

The district court relied heavily on a stipulation limiting the defenses that Wells Fargo would raise in response to the government's setoff claim. (App-21-22.) Because Wells Fargo did not list § 6751 as one of the “defenses” it would raise, the district court held that Wells Fargo was barred from raising it. (Note that the government never invoked the stipulation on this issue.) But compliance with the written-approval requirement in § 6751 is “a mandatory, statutory element of a penalty claim” (Chai, 851 F.3d at 222 n.26 (emphasis added)); failure to comply with the statute is not a defense to a penalty claim.¹⁶ See, e.g., Park v. Thompson, 851 F.3d 910, 924 n.14 (9th Cir. 2017) (“A defense, of course, must be distinguished from simply punching holes in the prosecution's case by pointing out its weaknesses. . . .”). Wells Fargo stipulated that it would not present certain defenses, not that it would excuse the government from proving one of the statutory elements of its claim. (App-21-22.) The district court therefore erred in holding to the contrary.

The district court also held Wells Fargo should have raised § 6751 earlier in the proceedings, and more vigorously. But Wells Fargo raised that issue at least four separate times. And its argument was straightforward: the government failed to produce any evidence supporting one of the elements of its claim. Little more needed to be said. There is no law Wells Fargo is aware of that requires parties to gild the lily when making simple arguments, or finds waiver when they engage in brevity instead.

Conclusion

Wells Fargo respectfully asks the Court to reverse the judgment of the trial court and hold that Wells Fargo is entitled to the foreign tax credits claimed in connection with STARS, and is not liable for a negligence penalty.

Dated: April 12, 2018

Respectfully submitted,

s/ Charles F. Webber
Walter A. Pickhardt
Charles F. Webber
Deborah A. Ellingboe
FAEGRE BAKER DANIELS LLP
2200 Wells Fargo Center
90 South Seventh Street
Minneapolis, Minnesota 55402
(612) 766-7000

Alan J.J. Swirski
Christopher P. Bowers
B. John Williams
Nathan P. Wacker
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
1440 New York Avenue, N.W.
Washington, D.C. 20005
(202) 371-7000

Attorneys for Appellant
Wells Fargo & Co