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Bailout Beneficiary Wells Fargo Loses Transit Tax-Shelter Lawsuit

3:00 PM EST on January 12, 2010

The tax tricks known as SILOs -- in which major banks snapped up rail cars and other pieces of public infrastructure from cash-strapped localities, only to lease them back and claim a tax write-off -- has prompted an outcry from the Hill as Wall Street's biggest players invoked obscure claims to wring money from local transit agencies.

TR1_100509.jpg(Photo: NJBIZ)

Congress formally banned SILOs (short for "sale in, lease outs") in 2004, but some banks are so intent protecting their deals that a court battle is needed to settle the cases.

And in one such dispute, Wells Fargo has lost a $115 million SILO lawsuit against the same federal government that gave the bank a $25 billion bailout last year. From the opinion released by federal claims court Judge Thomas Wheeler:

Although well disguised in a sea of paper and complexity,the SILO transactions essentially amount to Wells Fargo’spurchase of tax benefits for a fee from a tax-exempt entity thatcannot use the deductions.

Wells Fargo had taken on the government over a passel of 26 SILOs, including several signed with transit agencies in New Jersey, Washington D.C., California, and Harris County, Texas. A Belgian telecom company was also party to one of the tax shelters at issue in the suit.

In some of the deals, beleaguered insurance company AIG had agreed to underwrite the SILOs. The precipitous fall of AIG's credit rating last year as it headed for an $80 billion bailout triggered some of the major banks' claims to SILO payments from transit agencies.

As lawmakers continue to weigh legislation that would slap a 100 percent excise tax on banks' SILO proceeds, however, it's important to note that local transit agencies weren't necessarily innocent victims in some of the deals. When Congress moved to outlaw SILOs four years ago, transit officials were seen lobbying alongside banks to preserve the shelters.

One former lawyer for Caltrans, California's state DOT, even bragged last fall that he had put one over on Wells Fargo by structuring the deal to shield his employers from liability. "I sold [the bank] the Brooklyn Bridge," he told BusinessWeek.

A Wells Fargo spokeswoman told Bloomberg today that the bank is weighing whether to pursue an appeal.

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