In a typical scenario where one arm of the government – in this case the IRS – doesn’t know what another arm of the government is doing, the IRS has continued to legally pursue Wells Fargo (NYSE:WFC) over SILO deals which another government arm – the Federal Transit Administration – had approved of for Wells Fargo to enter into.
For those who aren’t aware of what a SILO is, it’s an acronym for “sale-in, lease-out,” which refers to a company acquiring equipment from a government and then leasing it back to those selling it to them. Those buying the equipment can then of course deduct the appreciation of the equipment from their taxes, along with interest from the loans they too out to make the purchase.
According to the IRS, these deals are simply a means of avoiding taxes by companies, and so will normally go to court to defend themselves against a Silo deal or deals in order to keep other corporations from using them for the same purpose. The majority of past cases have been won by the IRS, so this should be an interesting conclusion if Wells Fargo is able to convince a judge that it’s an investment, which they asserted during the case.
The specific problem with the Wells Fargo case is that the California Transportation Dept. (Caltrans) agreed to enter into three SILO deals with Wells Fargo in 2001-2002 to acquire commuter rail cars and locomotives from a funding via a loan. The now retired lawyer from Caltrans that put together the deal, William Bassett, said that Caltrans received $27 million in fees for the three deals, of which the related assets were worth $230 million. Caltrans than signed on to lease back the equipment, which in Wells Fargo’s eyes, altogether, is a taxable event, and the subject of the ongoing dispute, which is awaiting the decision of a judge as to its veracity.
As mentioned earlier, I find this odd that we have another circumstance surrounding bank issues where one arm of the government, in this case the Federal Transit Administration, encouraged and approved of the deal, while another part of the government battles against it. The other one I’m referring to is the debacle surrounding the lawsuit between the SEC and Bank of America where the SEC admits that Ben Bernanke and former Treasury Secretary Henry Paulson were aware of the bonuses to be awarded to Merrill Lynch executives, and were not only aware of it, but pushed Bank of America to go ahead with the deal when they indeed had wanted stop the process from going forward. This is incompetence, dishonest and possibly illegal. This is why the SEC didn’t vigorously pursue executives at Bank of America because they knew it could end up revealing the government’s and Federal Reserves’ role in the shady deal.
To make matters worse in the Wells Fargo SILO situation, the former Caltrans lawyer, Bassett, made an odd boast that he had sold Wells Fargo “the Brooklyn Bridge,” meaning he knew they were dubious, even while encouraging the bank to go forward. I’m not so sure that was a smart comment to make, but there it is. Bassett even admits he knew legal issues would arise from the SILO deals but arranged them anyway.
The bottom line? The government and the Federal Reserve has had its hands dirty during the banking crisis and the banking industry in general, and when you have one agency approving one thing while another one them comes in and fights against them, it’s schizophrenic, and we can’t operate in an atmosphere where a business can be encouraged by one arm of the government to go ahead with something while another one than says we’ve done something wrong. I guess you could say this is pure crazy … and it is.
