                  United States Court of Appeals
                              For the Eighth Circuit
                          ___________________________

                                  No. 11-3616
                          ___________________________

                             WFC Holdings Corporation

                         lllllllllllllllllllll Plaintiff - Appellant

                                             v.

                               United States of America

                        lllllllllllllllllllll Defendant - Appellee
                                       ____________

                      Appeal from United States District Court
                     for the District of Minnesota - Minneapolis
                                    ____________

                             Submitted: May 16, 2013
                     Filed: August 22, 2013 (Corrected 9/6/13)
                                  ____________

Before WOLLMAN, MURPHY, and SMITH, Circuit Judges.
                         ____________

SMITH, Circuit Judge.

       WFC Holdings Corporation (WFC) appeals from the judgment of the district
      1
court, which held that WFC is not entitled to a tax refund for a capital loss it claimed
as a result of a complex transaction involving the transfer of leases and the sale of

      1
      The Honorable John R. Tunheim, United States District Judge for the District
of Minnesota.
stock. We hold that WFC failed to adequately show that the transaction had either
objective economic substance or a subjective, non-tax business purpose, and we
affirm.

                                       I. Background
       In 1996, Wells Fargo & Company ("Old Wells Fargo" or OWF) acquired First
Interstate Bancorp ("First Interstate") in a hostile takeover. OWF and First Interstate
had overlapping geographical footprints, and the acquisition left OWF with
unexpected real estate liabilities consisting of a large number of leased properties that
were no longer needed for its business operations. OWF remained obligated to pay
rent on the properties. Some of the properties were "underwater," meaning that OWF's
rent obligations exceeded the amount of rent it could obtain from subleasing the
property. In 1998, OWF merged with Norwest Corporation to become WFC. WFC
retained the real estate liabilities that OWF had acquired through the latter's takeover
of First Interstate.

        Customarily, WFC files consolidated income tax returns for its various banking
and non-banking subsidiaries. Among WFC's banking subsidiaries are Wells Fargo
Bank, N.A. and Wells Fargo Bank (Texas), N.A. (collectively, "the Bank"). WFC's
leases were held by the Bank, which is subject to the regulatory oversight of the
Office of the Comptroller of the Currency (OCC). The OCC regulates federally
chartered banks' real estate holdings pursuant to the National Bank Act (NBA). See
12 U.S.C. § 29. The NBA permits a national bank to hold real estate only for use in
its banking business and other limited purposes. See id. Real estate held for other
purposes, including "[f]ormer banking premises," are referred to as "[o]ther real estate
owned (OREO)" (or ORE).12 C.F.R. § 34.81(e)(2). "[F]ormer banking premises" that
the bank currently leases qualify "as OREO when a bank no longer uses the property
for its banking business." OCC Interpretive Letter, 1983 WL 145898, at *1–3.




                                          -2-
       The NBA requires national banks to dispose of OREO within five years. 12
U.S.C. § 29; see also 12 C.F.R. § 34.82(a) ("A national bank shall dispose of OREO
at the earliest time that prudent judgment dictates, but not later than the end of the
holding period (or an extension thereof) permitted by 12 U.S.C. 29."). "A national
bank may comply with its obligation to dispose of [leased] real estate under 12 U.S.C.
29 . . . [b]y obtaining an assignment or a coterminous sublease," i.e., a sublease
coterminous with the bank's master lease. 12 C.F.R. 34.83(a)(3)(i). The OCC may
extend the five-year disposition period for up to "an additional five years, if (1) the
[bank] has made a good faith attempt to dispose of the real estate within the five-year
period, or (2) disposal within the five-year period would be detrimental to the [bank]."
12 U.S.C. § 29. Furthermore, in 1996 the OCC amended the regulations to toll the
disposition period for the duration of any non-coterminous sublease. 12 C.F.R. §
34.83(a)(3)(i). The 1996 amendment also permitted

      [a] national bank holding a lease as OREO [to] enter into an extension
      of the lease that would exceed the holding period referred to in § 34.82
      if the extension meets the following criteria:

             (A) The extension is necessary in order to sublease the
             master lease;

             (B) The national bank, prior to entering into the extension,
             has a firm commitment from a prospective subtenant to
             sublease the property; and

             (C) The term of the extension is reasonable and does not
             materially exceed the term of the sublease . . . .

Id.

     In 1998, prior to OWF's merger with Norwest to become WFC, KPMG, LLC
("KPMG") served as OWF's accounting firm. At that time, KPMG marketed a


                                          -3-
contingent-liability tax-reduction strategy it referred to as an "economic liability
transaction." In accordance with this strategy, KPMG advised OWF that OWF's
underwater leases could be used to reduce its federal income tax liability. The
contingent-liability strategy called for accelerating future tax deductions to create
current losses that could be used to shield current income from tax.

       The strategy involved three steps. First, OWF would create a new subsidiary
or locate an existing subsidiary holding corporation for use. Second, OWF would
make a tax-free transfer of valuable assets and tax-deductible liabilities to the
subsidiary. Combining features of sections of the Internal Revenue Code ("the Code")
make this tax-free transfer theoretically possible. In general, a transfer of property into
a corporation in return for stock in that corporation results in a taxable gain or loss,
depending on the difference between the tax basis2 in the transferred property and the
tax basis of the stock. But 26 U.S.C. § 351(a) provides that a taxpayer will recognize
no gain or loss from its transfer of property into a corporation solely in exchange for
that corporation's stock, provided that it controls the corporation immediately
thereafter. Furthermore, 26 U.S.C. § 358(a)(1) provides that, as a general rule, a
taxpayer's tax basis in the stock it receives through a § 351 tax-free transfer must be
equal to the tax basis of the property transferred into the corporation. If, in addition
to stock, a taxpayer receives money, it must reduce its tax basis in the stock by the
same amount. 26 U.S.C. § 358(a)(1)(A)(ii). Generally, if, pursuant to a § 351 transfer,
a corporation assumes some liabilities of the taxpayer, then the corporation's
assumption of those liabilities is treated "as money received by the taxpayer." 26
U.S.C. § 358(d)(1). Thus, ordinarily, the corporation's assumption of the liabilities
would require the taxpayer to reduce its tax basis in the stock. However, under 26


      2
       Black's Law Dictionary defines a tax basis as "[t]he value assigned to a
taxpayer's investment in property and used primarily for computing gain or loss from
a transfer of the property. Basis is usu[ally] the total cost of acquiring the asset,
including the purchase price plus commissions and other related expenses, less
depreciation and other adjustments." Black's Law Dictionary (9th ed. 2009).

                                           -4-
U.S.C. §§ 358(d)(2) and 357(c)(3), if the corporation assumes liabilities the payment
of which would give rise to a tax deduction, then the corporation's assumption of those
liabilities does not require the taxpayer to reduce its tax basis in the stock.

       Accordingly, the second step of the contingent-liability strategy that KPMG
proposed would require OWF to transfer valuable assets and an equal amount of tax-
deductible future liabilities to the designated subsidiary holding corporation, in
exchange for stock in that corporation. The stock's market value would be reduced by
the negative value of the tax-deductible future liabilities, but the stock's tax basis
would remain equal to the tax basis of the assets transferred to the corporation—
unreduced by the negative value of the future tax-deductible liabilities. Finally, the
third step would involve OWF selling the high-tax-basis/low-market-value stock to
an outside third party at the low market value, resulting in a seemingly sizable capital
loss that could be used to shield current income from tax.

        KPMG advised OWF that the contingent-liability strategy required a non-tax
business purpose to succeed. Thus, "[a]scertaining a non-tax business purpose[] was
'the first question' KPMG asked of clients considering the transaction." WFC Holdings
Corp. v. United States, No. 07-3320 JRT/FLN, 2011 WL 4583817, at *4 (D. Minn.
Sept. 30, 2011). Donald Dana managed OWF's Corporate Properties Group (CPG),
which oversaw all properties owned or leased by every entity under OWF's control.
Dana was responsible for identifying a non-tax business purpose for OWF's use of the
contingent-liability strategy.

       Dana identified two business purposes for transferring 21 of the Bank's leased
properties to the designated subsidiary holding corporation. First, he proposed that
managers of the designated subsidiary holding corporation could be incentivized to
exceed market expectations by sharing in the equity of the properties. Second, the
strategy would strengthen OWF's hand in negotiations with its "good bank
customers"—customers who both (1) banked with OWF and (2) leased properties

                                          -5-
from OWF. At that time, OWF's senior tax attorney Karen Bowen "sent an internal e-
mail message in which she stated, 'We are working with CPG on a project to move
underwater leases to a special purpose entity to trigger unrealized tax losses.'" Id. at
*5 (citation omitted). OWF then merged with Norwest to become WFC.

        Afterwards, WFC significantly revised the business purpose for the contingent-
liability strategy. Dan Vandermark, the former Vice Present of Tax for Norwest,
became the Vice President of Tax for WFC. Vandermark's position gave him
discretion to veto the strategy's use as a tax-reduction strategy. Vandermark instructed
Dana to create a business purpose document that would withstand IRS scrutiny.
Vandermark considered the existing strategy to have a "99.9% chance of losing" a tax
audit. Id. at *8. "Vandermark testified that . . . 'we knew we were going to be going
to court on this, and so we wanted to be prepared for it from the get-go. So I told them
that we would need to document—fully document every aspect of the—business
purpose of this transaction.'" Id. (citation omitted). WFC regulatory attorney, Julius
Loeser, subsequently articulated another business purpose for the contingent-liability
strategy: the avoidance of OCC regulations.

      Loeser explained by email that transferring underwater leases into a non-
      banking subsidiary would seem to confer a tremendous regulatory
      benefit to WFC. Specifically, Loeser explained that pursuant to OCC
      regulations, WFC had a limited time period in which to dispose (i.e.
      through assignment or termination) of leased space that was no longer
      actively used in banking operations and had not been coterminously
      subleased. By contrast, the Fed, with regulatory oversight over the non-
      bank subsidiary expected to receive the underwater leases, imposed no
      such mandatory disposition regulations for leased premises. Transferring
      underwater leases into a non-banking subsidiary would therefore allow
      WFC more flexibility in managing the leases.

Id. Dana wrote a new version of the business-purpose document that incorporated the
regulatory purpose. The new document stated that CPG's ability to execute lease

                                          -6-
extensions to its subtenants was impeded by the OCC's rule that properties had to be
disposed of within five years. It explained that transferring the leases to a non-banking
subsidiary would cause them to fall under the Fed's less stringent regulatory regime.

              As an example, Dana cited the Garland operations building on the
       fringe of downtown Los Angeles. The Garland building, acquired from
       First Interstate in 1996, is a 700,000 square foot space rendered
       superfluous after the merger. The bottom floors have no windows and
       are essentially designed as a vault. WFC was liable to pay rent on a lease
       on the Garland building through 2009, with multiple purchase and lease
       extension options. Bank of America, WFC's competitor, was interested
       in leasing 130,000 square feet of the Garland building, including the cash
       vault, but required more than a ten-year term. According to Dana, OCC
       regulations prohibited him from offering such a sublease beyond the
       mandatory disposition period. Accordingly, Bank of America walked
       away from the deal.

Id. at *9.

      WFC's final stated business purpose for its strategy included (1) avoiding OCC
regulatory restrictions, (2) strengthening its negotiating position with respect to its
subtenant "good bank customers," and (3) incentivizing managers. Id.

       WFC then initiated the following transactions. In December 1998, pursuant to
a lease restructuring transaction (LRT), the Bank transferred government securities
with a tax basis of roughly $426 million, plus leasehold interests in 21 commercial
properties (along with the associated rental liabilities), to a holding corporation that
WFC controlled, Charter Holdings, Inc. ("Charter"). In return, Charter issued 4,000
shares of its stock to the Bank and assumed the lease obligations. The Bank then sold
its 4,000 shares of Charter stock to WFC for $4 million, which sold it to Lehman
Brothers, Inc. for $3.7 million two months later. WFC filed a tax return for 1999 that
included a deduction for a capital loss of roughly $423 million. WFC did not utilize


                                          -7-
the capital loss in its 1999 return, but in 2003, WFC filed a refund claim in which it
claimed a capital loss carryback from its 1999 tax return that resulted in part from the
1999 capital loss. WFC claimed a refund of $82,313,366 for the 1996 tax year.

       In 2007, the Internal Revenue Service (IRS) disallowed the refund. WFC filed
suit, seeking a refund of the taxes. The district court conducted a trial on the merits
and entered judgment in favor of the IRS on all claims. The district court found that,
although the government failed to prove that WFC violated IRS requirements, the
LRT/stock transfer nevertheless failed both the "business purpose" and "economic
substance" components of the common law sham transaction test.

                                     II. Discussion
       WFC argues that the IRS should have allowed its $82,313,366 refund for the
1996 tax year. It argues that the district court erred in finding that the LRT/stock
transfer constitutes a sham transaction. "The general characterization of a transaction
for tax purposes is a question of law subject to review. The particular facts from which
the characterization is to be made are not so subject." Frank Lyon Co. v. United States,
435 U.S. 561, 581 n.16 (1978) (citing Am. Realty Trust v. United States, 498 F.2d
1194, 1198 (4th Cir. 1974)).

      Under the Code, "[t]here shall be allowed as a deduction any loss sustained
during the taxable year and not compensated for by insurance or otherwise." 26 U.S.C.
§ 165(a). "Only a bona fide loss is allowable. Substance and not mere form shall
govern in determining a deductible loss." 26 C.F.R. § 1.165–1(b).

       Under the common law "sham transaction" or "economic substance" doctrine,
"even if a transaction is in 'formal compliance with Code provisions,' a deduction will
be disallowed if the transaction is an economic sham." Dow Chem. Co. v. United
States, 435 F.3d 594, 599 (6th Cir. 2006) (quoting Am. Elec. Power Co. (AEP) v.
United States, 326 F.3d 737, 741 (6th Cir. 2003)).

                                          -8-
Although taxpayers may structure their business transactions in a manner
that produces the least amount of tax, see Boulware v. United States, 552
U.S. 421, 430 n.7, 128 S. Ct. 1168, 170 L. Ed. 2d 34 (2008) (citing
Gregory v. Helvering, 293 U.S. 465, 469, 55 S. Ct. 266, 79 L. Ed. 596
(1935)); Compaq Computer Corp. v. Commissioner, 277 F.3d 778, 781
(5th Cir. 2001), rev'g 113 T.C. 214, 1999 WL 735238 (1999), the
economic substance doctrine requires that a court disregard a transaction
that a taxpayer enters into without a valid business purpose in order to
claim tax benefits not contemplated by a reasonable application of the
language and the purpose of the Code or the regulations thereunder, see,
e.g., ACM P'ship v. Commissioner, 157 F.3d 231, 248 (3d Cir. 1998),
aff'g in part, rev'g in part T.C. Memo. 1997-115; Rice's Toyota World,
Inc. v. Commissioner, 752 F.2d 89, 91–92 (4th Cir. 1985), aff'g in part,
rev'g in part 81 T.C. 184, 1983 WL 14860 (1983); New Phoenix Sunrise
Corp. & Subs. v. Commissioner, 132 T.C. 161, 2009 WL 960213 (2009),
aff'd, 408 Fed. Appx. 908 (6th Cir. 2010); Blum v. Commissioner, T.C.
Memo. 2012-16; Palm Canyon X Invs., LLC v. Commissioner, T.C.
Memo. 2009-288. Such a transaction is disregarded even though it may
otherwise comply with the literal terms of the Code and the regulations
thereunder. See, e.g., Coltec Indus., Inc., 454 F.3d at 1351–1355.

       While the origin of the economic substance doctrine is generally
traced to the Supreme Court's holding in Gregory v. Helvering, 293 U.S.
465, 55 S. Ct. 266, 79 L. Ed. 596, current application of the doctrine
stems primarily from the Supreme Court's decision in Frank Lyon Co. v.
United States, 435 U.S. 561, 98 S. Ct. 1291, 55 L. Ed. 2d 550 (1978). In
Frank Lyon Co., 435 U.S. at 566–568, the taxpayer borrowed $7.1
million from one bank, bought a building from another bank for $7.6
million, and leased the building back to the same bank which had sold
the property for rent equal to the taxpayer's payments of principal and
interest on the $7.1 million loan. The taxpayer claimed depreciation
deductions on the building and interest deductions on the loan and
reported the payments from the bank as income from rent. Id. at 573. The
United States argued that the transaction should be disregarded because
it was merely an elaborate financing scheme designed to manufacture tax
deductions. Id. The Court disagreed, holding that the transaction was not



                                  -9-
      a sham. Id. at 583–584. The Court set forth the following standard for
      determining when a transaction should be respected for tax purposes:

              [W]here, as here, there is a genuine multiple-party
              transaction with economic substance which is compelled or
              encouraged by business or regulatory realities, is imbued
              with tax-independent considerations, and is not shaped
              solely by tax-avoidance features that have meaningless
              labels attached, the Government should honor the allocation
              of rights and duties effectuated by the parties.

                                         ***
      [Id.]


Gerdau Macsteel, Inc. v. C.I.R., 139 T.C. 67, 168–69 (T.C. 2012) (alterations in
original) (footnotes omitted).

             In determining whether a transaction is a sham for tax purposes,
      the Eighth Circuit has applied a two-part test set forth in Rice's Toyota
      World, Inc. v. Commissioner, 752 F.2d 89, 91–92 (4th Cir. 1985), which
      the Fourth Circuit ostensibly found in the Supreme Court's opinion in
      Frank Lyon Co. See Shriver v. Comm'r, 899 F.2d 724, 725–26 (8th Cir.
      1990). Applying that test, a transaction will be characterized as a sham
      if "it is not motivated by any economic purpose outside of tax
      considerations" (the business purpose test), and if it "is without
      economic substance because no real potential for profit exists" (the
      economic substance test). Id. at 725–26. The Shriver Court analyzed the
      transaction at issue in that case under both parts of the test, but then said
      in dictum, "[W]e do not read Frank Lyon to say anything that mandates
      a two-part analysis." Id. at 727. The Court suggested that a failure to
      demonstrate either economic substance or business purpose—both not
      required—would result in the conclusion that the transaction in question
      was a sham for tax purposes.




                                          -10-
IES Indus., Inc. v. United States, 253 F.3d 350, 353–54 (8th Cir. 2001) (alteration in
original). IES did "not decide whether the Rice's Toyota World test requires a two-part
analysis because [it] conclude[d] that the [transactions in that case] had both economic
substance and business purpose." Id. at 353–54. Hence, this court has not yet adopted
a particular approach to the sham transaction test.3 Because we hold that WFC's
LRT/stock transfer has neither economic substance nor business purpose, we need not
definitively resolve that issue. See Shriver, 899 F.2d at 726–27. "'[T]he transaction[s]


      3
       We note that

      [t]he Courts of Appeals are split on the proper weight to be given to
      these prongs in deciding whether to respect a transaction under the
      economic substance doctrine, and alternative approaches have emerged.
      Some Courts of Appeals apply a disjunctive analysis, under which a
      transaction is valid if it has economic substance or a business purpose.
      See, e.g., Horn v. Commissioner, 968 F.2d 1229, 1236–1238 (D.C. Cir.
      1992), rev'g Fox v. Commissioner, T.C. Memo. 1988-570; Rice's Toyota
      World, Inc. v. Commissioner, 752 F.2d at 91. Other Courts of Appeals
      apply a conjunctive analysis, under which a transaction is valid only if
      the transaction has economic substance beyond tax objectives and the
      taxpayer had a nontax business purpose for entering into the transaction.
      See Dow Chem. Co. v. United States, 435 F.3d 594, 599 (6th Cir. 2006);
      Winn-Dixie Stores, Inc. v. Commissioner, 254 F.3d 1313, 1316 (11th Cir.
      2001), aff'g 113 T.C. 254, 1999 WL 907566 (1999); United Parcel Serv.
      of Am., Inc. v. Commissioner, 254 F.3d 1014, 1018 (11th Cir. 2001),
      rev'g T.C. Memo. 1999-268. Still other Courts of Appeals adhere to the
      view that a lack of economic substance is sufficient to invalidate the
      transaction regardless of whether the taxpayer has motives other than tax
      avoidance. See, e.g., Coltec Indus., Inc., 454 F.3d at 1355. And still other
      Courts of Appeals treat the objective and subjective prongs merely as
      factors to consider in determining whether a transaction has any practical
      [economic effects other than the creation of income tax losses.]
      Commissioner, 157 F.3d at 248.

Gerdau Macsteel, Inc., 139 T.C. at 169–70.

                                         -11-
must be viewed as a whole, and each step, from the commencement of negotiations
to the consummation of the sale, is relevant.'" IES, 253 F.3d at 356 (alterations in
original) (quoting Comm'r v. Court Holding Co., 324 U.S. 331, 334 (1945)).

                          A. Objective Economic Substance
       Under the Code, "[t]here shall be allowed as a deduction any loss sustained
during the taxable year and not compensated for by insurance or otherwise." 26 U.S.C.
§ 165(a). "Only a bona fide loss is allowable. Substance and not mere form shall
govern in determining a deductible loss." 26 C.F.R. § 1.165–1(b). Several decades
ago, this court discussed the circumstances under which a taxpayer could claim an
exemption for a loss in the context of a similar revenue act:

             To secure a deduction, the statute requires that an actual loss be
      sustained. An actual loss is not sustained unless when the entire
      transaction is concluded the taxpayer is poorer to the extent of the loss
      claimed; in other words, he has that much less than before.

             A loss as to particular property is usually realized by a sale thereof
      for less than it cost. However, . . . the realization of loss is not genuine
      and substantial . . . . [where] the taxpayer has not actually changed his
      position and is no poorer than before the sale. The particular sale may be
      real, but the entire transaction prevents the loss from being actually
      suffered. Taxation is concerned with realities, and no loss is deductible
      which is not real.

Shoenberg v. Comm'r of Internal Revenue, 77 F.2d 446, 449 (8th Cir. 1935). More
recently, this court stated:

            "A transaction will not be given effect according to its form if that
      form does not coincide with the economic reality and is, in effect, a
      sham." F.P.P. Enterprises v. United States, 830 F.2d 114, 117 (8th Cir.
      1987). "'The presence or absence of economic substance is determined
      by viewing the objective realities of the transaction, namely, whether

                                          -12-
       what was actually done is what the parties to the transaction purported
       to do.'" Massengill [v. C.I.R.], 876 F.2d [616,] 619 [(8th Cir. 1989)]
       (quoting Killingsworth v. Commissioner, 864 F.2d 1214, 1216 (5th Cir.
       1989)).

Gran v. Internal Revenue Serv. (In re Gran), 964 F.2d 822, 825 (8th Cir. 1992). "[A]
transaction will be characterized as a sham if . . . it 'is without economic substance
because no real potential for profit exists' . . . ." IES, 253 F.3d at 353 (quoting Shriver,
899 F.2d at 725–26).

       Here, the district court "readily conclude[d] that the stock sale from the [Bank]
to WFC and from WFC to Lehman lacked economic substance and did not accomplish
what WFC purports it to have done." WFC Holdings Corp., 2011 WL 4583817, at *45
(citing Shell Petroleum Inc. v. United States, No. H-05-2016, 2008 WL 2714252, at
*37–38 (S.D. Tex. July 3, 2008)). The court found that, "in entering into a transaction
that it knew would include a bona fide loss of $423 million, under the economic
substance test WFC should have reasonably anticipated a profit in excess of that
amount." Id. Nevertheless, "[WFC] cannot show that the LRT had the potential to
generate profits anywhere near the loss it allegedly sustained in the stock sale, or over
$423 million in gain." Id.

        WFC maintains that we need look no farther than the district court's findings
to see that the LRT had economic substance. WFC points to the district court's finding
"that [it] had a substantial liability on its hands in the form of post-merger superfluous
property and underwater leases." Id. at *46. WFC argues that the district court
explicitly "agree[d] with [it] that transference of underwater property to a nonbanking
subsidiary can sometimes improve a bank's ability to market lease tails and take
advantage of prospective lucrative subleasing opportunities that otherwise would not
exist in ORE properties." Id. at *38. WFC argues that more than $380 million of the
$423 million in leases that were transferred to Charter were properties that were either
clearly ORE or at risk of ORE designation under the OCC's ambiguous regulatory

                                           -13-
standards. It maintains that the transfer of the leases from the Bank to Charter freed
them from the OCC's stringent mandatory-disposition requirements, which had
precluded the collection of any loss-mitigating sublease rent after the end of the
disposition period. In particular, WFC observes that the court found that its lease
transfer of the 700,000-square-foot Garland building in downtown Los Angeles to
Charter "enhanced WFC's ability to maximize its profits from" its "lease extension and
purchase options" on that lease. Id. at *48. WFC points out that the court found that
"Garland . . . had a large profit potential due to the prospective reduction in master
lease payments," id. at *38, and even that "Garland subleases have subsequently
generated millions of dollars in profit." Id. at *30. WFC also argues that the district
court erred in finding that the issuance and sale of stock to Lehman had no non-tax
economic effects.

     The government responds that WFC has misconstrued the court's findings.
According to the government:

      What the court actually found was that transferring leases to "a non-
      banking subsidiary can sometimes improve a bank's ability" to sublease
      "ORE property," citing only "Garland" as an example. But, as the court
      further found, [WFC] could have obtained that profit potential by
      "simply transferr[ing] the leases to a non-banking subsidiary without
      accepting the administrative burdens and transaction costs of creating a
      new class of stock and subsequently selling it." [WFC] . . . could have
      transferred the leases to Charter without engaging in the three-step
      LRT/Stock Transaction.

(Citations omitted) (second alteration in original.) The government argues that the
creation and sale to Lehman Brothers of the Charter stock were crucial steps of the
LRT/stock transaction that had no practical economic effect on WFC's ability to
remove the Garland property from OCC oversight and develop its profit potential.




                                         -14-
       The government's argument is correct. WFC has misconstrued the district
court's findings. WFC's transfer of the Garland lease to Charter—one economically
beneficial component of a much larger, complex transaction—does not impart
economic substance to the larger LRT/stock transaction. We agree with the district
court, which stated:

             The Court cannot isolate one part, or even a few parts, of one step
      of a large, complex transaction and find that its profit potential imbues
      the entire transaction with substance which is otherwise lacking. . . . [B]y
      focusing on Garland's profitability and asking the Court to disregard the
      stock sale to Lehman as a mere inconsequential recognition event,
      . . . WFC . . . seeks to isolate a kernel of prospective profitability to
      justify a large, multi-step, multi-property transaction. This the Court
      cannot do. WFC has not shown that the LRT, viewed as a whole, had
      economic substance . . . .

Id. at *48. "Modest profits relative to substantial tax benefits are insufficient to imbue
an otherwise dubious transaction with economic substance." Salina P'ship LP v.
C.I.R., T.C. Memo. 2000-352 at *12 (T.C. 2000) (citations omitted). Viewing "the
transaction . . . as a whole," the LRT/stock transaction did not create "a real potential
for profit." IES, 253 F.3d at 353, 356 (quotations, alterations, and citation omitted).
Consequently, the district court did not err in finding that the LRT/stock transaction
lacked objective economic substance.

                          B. Subjective Business Purpose
             The business purpose inquiry examines whether the taxpayer was
      induced to commit capital for reasons only relating to tax considerations
      or whether a non-tax motive, or legitimate profit motive, was involved.
      See [Rice's Toyota World, 752 F.2d at 91–92]. The determination of
      whether the taxpayer had a legitimate business purpose in entering into
      the transaction involves a subjective analysis of the taxpayer's intent.
      Kirchman v. Commissioner, 862 F.2d 1486, 1492 (11th Cir. 1989).



                                          -15-
Shriver, 899 F.2d at 726.

      [W]e . . . consider factors that are arguably relevant to the inquiry. We
      do so, however, mindful of the fact that "[t]he legal right of a taxpayer
      to decrease the amount of what otherwise would be his taxes, or
      altogether avoid them, by means which the law permits, cannot be
      doubted." Gregory v. Helvering, 293 U.S. 465, 469, 55 S. Ct. 266, 79 L.
      Ed. 596 (1935). A taxpayer's subjective intent to avoid taxes thus will
      not by itself determine whether there was a business purpose to a
      transaction.

IES, 253 F.3d at 355 (third alteration in original).

      Viewing the LRT/stock transfer as a whole, the district court found

      that WFC has failed to establish a legitimate business purpose for the
      transaction other than tax benefits. As in Haberman Farms, Inc. v.
      United States, 305 F.2d 787, 792 (8th Cir. 1962), in which the Eighth
      Circuit rejected as a sham a transaction involving a farming business'
      transfer of certain liabilities into a subsidiary, "an analysis of [WFC's]
      asserted reasons [for the LRT] in the light of the facts leaves [the Court]
      with the distinct impression that in actuality the reasons are thin and
      tenuous and that the only substantive one among them is the tax
      motivation."

WFC Holdings Corp., 2011 WL 4583817, at *44 (alterations in original).

       WFC argues that it entered the LRT/stock transaction "with a subjective intent
to treat [it] as [a] money-making transaction[]." See IES, 253 F.3d at 355. Given our
conclusion that the LRT/stock transaction had no real potential for profit, supra, Part
II.A., WFC faces an uphill battle to establish that it had a subjective intent to treat the
LRT/stock transfer as a money-making transaction. Even so, we examine WFC's three
asserted business purposes: avoidance of OCC regulations, strengthening WFC's

                                           -16-
negotiating position with "good bank customers," and creating management
efficiencies.

                           1. Avoidance of OCC Regulations
       WFC argues that the LRT/stock transfer was motivated by its concern to free
its leases on ORE property from what it characterizes as the OCC's stringent
mandatory-disposition regulations in order to make its leases easier to manage. WFC
argues that the district court engaged in a "slicing and dicing" approach to its
business-purpose analysis, in violation of the Supreme Court's mandate that the
transaction must be viewed as a whole. See Court Holding Co., 324 U.S. at 334
("[T]he transaction must be viewed as a whole, and each step, from the
commencement of negotiations to the consummation of the sale, is relevant."). WFC
argues that the district court required it to show that its regulatory rationale separately
explained its transfer of leases to Charter and its transfer of stock to Lehman.

      Addressing the stock transfer, the district court found that

      regulatory concerns do not explain the issuance of the Preferred Stock
      and sale of the stock to Lehman. If WFC wanted to escape OCC
      supervision, it could have simply transferred the leases to a non-banking
      subsidiary without accepting the administrative burdens and transaction
      costs of creating a new class of stock and subsequently selling it.

WFC Holdings Corp., 2011 WL 4583817, at *36. Furthermore, addressing the lease
transfer, the district court found that "the record contains compelling evidence that
regulatory concerns did not lead WFC to transfer the selected leases to Charter." Id.
As the court found:

      Dana testified that although regulatory concerns drove the transaction,
      he did not consult any WFC-generated list of ORE properties when
      assembling the portfolio. While the business purpose document


                                           -17-
      ultimately contained a partial list of "good bank customers" in the
      selected leases, WFC cited no written material quantifying those
      properties which were ORE or at risk of such designation.

Id. at *37. The court noted that "there is no clear, bright-line rule promulgated by the
OCC to determine when a partially vacated former bank premises constitutes ORE."
Id. at *16. Nevertheless, based on the evidence, as many as 11 and as few as three of
the 21 leases transferred to Charter were actually ORE. See id. at *36.

      Dana identified at least ten of the twenty-one selected leases as not ORE,
      while an internal email from 2000 identified a mere three of the
      properties as having been ORE before the transfer to Charter. Louisiana
      Street, for example, was nearly 100% occupied by the bank. It appears,
      however, that WFC incongruously declined to include numerous
      underwater leases in the transaction. Several of the selected leases had
      master leases expiring before the ten-year ORE disposition period, and
      Wells Fargo signed coterminous subleases for periods of less than forty-
      eight months both before and after the LRT. (See, e.g., Px. 45 at 127
      (Charles Schwab sublease), Px. 121 (City of Los Angeles sublease).)
      These facts undermine WFC's contention that it sought to increase the
      marketability of lease tails through Fed oversight.

Id. at *36. Furthermore,

      from 1996 to 1998, no one at Wells Fargo contacted the OCC to
      determine whether the selected leases WFC now characterizes as "at
      risk" of ORE designation were in fact at risk, or whether the bank could
      exercise certain lease extension options pursuant to 12 C.F.R.
      § 34.83(a)(3)(i), as amended in 1996.

Id. at *37. Consequently, the court found that WFC "failed . . . to show that the
regulatory concern drove the transfer to a non-banking subsidiary of the[] . . . selected



                                          -18-
leases, and it has entirely failed to establish that this purpose motivated the LRT as a
whole." Id. at *36.

       We do not find that the district court's business-purpose analysis amounted to
an improper "slicing and dicing" approach. To be sure, the district court found that the
regulatory rationale was not the business purpose for either the stock transfer or the
lease transfer. It did so because the regulatory rationale was not the business purpose
for the LRT/stock transfer as a whole. Dana selected the 21 properties before WFC
produced the regulatory rationale. Also, most of the properties are not actually ORE.
These facts undermine WFC's claim that it engaged in the LRT/stock transfer to avoid
the OCC's disposition provisions for ORE property. We hold that the district court did
not err in finding that WFC failed to meet its burden of proving by a preponderance
of the evidence that avoiding OCC regulations was its business purpose for the
LRT/stock transfer.

                          2. Other Alleged Business Purposes
       WFC argues that two other purposes motivated the LRT/stock transfer. First,
it argues that it was motivated to strengthen its negotiating position with respect to its
"good bank customers." Second, it argues that it was motivated to enter the LRT/stock
transfer to create management efficiencies. The district court's factual findings reflect
that WFC failed to show that either of these business purposes motivated its
transactions as well. In particular, addressing WFC's "good bank customer" rationale,
the district court found that

      the first written notice to [WFC's] lease negotiators on the effect of the
      transfer was on June 30, 1999, approximately six months after the LRT
      and after numerous subleases and other documents had already been
      signed. Notably, the memorandum did not discuss how lease negotiators
      could or should use a fiduciary duty to Charter's outside investor to
      deflect attempts by good bank customers to obtain favorable terms on
      deals. Pursuant to the memorandum, subtenants—presumably including


                                          -19-
      numerous good bank customers—were not informed of the transfer to
      Charter and continued making sublease payments directly to the bank.

Id. at *39. "Even after the issuance of the memorandum, CPG employees, including
vice presidents, continued to sign subleases and other documents with entities
considered good bank customers in the name of the bank despite the transferring
banks having signed away their interest to Charter." Id. at 40. We agree with the
district court that

      [WFC's] laxness in enforcing the form of the LRT, and in particular
      ensuring that the lease negotiators knew how to leverage the fiduciary
      duty owed to outside investors, severely undermines WFC's assertion
      that it executed the LRT for the purpose of using Charter's name and
      duty to its outside investor to fend off pressure from good bank
      customers.

Id. Likewise, our review confirms the district court's finding that

      the record is bereft of evidence showing how the LRT enabled any
      financial benefit from the avoidance of bureaucracy and centralization
      or how WFC legitimately hoped it would do so. To the contrary, WFC
      did not act in a manner consistent with the stated business purpose of
      centralization and bureaucratic avoidance.

Id. at *43.

       Consequently, we hold that the district court did not err in finding that WFC
failed to prove by a preponderance of the evidence that the LRT/stock transfer was
motivated by a purpose to strengthen its hand with good bank customers or to create
management efficiencies.




                                         -20-
                                   III. Conclusion
       Because we hold that the district court did not err in finding that the LRT/stock
transfer lacked both objective economic substance and a subjective business purpose,
we affirm the judgment of the district court.
                        ______________________________




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