How Wells Fargo Won the Tax-Dodging Trophy

NEW YORK ( TheStreet)-- Wells Fargo ( WFC)'s use of a short-lived, highly controversial amendment to the tax code in its acquisition of Wachovia in 2008 has largely been forgotten.

But the amendment, announced by the Internal Revenue Service on Sept. 30, 2008 and revoked by Congress just three and a half months later, had a lot to do with why Wells Fargo beat out AT&T ( T), Verizon Communications ( VZ), General Electric ( GE) and IBM ( IBM) to top the list of 25 companies with the largest tax subsidies from 2008-2010 (see chart below).

The list was included in a report by the nonprofit advocacy group Citizens for Tax Justice (CTJ) that was released last week.

The report found that Wells Fargo ( WFC) received $17.96 billion in tax breaks from 2008 through 2010, while earning more than $49 billion. Those subsidies allowed the bank to pay no taxes during those years, receiving instead a $681 million tax credit.

The unprecedented 2008 decision by the IRS was intended to encourage relatively healthy banks to acquire banks in danger of failing during some of the darkest days of the financial crisis, according to tax consultant Robert Willens.

Wells Fargo certainly appears to have gotten the message. On Oct. 3, 2008, just three days after the IRS relaxed its rules, Wells Fargo topped an earlier bid Citigroup ( C) had made on Sept. 29 --the day before the rule change -- announcing it would pay $15.1 billion for Wachovia. (The deal closed at the start of 2009 and ended up costing about $12.7 billion, according to Reuters.)

Willens says Wells Fargo's entire $17.96 billion in tax breaks could easily have come from the Wachovia deal -- adding up to considerably more than what Wells Fargo paid to acquire the bank.

The IRS rule change allowed Wells Fargo to use $60 billion in losses on Wachovia's books to shelter its own income, according to Willens. Ordinarily, Wells Fargo would only have been allowed to offset $1 billion per year of taxable income with losses from Wachovia. The difference, Willens estimates, adds up to roughly $20 billion in tax savings for Wells Fargo.

"It was widely believed that that was one of the motivators for Wells Fargo agreeing to make this acquisition -- the fact that they knew that they would be able to use those built-in losses to shelter as much income as they wanted to," Willens says.

Even leaving aside the unusual move by the IRS, Wells Fargo is "one of the most active companies in entering into tax shelters," Willens says.

A Wells Fargo spokesman disputed this characterization in an emailed statement to TheStreet.

According to the statement, the CTJ report "takes data out of context to advance an agenda. The truth is that over the past 10 years Wells Fargo has paid more than $30 billion in income taxes to federal and state authorities and billions more in other taxes, and it fulfills all tax obligations. The years cited by the study were unusual for Wells Fargo, as results included significant losses as a consequence of its acquisition of Wachovia, which when realized reduced Wells Fargo's taxable income."

The statement goes on to say that "a substantial portion of the Wachovia losses had been realized by the end of 2010, and based on results for the first three quarters 2011, Wells Fargo expects to pay significant income taxes for 2011."

Wells Fargo's Wachovia acquisition is just one example of the underappreciated role tax loopholes have played in helping U.S. companies recover from the 2008 crisis. Particularly noteworthy is General Motors ( GM), which got a big tax benefit from its purchase of Americredit last year.

That deal also generated a bit of controversy when it was announced in July of last year, with Senator Chuck Grassley (R, Iowa) wondering why GM was making a $3.5 billion acquisition before it had repaid bail out money to taxpayers and calling for an investigation.

The acquisition closed about three months after it was announced, though an audit of the tax benefits to GM by TARP Inspector General Neil Barofsky was underway when Barofsky stepped down from that post in March of this year. The current status of the audit could not be learned in time for publication of this article.

-- Written by Dan Freed in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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