Wells Fargo (WFC) Penalized By Court On Abusive Tax Shelter

Following a three-week trial in a federal court in Minnesota, the jury passed a verdict on Wells Fargo & Company (NYSE:WFC) . The bank has been penalized with a 20% negligence fine in relation to the foreign tax credits claimed on the basis of Structured Trust Advantaged Repackaged Securities (STARS), a tax shelter that secures U.S. companies’ profits from double taxation.

Despite the bank’s assurance of STARS being a single and low cost funding based transaction, the court found two different transactions, a loan and a trust structure. The loan was a $1.25 billion contribution by Barclays (LON:BARC) PLC (NYSE:BCS) to the Wells Fargo trust, which the bank had to repay after five years. It was found that the bank entered into it for tax-related purposes only.

Whereas regarding the trust, the jury found that it contained potential for pretax profit and that the bank entered into it solely for tax reasons. However, Wells Fargo has to pay the penalty for the underpayments of the foreign-tax credits disallowed by the Internal Revenue Service.

In the past, the courts have been found to have rejected tax shelters coming under STARS, which involved banks such as Bank of New York Mellon Corporation (NYSE:BK) , BB&T Corporation (NYSE:BBT) and Santander (MC:SAN) Bank.

This is another blow to Wells Fargo’s reputation in a short time span. Although, the bank’s efforts to alleviate the impact of the scandals are encouraging, its financials continue to remain under pressure.

Wells Fargo’s shares have gained 2.4% in the last six months, underperforming the 8.1% growth for Zacks categorized Banks - Major Regional industry.

Currently, the bank carries Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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