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Tuesday, February 18, 2003


The Wells Fargo case had over $800 million in deficiencies and penalties at stake. That amount of money could fund an endowment to pay the LITC (Low-Income Taxpayer Clinic) program at more than five times its current level for eternity. Or it could pay for just under 1% of the expected cost of the upcoming war in Iraq.

Unfortunately, I did not really understand this case. Well, not enough to critique it. The decision hinged on the expert testimony of some of the top actuaries in the country, and I have no education in or experience with actuarial science. But I can summarize:

�Wells Fargo� (actually Northwest Corp., which subsequently bought Wells Fargo, changed its name to Wells Fargo, and moved its corporate headquarters to San Francisco) established a plan to pay postretirement medical expenses for retired employees. IRS disagreed with the actuarial method they used to fund the reserve, and disallowed deductions because of alleged excess contributions. There are six different actuarial methods that can be used to calculate appropriate contributions. Wells Fargo preferred the entry age normal cost method, and IRS preferred the aggregate cost method. Tax Court picked the individual level premium cost method. This was the method under which the contributions were originally calculated, and was therefore a win for Wells Fargo because they had no excess contributions under that method. The selling points for the Tax Court were that normal cost begins no earlier than the date the plan was established, and that the plan would be fully funded for each employee at the time of their retirement. For those interested, there are extensive discussions in this case of the terms of art �reserve� and �level� funding.

IRS also disputed the interest rates used by Wells Fargo in calculating their reserves, but Tax Court said IRS did not take into account certain local taxes the plan would have to pay.

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