Tax Shelters: Denied a Claim for Foreign Tax Credits, Wells Fargo’s Effort to Claim a Deduction Fails

STARS, Wells FargoOn September 15, 2017, the latest chapter in the Wells Fargo/STARS saga came to an end: Having earlier lost its claim for foreign tax credits associated with the STARS transaction, Wells Fargo’s alternative argument that it could deduct the foreign taxes it paid was also rejected. Wells Fargo & Co. v. United States, No. 09-CV-2764 (PJS/TNL), 2017 U.S. Dist. LEXIS 150064 (D. Minn. Sept. 15, 2017).

To summarize, STARS was a complex arrangement between Wells Fargo and a foreign bank comprised of two components: A trust structure in which income-producing assets were exposed to tax in the United Kingdom to generate foreign tax credits, and a loan to Wells Fargo.… Read More

Tax Procedure: Wells Fargo and the Negligence Penalty

STARS, Wells FargoThe recent opinion in Wells Fargo & Co. v. United States, No. 09-CV-2764 (PJS/TNL), 2017 U.S. Dist. LEXIS 80401 (D. Minn. May 24, 2017) provided a thoughtful application of the economic substance doctrine.

In the same opinion, the court also addressed the applicability of a negligence penalty for the underpayments associated with the aspects of the STARS transaction that lacked economic substance; the penalty potentially applied to its claims for foreign tax credits derived from the trust component of the transaction. Wells Fargo, 2017 U.S. Dist. LEXIS 80401 at *13. The question was what a taxpayer must establish to avoid a negligence penalty under section 6662(b)(1) of the Internal Revenue Code; Wells Fargo argued that it should not be penalized if the position it took on its tax return was objectively reasonable under relevant authority.… Read More

Tax Shelters: STARS Economic Substance Ruling In Wells Fargo Does Not Follow Conjunctive Test

STARS, TaxesThe litigation over Wells Fargo’s STARS transaction took another interesting turn last week, as the district court had to rule on the legal implications of the jury’s verdict. Wells Fargo & Co. v. United States, No. 09-CV-2764 (PJS/TNL), 2017 U.S. Dist. LEXIS 80401 (D. Minn. May 24, 2017). The litigation focused on whether STARS was a sham transaction that should not be respected for tax purposes because it lacked economic substance.

STARS, an acronym for Structured Trust Advantaged Repackaged Securities, was a transaction promoted to U.S. banks by a British financial-services company. Under this arrangement, Wells Fargo placed assets in a trust managed by a trustee based in the United Kingdom, making the assets subject to U.K.… Read More

Tax Shelters: The Government Prevails Against Santander

Santander Holdings United States v. United StatesThe IRS and the Tax Division of the Department of Justice have expended significant effort fighting tax shelters, and they have enjoyed many successes in that endeavor. One transaction that the government challenged was known as “STARS,” an acronym for Structured Trust Advantaged Repackaged Securities. STARS was a transaction that Barclays promoted to a number of U.S. banks; it gave Barclays tax benefits in the United Kingdom, while the U.S. counterparties claimed significant foreign tax credits with minimal risk.

The IRS and the Tax Division pursued a series of cases attacking the STARS transaction as a tax shelter. Deploying the economic substance doctrine, the government obtained favorable rulings in two cases:

  • In Bank of New York Mellon Corp.
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Interest Netting: The Impact of Mergers on Section 6621(d)

mergerUnder the Internal Revenue Code, corporations pay a higher rate of interest on underpayments than they receive on overpayments. See I.R.C. § 6621(a)(1), (2), (c)(1). For a corporate taxpayer that has both underpayments and overpayments, this can produce unfair results. To ameliorate the problem, Congress enacted Section 6621(d):

To the extent that, for any period, interest is payable under subchapter A and allowable under subchapter B on equivalent underpayments and overpayments by the same taxpayer of tax imposed by this title, the net rate of interest under this section on such amounts shall be zero for such period.

I.R.C. § 6621(d).… Read More

Bucking A Trend: Santander STARS Shelter Upheld

Santander Holdings United States v. United StatesStructured Trust Advantaged Repackaged Securities, or STARS, a tax shelter, has been the subject of significant litigation. STARS was a trust transaction that provided tax benefits to Barclays Bank PLC (its promoter) and foreign tax credits to U.S.-based participants. The government has argued that STARS lacked economic substance, and it has had partial wins in Bank of New York Mellon Corp. v. Commissioner, No. 14-704-ag(L), 2015 U.S. App. LEXIS 15993 (2d Cir. Sept. 9, 2015), and in Salem Financial Inc. v. United States, 786 F.3d 932, 937 (Fed. Cir. 2015), decided in May. Last week, another decision was issued, denying a summary judgment motion by another STARS participant.… Read More

Not Enough Substance: the Eighth Circuit Looks at a Lease Restructuring Transaction.

The economic substance doctrine was developed by courts to address transactions that appeared to comply with the Internal Revenue Code but generated results that seemed to be inconsistent with Congressional intent. The doctrine’s modern application is usually traced to the Supreme Court’s decision in Frank Lyon Co. v. United States, 435 U.S. 561 (1978). While Congress has codified the doctrine, courts continue to apply pre-codification case law to older transactions.

Recently, the Eighth Circuit applied the doctrine to a refund claim brought by WFC Holdings Corporation, which controls Wells Fargo Bank, N.A. and other related entities. WFC Holdings Corp. v. United States, 2013 U.S.Read More