Be A Little Subtle: A Look at Bad Tax Planning

tax planningAggressive tax planning can be bad, as it can come back to haunt you. Aggressive tax planning that is obvious is worse, as the taxpayer can be left to defend an indefensible position.

Robert Smith learned the hard way: In June 2009, Smith sold his company, National Coupling, and retired; he received a $600,000 bonus, $248,246 from the sale of his stock, and $181,170 from two life insurance policies that his company had owned. Smith v. Comm’r, No. 21707-15, T.C. Memo 2017-218, 2017 Tax Ct. Memo LEXIS 217, **3 (Nov. 6, 2017). Mr. Smith expected to receive patent rights to a sprinkler design as well, but that was not addressed in the sale documents.… Read More

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 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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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

A Tax Opinion that Didn’t Carry the Day.

Although Congress codified the economic substance doctrine, courts continue to deal with an inventory of cases applying the doctrine under existing precedent. On June 24th, the Fifth Circuit decided an interesting one, Nevada Partners Fund, L.L.C. v. United States, 2013 U.S. App. LEXIS 12877 (June 24, 2013).

Nevada Partners involved a tax shelter that was driven by foreign currency transactions. The multi-tiered structure, as described by the Court, worked like this:

  • First, the investment manager established a group of LLCs. These included an LLC which would act as a holding company for two others. This first-tier LLC would be formed with a transitory partner and it would own 99% of a second LLC, which in turn would own 99% of a third LLC.
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Holding a Bad Hand: The Third Circuit Addresses Economic Substance, Part III.

What lessons can we take from Crispin v. Commissioner, No. 12-2275 (3d Cir. Feb. 25, 2013?

The Court’s decision on economic substance is on very solid ground, as the case had a variety of bad facts suggesting that the taxpayer was playing audit roulette:

  • First, Crispin entered into his transaction after the IRS had issued a notice relating to inflated basis transactions generally. Crispin v. Comm’r, No. 12-2275, slip op. at 5 (citing Notice 2000-44, 2002-2 Cum. Bull. 255 (Aug. 13, 2000)).
  • Second, the IRS issued another notice that critiqued CARDS transactions before Crispin filed the relevant returns. Id.
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Holding a Bad Hand: The Third Circuit Addresses Economic Substance, Part I.

While tax law is driven in large measure by statutes and regulations, case law remains significant, particularly in the context of litigation involving tax shelters.

Historically, courts developed a variety of common law doctrines such as “substance over form,” “step transaction,” or “business purpose” that come into play in the context of transactions that are perceived to be abusive. Among the more prominent of these doctrines is the economic substance doctrine. While Congress took steps to codify the economic substance doctrine in 2010, it did so on a prospective basis, leaving a large number of pending tax cases to be governed by existing common law principles.Read More

The Eleventh Circuit Looks at Valuation Misstatement Penalties.

Section 6662 of the Internal Revenue Code imposes a 20% penalty in various situations when a taxpayer is negligent; these include penalties for a “substantial valuation misstatement.” I.R.C. § 6662(b)(3). A substantial valuation misstatement occurs where the taxpayer claims a basis in property that is 150% or more of the correct value. I.R.C. § 6662(e)(1)(A). Moreover, the penalty is increased from 20% to 40% if the taxpayer overstates basis by 200% or more. I.R.C. § 6662(h)(1). Section 6662 also imposes a 20% penalty regime where a taxpayer enters into a transaction that lacks economic substance. I.R.C. § 6662(b)(6). Although there are alternative penalties, only one may be applied to a particular underpayment of tax.Read More