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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