It is a period of civil war.
IRS spaceships, striking from a hidden base, have won their first victory against the evil Corporate Empire (See: IRS Wins Massive Tax Shelter Case, Denying BNY Mellon $900 Million in Tax Benefits)
During the battle, IRS spies managed to steal secret plans to the Empire’s ultimate weapon, STARS transactions, an armored code of business law with enough power to dodge billions in tax payments.
Pursued by the IRS’ sinister agents, Corporate lawyers raced home aboard their starships, remiss of the stolen plans that made their companies thrive and restored the secret swiss bank account to the galaxy.
In these dark times, the power to shelter corporate profits offshore is insignificant next to the power of the Economic Substance Doctrine.
In the upcoming months a string of high profile cases will showcase the U.S. government’s fight against corporate tax sheltering.
The accused are four major U.S. banks previously involved in structured transactions with London-based Barclays Plc.
The transactions, known as STARS deals, were designed entirely for purposes of tax avoidance, according to the IRS. STARS is short for “structured trust advantaged repackaged securities.” The banks, meanwhile, claim STARS were done to “enhance their core business model,” and are challenging the IRS over back tax charges worth hundreds of millions of dollars a piece.
BNY Mellon – the world’s largest custody bank – was the first to sue the IRS after it received a tax bill of around $900 million for improperly claimed foreign tax credits related to its STARS transactions with Barclays. The U.S. tax court ruled in the IRS’ favor: “U.S. tax laws and treaties do not recognize sham transactions or transactions that have no economic substance as valid for tax purposes,” the court said in its opinion.
BNY Mellon is appealing that decision. Three other banks – Wells Fargo, BBT Corp and Santander Holdings are taking on the IRS in separate cases. In total, over $3 billion of transactions are on the line.
The IRS’ main weapon in these cases is economic substance – a doctrine in U.S. tax law under which a transaction must have an economic purpose other than the reduction of tax liability in order to be considered valid. While not as clumsy or random as a blaster, it may not be the ultimate weapon that prosecutors need it to be; one tax expert called it a”club in the closet” for the IRS that it is using too broadly.
Enhancements to the economic substance doctrine were written into the President’s 2010 healthcare system overhaul, upping the ability of the IRS to prove tax avoidance and allowing them to impose punitive penalties of up to 40% of the tax liability.
“For the IRS, said Robert Probasco, a partner at Thompson Knight, the doctrine is a ‘convenient way to dispose of cases without some of the messiness of statutory interpretation.’” Tax and legal experts are divided over whether that argument will hold through the appeals process and future legal showdowns.
Still, “If BNY Mellon loses its appeal of the Tax Court’s February decisions, ‘it will be the most remarkable extension of the economic substance doctrine around,’” said Jasper Cummings, a tax analyst with Alston and Bird LLP.
Already, BBT Corp recognized a $281 million expense as a result of the BNY Mellon case. A U.S. tax court heard closing arguments over their entire $892 million STARS dispute on July 30; a decision is expected sometime in the fall.
Santander and Wells Fargo will take the hot seat later this year as well, but Barclays – the bank that marketed and arranged the transactions – is not a party for the STARS cases.
In any case, those eagerly awaiting the summer 2015 release of Episode VII have plenty of STARS wars to keep themselves busy with.
JDKatz, P.C. is a full-service law firm focused on tax law, business and transactional law, estate planning and elder law. We are dedicated to minimizing your existing liability and risks while providing valuable tax planning to streamline your tax issues in the future. Please call us at 301-913-2948 to schedule an appointment to meet with one of our trusted attorneys, or visit http://www.taxattorneymd.com.
- Obama Vetoes Construction of the Death Star (joytaxlaw.com)
- The Billion Dollar KO: IRS Wins Massive Tax Shelter Case (joytaxlaw.com)
- Banks test U.S. IRS anti-tax shelter weapon in STARS wars (uk.reuters.com)