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S.T.A.R.S. Transactions – Jury Is In, Foreign Tax Credit Disallowed

S.T.A.R.S. Transactions – Jury Is In, Foreign Tax Credit Disallowed

As a litigation strategy, a large corporation that is important to a community may decide that it is better to pay the tax and demand a jury trial in U.S. District Court as part of its claim for refund, rather than to defer payment while it argues the case before the Tax Court. The basic theory is that the jury will not be sympathetic towards the I.R.S. In a recent jury trial involving Wells Fargo, it found that the strategy did not work when the issue involved a tax shelter knows as a S.T.A.R.S. (structured trust advantaged repackaged securities) transaction. Rusudan Shervashidze and Galia Antebi explain.

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S.T.A.R.S. Transactions – Interest Deduction Allowed but Foreign Tax Credit Disallowed

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In a partial reversal of the I.R.S. position, a U.S. financial institution was allowed to deduct interest expense on borrowings that formed part of a S.T.A.R.S. transaction in Salem Financial, Inc. v. United States. While the Appeals Cout held that the taxpayer could not claim foreign tax credits for the U.K. taxes paid pursuant to the S.T.A.R.S. transaction, it allowed deductions for interest paid on a loan.

Branch Banking & Trust Corporation (“BB&T”), a North Carolina financial holding company, and Barclays Bank PLC (“Barclays”), a U.K. bank were the participants in a financial product transaction BB&T entered into a structured trust advantaged repackaged securities (“S.T.A.R.S.”) transaction with Barclays from August 2002 through April 2007. Generally, the economic benefit of a S.T.A.R.S. transaction is to increase yields on investments by affixing an interest expense deduction and a double dip of foreign tax credits to the total return of the investor. Barclays invented the S.T.A.R.S. transaction structure along with the international accounting firm based in the U.K., KPMG L.L.P.