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“Manning Up”: Twenty-First Century Tales of Tax Avoidance and Examination Options on the I.R.S.’s Table

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“Manning Up”: Twenty-First Century Tales of Tax Avoidance and Examination Options on the I.R.S.’s Table

The U.S. tax system is a “self-assessment” system: upon determining how tax provisions apply to their transactions, taxpayers pay the tax they determine is due, and report the transactions to the I.R.S. in sufficient detail to permit the I.R.S. to confirm that liability was correctly calculated. Paradoxically, the tax system is so complex that it incessantly creates ambiguity and opportunity for abuse. Determining one’s tax obligations is often difficult, even for taxpayers with simple profiles. In a lighthearted article, Andreas A. Apostolides looks at two recent events – the first is a letter written by Senate Finance Committee Chairman Ron Wyden to the Chairman of Bristol-Myers Squibb questioning a ten-year-old transaction and the second is a court decision striking down the I.R.S. system of listed transactions and transactions of interest, both part of the anti-tax shelter provisions of U.S. tax law.

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

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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.