Another Bullshit Tax Shelter Bites the Dust (2/12/13)

Note to readers, this is a cut and paste from a blog entry on my Federal Tax Crimes Blog, here.  The subject overlaps, so I have put it here as well.

In Bank of New York Mellon Corp. v. Commissioner, 140 T.C. No. 2 (2013), here, the Tax Court knocked down yet another another bullshit tax shelter.  It is a complex case, and for purposes of this blog, I will not get into the weeds (this genre of tax shelter usually has many weeds designed to obscure the big picture what is really going on -- i.e., pretty much nothing except paper and money shuffling and re-shuffling, with net effect mostly to the promoters).  I will just summarize the gravamen of the opinion:

The Court opens the opinion (after finding the bullshit facts) as follows (emphasis supplied):

This complex transaction presents a case of first impression in this Court. We are asked to decide whether petitioner is entitled to foreign tax credits and certain expense deductions from the STARS transaction and also whether petitioner is entitled to report income generated from the STARS assets as foreign source income. Respondent argues that the STARS transaction lacked economic substance. Respondent asserts consequently that the foreign tax credits and expenses attributable to STARS should be disallowed and the income from the STARS assets should be characterized as U.S. source. n7 Petitioner, in contrast, contends the STARS transaction had economic substance. In this regard, petitioner asserts that BNY entered into STARS to obtain low-cost funding for its banking business and that it reasonably expected to earn a pre-tax profit from STARS. Additionally, petitioner contends that the U.S. foreign tax credit was intended for transactions like STARS.
   n7 Respondent also argues that the foreign tax credits BNY claimed are disallowed under substance over form doctrines (including the step transaction doctrine) and under the statutory anti-abuse rule in sec. 269(a). We need not decide these arguments because of our other holdings.

The Court  then concludes that, on the facts, there was no economic substance.  That holding seems solid.

Yet Another Bullshit Tax Shelter Goes Down; BB&T's Streak on Bullshit Tax Shelters Continues (9/21/13)

In Salem Financial, Inc. v. United States, 112 Fed. Cl. 543, 2013 U.S. Claims LEXIS 1372 (9/20/13), here, the court (Judge Wheeler) rejects yet another bullshit tax shelter wrapped in complexity but no substance.  This one's acronym is STARS ("Structured Trust Advantaged Repackaged Securities") "The acronym "STARS" 

is not particularly descriptive of the transaction at issue. There is no indication of a loan in the acronym and there are no "repackaged securities" in the transaction. The evidence suggests that the concept of STARS began as something different, and only grew to include a loan when marketed to banks in the United States..  

The beginning of the opinion sets the tone (bold face supplied by JAT):

The BB&T STARS transaction was in effect for nearly five years, from August 1, 2002 through April 5, 2007. The purpose of the STARS transaction was to generate large-scale foreign tax credits for a U.S. taxpayer, which could be used to enhance revenue and reduce taxes in the United States. The amount at issue in this case, including the potential assessment of taxpayer penalties, is $772,144,153.45. This amount is comprised of the following: disallowed foreign tax credits ($498,161,951); disallowed interest deductions ($74,551,947.40); the tax paid on "Bx" payments from Barclays to BB&T ($84,033,228.20); disallowed transaction cost deductions ($2,630,125.05); and penalties ($112,766,901.80). 

The complexities of the STARS transaction, including the concept of a Bx payment, will become apparent below. Stripped to its essence, however, STARS called for the U.S. taxpayer, in this case BB&T, to establish a trust containing approximately $6 billion in revenue-producing bank assets. The monthly revenue from the trust was then cycled through a U.K. trustee, an act that served as a basis for U.K. taxation. Although the revenue was immediately returned to BB&T's trust, the assessment of U.K. taxes generated U.K. tax credits that were shared 50/50 between Barclays and BB&T. A $1.5 billion loan from Barclays to BB&T also was part of the structured transaction, although the loan was not necessary to the objective of generating foreign tax credits. The Barclays monthly Bx payment to BB&T represented BB&T's share of the tax credits, and had the effect of reducing the interest cost of BB&T's loan. The main question presented is whether the STARS transaction had any purpose other than to generate tax savings, and if not, whether penalties should be assessed against BB&T. 

The parties provided a STARS tax tutorial presentation to the Court on February 13, 2013 before the trial began. The Court held 21 days of trial in Washington, D.C. from March 4 through April 2, 2013. During the trial, the Court heard the testimony of 26 witnesses, of which thirteen were experts. The Court admitted deposition excerpts for eleven additional witnesses, principally from those persons who reside outside the United States or where the parties agreed that a deposition could substitute for relatively brief testimony. The Court received in evidence approximately 1,250 exhibits during the trial. The parties submitted post-trial findings of fact and memoranda of law on June 7, 2013, and post-trial reply briefs on July 3, 2013. The Court heard closing arguments on July 30, 2013.

8th Circuit Rejects Wells Fargo Bullshit Tax Shelter (4/27/20)

In Wells Fargo & Company v. United States, ___ F.3d ___ (8th Cir. 2020), here, the Eight Circuit rejected the taxpayer’s claim of entitlement for bullshit tax shelter benefits and claim that it should not be subject to the negligence penalty for claiming the supposed benefits of the bullshit tax shelter.

On the merits of the bullshit tax shelter, I just observe that it had a common characteristic for such nonsense - considerable complexity that served both to create a superstructure designed in part to hide the sham nature of the transaction.  The Eighth Circuit said (Slip Op. 4):

Turning to the facts of this case, we note that STARS is a sophisticated financial transaction with a fairly complex structure. See Wells Fargo & Co. v. United States (Wells Fargo I), 143 F. Supp. 3d 827, 831 (D. Minn. 2015) (“The STARS transaction was extraordinarily complicated—so complicated, in fact, that it almost defies comprehension by anyone (including a federal judge) who is not an expert in structured finance.”); Santander Holdings USA, Inc. v. United States, 977 F. Supp. 2d 46, 48 (D. Mass. 2013) (noting that STARS was “surpassingly complex and unintuitive; the sort of thing that would have emerged if Rube Goldberg had been a tax accountant”).

In my Federal Tax Procedure Book, I describe characteristics of abusive tax shelters as follows (footnotes omitted):

Abusive tax shelters are many and varied.  Some are outright fraudulent, usually wrapped in a shroud of paper work and cascade of words designed to mask the shelter as a real deal.  The more sophisticated are often without substance but do have some at least attenuated, if superficial, claim to legality.  Some of the characteristics that I have observed for tax shelters that the Government might perceive as abusive are that (i) the transaction is outside the mainstream activity of the taxpayer, (ii) the transaction is incredibly complex in its structure and steps so that not many (including IRS auditors, if they stumble across the transaction(s)) will have the ability, tenacity, time and resources to trace it out to its illogical conclusion (this feature is often included to increase the taxpayer’s odds of winning the audit lottery); (iii) the transaction costs of the arrangement and risks involved, even where large relative to the deal, offer a favorable cost benefit/ratio only because of the tax benefits to be offered by the audit lottery, (iv) the promoters (and other enablers) of the adventure make a lot more than even an hourly rate even at the high end for professionals (the so-called value added fee, which is often insurance type compensation to mediate potential penalty risks by shifting them to the tax professional or the netherworld between the taxpayer and the tax professional) and (v) the objective indications as to the taxpayer's purpose for entering the transaction are a tax savings motive rather than any type of purposive business or investment motive. 

Moving to the penalty issue, the bottom line holdings are:

1.  The negligence penalty in § 6662 applies to conduct including “any failure to make a reasonable attempt to comply with the provisions of this title, and the term “disregard” includes any careless, reckless, or intentional disregard.”  § 6662(c).  The regulations flesh this out by providing a “reasonable-basis” defense if the taxpayer’s return reporting position was “reasonably based on one or more of the authorities set forth in § 1.6662-4(d)(3)(iii) (taking into account the relevance and persuasiveness of the authorities, and subsequent developments).” 26 C.F.R. §§ 1.6662-3(b)(1), (3).  The issue was whether, in order to invoke the defense, the taxpayer must have actually based the return reporting position on authorities recognized by the regulation or whether, in the absence of such actual reliance, the taxpayer can ex post facto assert that the authorities render the position reasonable.  The majority held that actual reliance was required.  The majority based its holding on a de novo interpretation of the regulation text, which it found unambiguous on the issue, without any deference to the IRS’s interpretation of the regulation.

2.  The Court held that § 6751(b)’s written supervisor approval requirement did not apply because the Government asserted the penalty as a setoff in a refund suit in which no assessment was made (perhaps because beyond the statute of limitations).

JAT Comments:

1.  Professor Leslie Book has an excellent discussion of the case:  Leslie Book, In Wells Fargo 8th Circuit Holds Reasonable Basis Defense to Negligence Penalty Requires Taxpayers Prove Actual Reliance on Authorities (Procedurally Taxing Blog 4/27/20), here.

2.  For those who like dancing on the head of pins, one might focus on the difference in deference aspect of the interpretive strategies by the majority and the dissenting judge.  The majority held that the regulation was not ambiguous as to whether actual reliance on the authorities was required, so that the majority made the de novo interpretation of the reliance requirement.  The dissent apparently thought the regulation was ambiguous and, since the IRS was interpreting the regulation to require actual reliance, performed an Auer analysis (a la Kisor) to (i) determine that Auer deference did not apply and (ii) the best interpretation of the ambiguous regulation was that actual reliance was not required.

3.  I have to wonder why, for such a blatantly sham transaction, the Government did not assert the civil fraud penalty as an offset.

4.   Of course, often bullshit tax shelter promoters will provide or arrange for an opinion that will, so the taxpayers are promoted or otherwise belief, will also shelter them from penalties if the underlying bullshit tax shelter fails.  Those opinions are often, let's say, result oriented and lacking in intellectual and research rigor.  Nevertheless taxpayers anticipate that they may be able to rely on the opinions to avoid penalties.  To do that, of course, they have to produce the opinions and subject them to the scrutiny of the IRS and the courts (and to the public if they litigate the issue).  For  bullshit tax shelters, those opinions are also bullshit.  And might well only succeed in avoiding the criminal penalty, but will not withstand analysis for the civil penalties.  Hence, although Wells Fargo certainly had at least one law or accounting firm opinion, it did not rely on the supposed authorities cited.

A Not So Bullshit Tax Shelter -- Maybe; Its All in the Eye of the Beholder (10/18/13)

Today's blog addresses yesterday's decision from a very good judge, George A. O'Toole, Jr. of USDC MA (Wikipedia here).  The decision is Santander Holdings USA, Inc. v. United States, 2013 U.S. Dist. LEXIS 149441 (D MA 2013), here.  The tax shelter was the STARS shelter -- for "Structured Trust Advantaged Repackaged Securities".  (Where do they get these names from?).  The Judge holds, in effect, that the shelter was not so bullshit and not bullshit at all.  For holdings in the prior cases that the shelter was quite bullshit, see here.

The Santander arrangement was complex, a common feature of bullshit tax shelters designed to deflect attention and/or comprehension.  Judge O'Toole says:

Up close, however, the transaction was surpassingly complex and unintuitive; the sort of thing that would have emerged if Rube Goldberg had been a tax accountant. The government might be forgiven for suspecting that the designers of anything this complex must be up to no good, but that understandable instinctive reaction is not a substitute for careful analysis, and on careful analysis, the government's position does not hold up.

For more discussion of the transaction, I direct readers to the opinion for Judge O'Toole's summary explanation of the transaction (footnotes omitted):

A very brief overview of the transaction is sufficient for present purposes. Sovereign created a trust to which it contributed $6.7 billion of income generating assets. The trustee of the trust was purposely made a U.K. resident, causing the trust's income to be subject to U.K. income taxation at a rate of 22 percent. The trust income was also subject to U.S. income taxation and was attributed to Sovereign, but  with a credit available for the amount paid in U.K. income taxes under section 901 of the Internal Revenue Code ("the Code"). 26 U.S.C. § 901. Sovereign paid U.K. taxes and then claimed credits for the amounts paid in calculating its U.S. income tax liability for the tax years in question. 

The transaction included a number of contrived structures and steps that, each viewed in isolation, would make little or no sense. For example, Barclays had an ownership interest in the trust and as a result received monthly distributions from the trust, which, under the terms of the transaction, it was required immediately to re-contribute to the trust. Standing in isolation, this circular movement of distributions would make no sense. In the context of the entire transaction, however, it was crucial to Barclays' obtaining favorable tax treatment under U.K. law, which gave it the ability to lower its effective lending rate to a U.S. bank. The result of the STARS transaction for Barclays was a net tax gain, which it was able to use to reduce other U.K. tax liabilities that it owed. 

The loan aspect of the transaction was also highly structured in an idiosyncratic way, although it was consistently treated by Sovereign for accounting and regulatory purposes as a secured loan, acceptably to regulating agencies, including the Securities and Exchange Commission and the Office of Thrift Supervision. One feature of the loan arrangements was what was denominated the "bx payment," or the "Barclays payment." It was calculated as approximately one-half of the amount Sovereign paid in taxes to the U.K. on the income earned by the trust. While in the intricacies of the transaction it was actually a monthly credit to Sovereign figured into its interest costs, the government refers to it as an affirmative payment in support of its "effective rebate" argument, and Sovereign accepts that characterization for purposes of this motion.