More on the Economic Substance Doctrine (ESD) and Relevancy in § 7701(o) (5/5/26)

In Kadau v. Commissioner, T.C. Memo. 2026-37 (5/5/26), referred to as Kadau II, TC Case # 286-21 here at #216; GS here, the Court held that the taxpayer’s microcaptive insurance arrangement failed under the Economic Substance Doctrine (“ESD”) in § 7701(o) and was subject to the 40% penalty in § 6662(b)(6) and (i). Given the facts in Kadau II and its earlier opinion in Kadau v. Commissioner, T.C. Memo. 2025-81 (referred to as Kadau I), at # 198 and GS here, the result is not surprising. The arrangement was smoke and mirrors to appear as a transaction with magic tax benefits.

Kadau II drew my attention because of its discussion of § 7701(o)’s requirement that the common law ESD be “relevant.” § 7701(o)(1) & (o)(5)(C). I have written on this issue before. See Liberty Global's Tax Scam Fails in Tenth Circuit (Federal Tax Procedure Blog 4/30/26), here; The Economic Substance Doctrine ("ESD")--the Common Law and § 7701(o) (Federal Tax Procedure Blog 3/31/26; 4/8/26), here; and Tax Court in Unanimous Reviewed Opinion Interprets and Applies the Accuracy-Related Economic Substance Penalty (Federal Tax Procedure Blog 11/12/25), here. I thought this might be a good point to offer further thoughts on § 7701(o) and the requirement that the common law ESD be “relevant.” (Actually, anticipating a theme below, my thoughts today may be a clarification of my earlier thoughts.)

Section § 7701(o), titled “Clarification,” states the general prongs of the common law ESD requirement—meaningful economic position effect and substantial nontax purpose. § 7701(o)(1). Then, in the balance of § 7701(o), some specific rules for applying the ESD are provided, such as that the nontax profit potential “be substantial in relation to the expected value of the net tax benefits that would be allowed if the transaction were respected.” § 7701(o)(2)(A). Those in the tax world for some time know precisely why that “clarification” was there—to foreclose taxpayer arguments that remote, unlikely profit potentials could still meet that prong of the common law ESD.

Kadau II addresses the term “relevant” in § 7701(o). Kadau II accepted the holding in Patel v. Commissioner, 165 T.C. ___, No. 10 (11/12/25) (reviewed unanimous) that § 7701(o) requires that the common law ESD must be “relevant” before § 7701(o) can apply. The Court in Kadau II did not need to address that predicate requirement because petitioners in briefing said (p. 4, emphasis supplied):

As the Court held in Patel III, a threshold determination must be made as to whether the economic substance doctrine is relevant. Because Petitioners formed a small captive insurance company, Petitioners acknowledge that section 7701(o) is applicable. The dispositive question is whether Petitioners’ transactions satisfy its requirements. Accordingly, we refrain from addressing any threshold determination issues and proceed directly to examination of the transaction by applying the foregoing elements outlined in section 7701(o)(1).

Liberty Global's Tax Scam Fails in Tenth Circuit (4/30/26)

In Liberty Global, Inc. v. United States, 174 F.4th 1208 (10th Cir. 2026), CA10 here, GS here, and CL here, using tax lingo and analysis, rejected Liberty Global’s tax scam. The panel majority correctly holds that Liberty Global’s farcical multiple steps did not pass economic substance doctrine (“ESD”) scrutiny.

The key issue upon which the majority of the panel and the dissenting judge differ is over what role, if any, § 7701(o)’s requirement that whether the ESD is “relevant.” § 7701(o)(1) & (o)(5)(C). So that readers can understand the statute’s textual context, I offer it here (with key word in red):

(o) Clarification of economic substance doctrine
    (1) Application of doctrine. In the case of any transaction to which the economic substance doctrine is relevant, such transaction shall be treated as having economic substance only if—
        (A) the transaction changes in a meaningful way (apart from Federal income tax effects) the taxpayer’s economic position, and
        (B) the taxpayer has a substantial purpose (apart from Federal income tax effects) for entering into such transaction.
* * * *
    (5) Definitions and special rules
    For purposes of this subsection—
    * * * *
        (C) Determination of application of doctrine not affected. The determination of whether the economic substance doctrine is relevant to a transaction shall be made in the same manner as if this subsection had never been enacted.

I have written previously on the issue of the term “relevant” in § 7701(o). The Economic Substance Doctrine ("ESD")--the Common Law and § 7701(o) (Federal Tax Procedure Blog 3/31/26; 4/8/26), here. I believe that ESD as the term is used both in the common law and in § 7701(o) means the same thing, except that § 7701(o) adds some specific rules that apply in applying certain features of the ESD. These specific rules address some taxpayer claims about how those features of the common law ESD work. For example, § 7701(o)(2) & (4) provide rules for applying the ESD requirement that a taxpayer have a non-tax profit potential. Section § 7701(o) rejects certain claims that taxpayers made in prior cases to avoid the ESD. Thus, I think that the threshold inquiry is whether the common law ESD applies (not that it is just relevant, but certainly, if ESD applies, it is relevant for purposes of § 7701(o) because the special rules of § 7701(o) may then apply).

Basically, what I am saying is that the panel majority gets it right and the dissent gets it wrong.

Tax Court in Unanimous Reviewed Opinion Interprets and Applies the Accuracy-Related Economic Substance Penalty (11/12/25)

In Patel v. Commissioner, 165 T.C. ___, No. 10 (11/12/25) (unanimous reviewed opinion), the Tax Court (Judge Jones) applied the interpreted the requirements of the accuracy-related penalty for transactions that lack economic substance, § 6662(b)(6), which applies the economic substance doctrine as codified under I.R.C. § 7701(o). The Opinion (for which there is yet no Tax Court permalink, may be reviewed in the Tax Court docket entries for the lead case, here at # 421, dated 11/12/25, on my Google Drive here, on TN here, and on GS here. The transaction at issue was yet another captive insurance case, but addressed for the first time the economic substance accuracy-related penalty.

The Tax Court earlier had shot down the particular captive insurance on the substantive tax merits in Patel v. Commissioner (Patel I), T.C. Memo. 2020-133, here, and Patel v. Commissioner (Patel II), T.C. Memo. 2024-34, here. The new Patel opinion addresses penalty issues not resolved in the prior opinions.

The new Patel opinion offers a relatively straightforward application of the statutory text to a transaction that, in my opinion from the prior Patel opinions, lacked economic substance and was the type of transaction to which the penalty should apply. Indeed, I think the Court’s application of the principles of statutory interpretation, although I think wooden, are what the current judicial environment requires (including a bow to legislative history “For those who consider legislative history relevant.” (Slip Op. 18-19); as phrased, it is not clear whether Judge Jones for the Court felt legislative history was relevant).

Readers of this blog entry are directed to the opinion for the Court’s reasoning and steps.

JAT Comments/Musings:

I offer just the following comments that caught my specific attention as I wandered through the Opinion (in order as they arise in the opinion and not necessarily in order of importance):

1. A host of amici briefs were filed; they are identified at Slip Op. 2 n. 2. The Opinion identifies the amici briefs in the footnote but otherwise does not refer to them. The footnote does add: 

At respondent’s request, we ordered the parties to file briefs in response to the amicus briefs. At the parties’ request, we held oral argument on the issues raised by the briefs.

I have not seen the amici briefs but, since the Court does not refer otherwise to them, I am not going to speculate what effect amici briefs had to the outcome. I will say that I have known the Patels’ lead counsel for some time, he is a very good tax litigator, and assume that he covered the bases in the briefs on which his name appears.

2. The Opinion says (Slip Op. 3 n. 5): “We understand the interaction of section 6662(a) and (b)(6) to impose a single penalty. Because the Commissioner determined that penalty for multiple years (each of the tax years at issue), we will refer to it in the plural (penalties).” Think about that unexplained comment.

ATL Article on Tax Structuring on Sale of MLB Team (2/8/24)

I picked this up today involving the type of planning that may keep well-paid tax controversy specialists busy in the future. Steven Chung, The Upcoming Baltimore Orioles Sale Is Structured To Avoid Capital Gains Taxes (Above the Law 2/7/24), here. The sale is described:

But it is not a straightforward sale. Rubenstein and his group will initially purchase 40% of the team. The remaining 60% will be sold, reportedly for tax reasons, after 94-year-old Angelos passes away. Angelos purchased the team in 1993 for $173 million. If the sale were to take place now, Angelos would face an estimated $250 million capital gains tax on the approximately $1.5 billion profit. But by waiting until after his passing, the basis step-up rule would increase his cost basis to current market value instead of his original purchase price. If the team is sold immediately thereafter, there will be little to no capital gains tax on the sale.

Rubenstein and his group [the buyers] would also enjoy some tax benefits as the new owners. According to Forbes, if the buyers are able to structure this as an asset sale, they will be able to take advantage of any losses incurred to offset other income. However, investors who do not materially participate in the team management can only use their losses to offset passive income such as real estate rental income.

 What is not clear is who will control the Orioles after Rubenstein’s initial 40% purchase. On one hand, the Angelos family could still control the team through its majority ownership. On the other hand, the Angelos family could allow Rubenstein to control the team after the initial purchase. If this happens, the IRS may try to reclassify the transaction as if 100% of the team was sold while Peter Angelos was still alive and thus trigger the capital gains tax. The IRS could argue that this two-step transaction was purely tax motivated, specifically to avoid the capital gains tax.

 The article goes on to discuss the tax issues familiar to and loved by all tax controversy afficionados-- “substance over form,” “codified economic substance doctrine,” and “step transaction doctrine.”  And the article notes:

Even if the sale avoids capital gains tax, Peter Angelos’s estate will be subject to federal estate taxes which is as high as 40% at the top bracket. Also, Maryland also has its own estate tax.

So, the IRS will certainly share in the success of this venture, with the only issue being how large its overall share will be.

Tax Court Dissects Complex Acquisition Transaction With Senior and Subordinated Debt Characterization in Issue (10/27/21)

In Tribune Media Co. v. Commissioner, T.C. Memo. 2021-122, here, issued yesterday, the Tax Court addressed a complex acquisition of the Chicago Cubs and held (in a 127 page opinion), that

• Certain debt (subordinated debt (called “sub debt”)) was equity rather than debt for tax purposes (slip op. 56-90.)  The result of holding the sub debt to be equity was that, under the partnership disguised sale rules, gain was recognized to the extent of the sub debt.  Specifically, and more precisely, since the parties agreed that the partnership disguised sale rules applied, the Court held that the treatment of the sub debt as equity meant that the exception for debt-financed distributions did not apply to that debt.  (This aspect of the transaction planning had been designed to qualify as debt-financed distributions.)  This holding turned upon the debt-equity distinction familiar to tax practitioners and even students of tax law.  The Court held (Slip op. 90) that “Although the sub debt had the superficial appearance of bona fide debt, it more closely resembles equity.”

• The senior debt in the transaction was bona fide recourse debt that could be allocated to support the debt-financed distribution exception to the disguised sale rules.  (Slip op. 91-119.)  With respect to the senior debt (slip op. pp. 118-119) the Court concluded (Slip op. 118-119, footnote omitted):

The Cubs transaction was a disguised sale in both form and substance. The economic reality of this transaction lies squarely within the intent of the disguised sale statute. The parties to the transaction formed a bona fide partnership that operates the Cubs franchise with assets contributed by Tribune. And the partnership in fact distributed cash to Tribune. This transaction also substantively fits into the debt-financed distribution exception for a disguised sale, receiving the distribution tax free up to the amount of the senior debt guaranteed by Tribune. CBH borrowed the senior debt, and Tribune guaranteed the senior debt. When such a transaction is explicitly provided for by Congress and followed by a taxpayer in both substance and form, we will not recharacterize it.The doctrine of substance over form is applied to prevent taxpayers from mislabeling transactions to achieve a desired tax consequence. Petitioners did not mislabel the transaction here; the economic substance of the Cubs transaction is a disguised sale with a debt-financed distribution, a structure contemplated by both the statute and the regulations.

District Court Holds that Santander's Arguments to Avoid Penalty for Bullshit Tax Shelter (No Substance) Lack Substance (7/24/18)

Here is an entry that I posted a few days ago on my Federal Tax Crimes Blog.  It is equally interesting to Federal Tax Procedure enthusiasts.

In Santander Holdings USA, Inc. v. United States (D. Mass. Dkt. 09-11043-GAO Dkt Entry 344 7/17/18), here, Santander previously lost the merits of its bullshit tax shelter on appeal, with the Court of Appeals holding that the shelter lacked economic substance.  Santander Holdings USA, Inc. v. United States, 844 F.3d 15 (1st Cir. 2016), here, cert. denied sub nom. Santander Holdings USA, Inc., & Subsidiaries v. United States, 137 S. Ct. 2295 (2017).  See my discussion of the Court of Appeals decision, First Circuit, Reversing the District Court, Rejects Santander's Bullshit Tax Shelter (Federal Tax Crimes Blog 12/17/16), here.

Santander argued that, although its tax shelter lacked economic substance -- i.e., was bullshit -- it should be able to avoid the accuracy related penalty.  Well, basically, the district court held that that argument too lacked substance -- was bullshit.  The opinion is short and, I think, predictable, so I forego addressing it further.

However, the district court did include a quote from the Court of Appeals' decision that I had included in my prior write up but was in a larger quote so that I had not focused on it.  The district court did focus on it as follows.  This is the quote (cleaned up):

When a transaction is one designed to produce tax gains not real gains—such as when the challenged transaction has no prospect for pre-tax profit—then it is an act of tax evasion that, even if technically compliant, lies outside of the intent of the Tax Code and so lacks economic substance.

The district corut did not quote the whole paragraph from the Court of Appeals which includes "tax evasion" twice, so I offer the whole paragraph (cleaned up):

The economic substance doctrine is centered on discerning whether the challenged transaction objectively lies outside the plain intent of the relevant statutory regime. A transaction fails the economic substance test if, though it actually occurred and technically complied with the tax code, it was merely a device to avoid tax liability. Courts may disregard the form of transactions that have no business purpose or economic substance beyond tax evasion. In other words, when a transaction is one designed to produce tax gains not real gains -- such as when the challenged transaction has no prospect for pre-tax profit -- then it is an act of tax evasion that, even if technically compliant, lies outside of the intent of the Tax Code and so lacks economic substance.

Readers of this blog will recognize the term "tax evasion."  At least in this blog and in other authorities on criminal tax matters, tax evasion is a term of art.  Narrowly, it means the specific tax evasion crime in § 7201, but is often used to cover the panoply of tax crimes where tax was evaded (e.g., the Sentencing Guidelines require that for a tax loss as the first step in the sentencing calculation).  But, the term usually does connote conduct that is criminal.  See e.g., the Wikipedia entry for Tax Evasion, here.

Tax Procedure Book Errata - Tax Common Law Doctrines and Statutory Interpretation (1/2/17)

Book Outline Section	Nature of Update	Location for current editions
Ch. 2 ¶ 1.B., Statutes and their Meanings	Introduce common law doctrines of statutory interpretation - business purpose, form over substance and economic substance	Student Ed. P. 37 Practitioner Ed. p. 42 (immediately before C. Committees and Committee Reports)

Finally, tax statutory interpretation includes applying the text in the light of certain precepts that inhere in the scheme of taxation that Congress adopted.  Students of tax law will already have heard concepts, often called tax common law doctrines, such as the business purpose doctrine, form over substance, and economic substance, which inform the application of the statute even when the statutory text says nothing about those concepts. n. 33a

n. 33a In Santander Holdings United States v. United States, ___ F.3d ___, 2016 U.S. App. LEXIS 22400 (1st Cir. 2016), the Court said:

               The federal income tax is, and always has been, based on statute. The economic substance doctrine, like other common law tax doctrines, can thus perhaps best be thought of as a tool of statutory interpretation, n8 as then-Judge Breyer characterized it in his opinion for this court in Dewees v. Commissioner, 870 F.2d 21, 35-36 (1st Cir. 1989).

   n8 As one commentator says:

               A related . . . claim is that the legislature assumes that long-standing common law doctrines such as economic substance will be used to interpret the statutes it enacts. Under this claim, the doctrines have been implicitly adopted as part of the statute -- at least where the statute does not indicate otherwise.

               Joseph Bankman, The Economic Substance Doctrine, 74 S. Cal. L. Rev. 5, 11 (2000).

Caveat, the footnote numbers above are based on  the footnote numbers in the current Practitioner Edition.  The footnote numbers will not be the same in the next Edition scheduled for publication in August 2017.

Another Bull Shit Shelter Bites the Dust (12/19/13)

We have yet another of the genre out of the Tenth Circuit, this time proving Michael Graetz's famous observation that an abusive tax shelter is “[a] deal done by very smart people that, absent tax considerations, would be very stupid.”  The new case is Blum v. Commissioner, 737 F.3d 1303 (10th Cir. 2013), here.

Before discussing the case, I offer this description of tax shelters from my Federal Tax Procedure Book (footnotes omitted):

Abusive tax shelters are many and varied.  Some are outright fraudulent, usually wrapped in a shroud of paper work designed to present 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 specifically IRS auditors) 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, still have a favorable cost benefit/ratio only because of the tax benefits to be offered by the audit lottery, (iv) the promoters 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 shift potential penalty risks 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.  More succinctly, Michael Graetz, a Yale Law Professor, has described an abusive tax shelter as “[a] deal done by very smart people that, absent tax considerations, would be very stupid.”  Other thoughtful observers vary the theme, e.g. a tax shelter “is a deal done by very smart people who are pretending to be rather stupid themselves for financial gain.”

Blum fits the pattern.

Mr. Blum was a very successful businessman.  He was apparently very capable in assessing risks and rewards of financial ventures.  Mr. Blum retained KPMG who sold him one of its tax shelter products which it marketed in the 1990s and early 2000s.  This particular product was OPIS, a basis enhancement strategy. The abusive basis enhancement strategies claimed to create large amounts of basis without the taxpayer having to incur a cost for the basis.  The taxpayer would then use the artificial basis to offset otherwise taxable gain, thereby artificially reducing the tax liability.  Mr. Blum got into the deal when he had a large gain that would otherwise be taxed.

When KPMG's representative made the pitch, Mr. Blum "claims he saw an investment opportunity; the Commissioner claims Mr. Blum saw a tax evasion opportunity."  (Emphasis supplied.) Mr. Blum bought the pitch and made a representation to KPMG that he was doing the deal for a legitimate nontax business or investment purpose.  (That representation was essential to KPMG's participation in implementing the transaction.)  Bottom-line, the Tax Court concluded and the Tenth Circuit concluded that the representation was false.

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.

A Self-Proclaimed "Simple Man," "Utterly Uneducated" in Tax and Finance, but Still a Self-Made Multi-Millionaire Loses his Bullshit Tax Shelter Case (4/15/13)

JAT NOTE: This blog is the same as a blog posted earlier on my Federal Tax Crimes Blog.  See A Self-Proclaimed "Simple Man," "Utterly Uneducated" in Tax and Finance, but Still a Self-Made Multi-Millionaire Loses his Bullshit Tax Shelter Case (Federal Tax Crimes Blog 4/13/13), here.

In Kerman v. Commissioner, ___ F.3d ___, 2013 U.S. App. LEXIS 7032 (6th Cir. 2013), here, the Sixth Circuit rejected the Kerman's claim for tax benefits or, at least, relief from penalties from a bullshit tax shelter, this one of the Cards variety that has met with uniform rejection from the courts.  I just gave you the final result.  But the opinion starts this way (usually you can tell the result from the opening):

A tax shelter can be legitimate — if the reported transaction has economic substance. But the shelter Mark Kerman participated in lacked such substance. The transaction had no purpose other than the creation of an income tax benefit. After Kerman claimed the benefit on his tax return, the IRS disallowed the deduction and imposed a valuation misstatement penalty pursuant to 26 U.S.C. § 6662(e), which was increased to 40 percent of the unpaid tax pursuant to § 6662(h). The tax court affirmed the IRS's decision. Kerman appeals, contending that the shelter was legitimate and that, even if it was not, the penalty should not be imposed. Because the transaction lacked economic substance and Kerman lacked reasonable cause or good faith to believe that it did, we AFFIRM.
I
A
Mark Kerman is a college-educated multi-millionaire.

Toward the end of the opinion another key signal dot is connected as follows:

Finally, Kerman argues, the tax court gave him too much credit. He's just a simple man, "utterly uneducated in the complex tax arena — let alone the more byzantine tax-shelter realm." Appellant's Br. 48. Consequently, he was forced to rely on personal advisors. And, he argues, his reliance was reasonable even if his advisors had conflicts of interest.

So, what should I say about the opinion?  Prudence and respect for my readers time counsels that I should not say anything except the bullet points from the case.  So, I won't.

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.