Tax Court Finds STARS Transaction Lacks Economic Substance

Texas Tax Lawyer, Vol. 40, No. 3, Spring 2013

4 Pages Posted: 17 Mar 2017 Last revised: 14 Aug 2018

See all articles by Robert Probasco

Robert Probasco

Texas A&M University School of Law

Lee Susan Meyercord

Thompson & Knight LLP

Date Written: March 1, 2013

Abstract

In Bank of New York Mellon Corp. v. Commissioner, the Tax Court found that a structured trust advantaged repackaged securities (“STARS”) transaction entered into by BNY Mellon lacked economic substance, and disallowed foreign tax credits of $199 million as well as transactional expenses of $8 million. BNY Mellon is the first test case to emerge from the IRS’s attempts to disallow tax benefits to several financial institutions that participated in the STARS transaction. The STARS transaction is one of a number of different transactions that the IRS refers to as “foreign tax credit generators.” These transactions generally rely on inconsistent treatment of the same transactions under the tax law of different jurisdictions. The inconsistent treatment may relate to the classification of an entity, the distinction between debt and equity, timing of income recognition, or various other aspects. Some foreign tax credit generators result in foreign tax credits being attributed to and used by a U.S. taxpayer who does not bear the economic burden of those taxes. In the STARS transaction, however, the U.S. taxpayer does bear the economic burden of the foreign taxes for which it claims a credit. The U.S. taxpayer also indirectly shares in the benefits the counterparty obtains in the U.K. tax system. The U.S. taxpayer’s tax position properly reflects the economics of the transaction, and the U.K. tax authority agrees with the treatment of the transaction for U.K. tax purposes. Nevertheless, the IRS has challenged these transactions and disallowed the U.S. taxpayer’s claimed foreign tax credits.

Keywords: Tax Court, Internal Revenue Service, IRS, Barclays, BNY Mellon, structured trust advantaged repackaged securities transaction, STARS transaction, foreign tax credit, FTC, economic substance

Suggested Citation

Probasco, Robert and Meyercord, Lee Susan, Tax Court Finds STARS Transaction Lacks Economic Substance (March 1, 2013). Texas Tax Lawyer, Vol. 40, No. 3, Spring 2013, Available at SSRN: https://ssrn.com/abstract=2933922

Robert Probasco (Contact Author)

Texas A&M University School of Law ( email )

1515 Commerce St.
Fort Worth, TX 76102
United States
817-212-4169 (Phone)

Lee Susan Meyercord

Thompson & Knight LLP ( email )

United States

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