According to Law360 the First Circuit Court of Appeals overturned an earlier $234 million
victory for Santander Holdings USA Inc. after ruling on December 16,
2016 that an internal securities transaction the bank had engaged in
lacked economic substance and does not qualify for foreign tax credits.
On November 16, 2015 we posted Judge
Rules Thant IRS Owes $234M To Sovereign Bancorp where
we discussed that a Massachusetts federal judge ruled that Sovereign
Bancorp can recover some $234 million that it paid in taxes, interest and
penalties to the federal government over an international securities
transaction, finding the deal had a business purpose outside its tax benefits.
Granting a motion for summary judgment by Sovereign, now Santander Holdings USA Inc. and denying a cross motion for partial summary judgment by the federal government, U.S. District Judge George A. O’Toole Jr. decided that the so called structured trust advantaged repackaged securities, or STARS, transaction had economic substance.
Now a three-judge panel unanimously held that the structured trust
advantaged repackaged securities, or STARS, transactions set up by Sovereign
Bancorp Inc., Santander’s predecessor, had only tax avoidance features with no
bona fide business purpose or real economic risks.
“The STARS Trust transaction itself does not have a reasonable prospect of
creating a profit without considering the foreign tax credits, and, as a
result, it is not a transaction for which Congress intended to give the benefit
of the foreign tax credit,” Circuit Judge Sandra Lynch wrote on behalf of the
panel, saying that the lower court had erred in concluding otherwise.
The transaction involves a process in which Sovereign created a trust in
2003 into which it ultimately contributed about $6.7 billion of its U.S.
located income producing assets. The trustee was a U.K. citizen subject to
British taxes, and while the trust was also subject to U.S. federal income tax,
it could claim a tax credit for taxes paid to the U.K. government.
Sovereign then partnered with Barclays Bank, which acquired a $1.15 billion
interest in the trust, but sold it right back to Sovereign for the same amount.
Sovereign treated the $1.15 billion contribution from Barclays as a loan, and
the trust entered into a series of transactions that generated a U.K. tax
benefit for Barclays.
The transactions involved the trust distributing funds to a blocked Barclays
account that Barclays could not access but which allowed it to formally hold
the funds in its name and be subjected to U.K. taxes. The blocked account then
immediately returned the funds to the trust, resulting in Barclays being
entitled to a tax credit and allowed to deduct its re-contributions to the
trust as a tax loss.
The panel agreed with the U.S. government that Sovereign’s U.K. tax was
artificially generated through a series of circular cash flows through the
trust and that Sovereign subjected its property and income to U.K. taxation
“only because it anticipated it could avoid U.S. taxes through the resulting
U.S. tax credit.”
The case is Santander Holdings USA v. United States, case number 16-1282,
in the U.S. Court of Appeals for the First Circuit.
Granting a motion for summary judgment by Sovereign, now Santander Holdings USA Inc. and denying a cross motion for partial summary judgment by the federal government, U.S. District Judge George A. O’Toole Jr. decided that the so called structured trust advantaged repackaged securities, or STARS, transaction had economic substance.
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