Mr. Cope monitors the development of U.S. tax law daily through postings on government websites, daily tax publications, monthly tax journals, tax newsletters, tax conferences and meetings of professionals organizations in New York and Washington. Each month he publishes the Tax Insights Blog, which describes and analyzes significant U.S. tax developments (e.g., judicial decisions, regulations, proposed tax legislation) having cross-border tax consequences. The blog's content should be of interest to U.S. businesses with foreign operations and businesses headquarted outside the United States with U.S. investments or U.S. operations.
Visitors to this website may subscribe to the blog via the RSS link below.
Federal Circuit Affirms That STARS Trust Lacks Economic Substance
On May 14, 2015, the U.S. Court of Appeals for the Federal Circuit issued its opinion in Salem Financial, Inc. v. United States. The Court of Appeals affirmed the decision of the Court of Federal Claims that the STARS trust lacked economic substance and so denied the taxpayer foreign tax credits flowing through the trust, but reversed the lower court in finding that the taxpayer was entitled to a deduction for interest accrued on a related loan. The Court of Appeals also affirmed the decision of the lower court that the taxpayer was liable for interest and penalties. The case is of interest because it illustrates the expanding (and uncertain) scope of the economic substance doctrine and the enhanced role of the courts in making U.S. federal income tax law.
IRS Offers More Guidance on Economic Substance Doctrine
On October 10, 2014, the IRS issued Notice 2014-58 providing additional guidance concerning the economic substance doctrine and related penalties. The guidance defines “transaction” for purposes of applying the economic substance doctrine and “similar rule of law” for purposes of the accuracy-related penalty of section 6662(b)(6). The Notice states that is an “amplification” of an earlier notice, Notice 2010-62, and is retroactive to March 31, 2010.
U.S. Senate’s Hearing Illuminates Taxation of “Basket Options”
The U.S. Senate’s Permanent Subcommittee on Investigations of the Committee on Homeland Security and Governmental Affairs (the “Subcommittee”) issued a report on July 22, 2104 entitled Abuse of Structured Financial Products: Misusing Basket Options to Avoid Taxes and Leverage Limits (the “Report”). The Report is the result of an extensive inquiry by the Subcommittee’s members and staff, including a public hearing held on July 22, into transactions in the form of options contracts entered into by Deutsche Bank AG (“Deutsche Bank”) and Barclays Public Limited Company (“Barclays”) with certain hedge funds. Although such transactions are no longer offered by these banks, the amount of tax at issue appears to be significant (although many of the tax years may be closed). The Report is another illustration of the strategy of the Subcommittee to publicize significant tax-aggressive transactions in an effort to discourage other large taxpayers from taking aggressive tax positions in the future.
Court of Federal Claims Follows Tax Court and Rejects the STARS Transaction
On September 20, 2013, the U.S. Court of Federal Claims issued an opinion in favor of the government in the case of Salem Financial, Inc. v. United States
.The case involved a cross-border tax-advantaged financing transaction, known as STARS, which was co-marketed to Salem Financial by Barclays Bank PLC and the U.S. accounting firm KPMG LLP. In Bank of New York Mellon Corporation v. Commissioner of Internal Revenue
the Tax Court considered the STARS transaction and denied the taxpayer the purported tax benefit (foreign tax credits) on grounds that the transaction, while compliant with the statute, failed to satisfy the economic substance doctrine. The case is of interest because it illustrates the expanding scope of the economic substance doctrine and the enhanced role of the courts in making U.S. federal income tax law.
Bank of New York Mellon Loses in Tax Court
On February 11, 2013, the U.S. Tax Court issued a decision in favor of the government in a case involving a tax-advantaged financing transaction entered into between Barclays Bank, PLC (“Barclays”) and the Bank of New York in 2001. The case is significant because it further elucidates how the Tax Court will apply the evolving economic substance doctrine in order to disallow tax benefits to participants in a transaction that otherwise follows the letter of the statutory law. The case also illustrates the increasing influence of the courts in U.S. tax matters, particularly those transactions that are complex or involve areas of the tax law that are less well developed.