SPECIAL REPORT: STARS Economic Substance Cases Could Split Circuits

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Four banks (or their holding companies or successors)—Wells Fargo, Bank of New York Mellon, Sovereign Bancorp and BB&T—are challenging the Internal Revenue Service's disallowance of foreign tax credits and interest expense deductions generated from participation in structured trust advantaged repackaged securities (STARS) transactions for lack of economic substance.
The banks and the IRS disagree over characterizations of the transactions, including whether the low-interest loans the U.S. banks received from Barclays Bank provided an objective economic benefit to the banks and whether foreign taxes paid by the banks constitute business expenses ineligible for a foreign tax credit.