December 21, 2016 Bank Not Entitled to Refund (Santander Holdings USA, Inc., CA-1)
A federal district court committed reversible error when it determined that a bank was entitled to tax benefits generated by a structured trust advantaged repackaged securities (STARS) transaction. The STARS transaction lacked economic substance because it had no objective nontax economic benefit and Congress did not intend that foreign tax credits would be available for this type of generated transaction.
Comment. The district court first held that payments the bank received from its U.K. counterparty were income when calculating the STARS trust transaction’s profit. Next, the district court held that, as a matter of law, the trust and loan transactions had economic substance and, therefore, the bank was entitled to interest-related deductions on expense for the loan transaction and a refund on the disallowed foreign tax credits claimed for the trust transaction and the penalties imposed by the IRS.