Santander Holdings USA, Inc. & Subsidiaries v. United States
977 F. Supp. 2d 46
D. Mass.2013Background
- Sovereign (now Santander Holdings USA) entered a complex STARS transaction with Barclays that placed income-generating assets in a U.K. resident trust, causing U.K. tax to be paid and claimed as a U.S. foreign tax credit for tax years 2003–2005.
- Barclays received trust distributions it immediately re-contributed; the structure produced a U.K. tax benefit for Barclays that allowed it to lend to U.S. banks at lower effective cost.
- As part of the arrangement Barclays made a periodic payment to Sovereign (the “bx” or Barclays payment), approximately one-half of Sovereign’s U.K. tax; parties treat that payment as a payment from Barclays to Sovereign for motion purposes.
- The IRS disallowed Sovereign’s foreign tax credits and assessed taxes, penalties, and interest; Sovereign sued to recover about $234 million, asserting the credits were proper.
- The government contends the Barclays payment was an “effective rebate” (i.e., a constructive payment by the U.K.), meaning Sovereign did not truly bear the U.K. tax burden, so the credits were improper; Sovereign contends the Barclays payment is pre-tax revenue and should be included in profit analysis.
- The court considered whether the Barclays payment must be excluded as a tax effect (rebate) when determining whether the trust had a reasonable prospect of profit (economic substance), and granted Sovereign’s motion for partial summary judgment.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Barclays payment should be treated as pre-tax revenue to Sovereign for assessing reasonable prospect of profit | Barclays payment is income to Sovereign and must be included in pre-tax profit | Payment is an "effective rebate" of U.K. taxes (a tax effect) and should be excluded from pre-tax profit | Court held the Barclays payment is income to Sovereign and must be included as pre-tax revenue |
| Whether a private party payment can be recharacterized as a foreign tax rebate for U.S. tax purposes | Payment is not a rebate; private payments are not taxes and should be treated as income | Payment is in substance a rebate/subsidy tied to foreign tax and therefore not a real tax payment | Court held private payments cannot be treated as U.K. tax rebates in the absence of statutory/regulatory authority; the payment is not a constructive rebate |
| Whether the economic substance doctrine defeats Sovereign’s credit claim when the payment is included | Including Barclays payment yields a reasonable prospect of profit; transaction has economic substance | Even with payment, transaction is a sham designed to manufacture foreign tax credits | Court held including the payment establishes reasonable prospect of profit; transaction not a sham on objectivity grounds here |
| Whether subjective intent inquiry is required to resolve economic substance at summary judgment | Objective analysis suffices; no trial needed on intent | Government urges subjective-motive inquiry to create factual dispute | Court held objective factors resolved the issue; subjective inquiry unnecessary for summary judgment |
Key Cases Cited
- In re CM Holdings, Inc., 301 F.3d 96 (3d Cir. 2002) (describing economic substance inquiry)
- Gregory v. Helvering, 293 U.S. 465 (U.S. 1935) (transaction disregarded when lacking substance)
- Frank Lyon Co. v. United States, 435 U.S. 561 (U.S. 1978) (substance over form principles)
- IES Indus., Inc. v. United States, 253 F.3d 350 (8th Cir. 2001) (taxpayer income where another pays its tax obligation)
- Dewees v. Commissioner, 870 F.2d 21 (1st Cir. 1989) (discussion of objective vs. subjective in sham doctrine)
- Fidelity Int’l Currency Advisor A Fund, LLC v. United States, 661 F.3d 667 (1st Cir. 2011) (economic substance analysis)
- Compaq Computer Corp. v. Commissioner, 277 F.3d 778 (5th Cir. 2001) (applying Old Colony principle to characterize tax payments as income)
- Old Colony Trust Co. v. Commissioner, 279 U.S. 716 (U.S. 1929) (taxes paid on behalf of taxpayer are income)
- Doyon, Ltd. v. United States, 37 Fed. Cl. 10 (Fed. Cl. 1996) (private payments not treated as tax items)
- Salem Fin., Inc. v. United States, 112 Fed. Cl. 543 (Fed. Cl. 2013) (STARS litigation addressing treatment of Barclays payment)
- Bank of N.Y. Mellon Corp. v. Commissioner, 140 T.C. 15 (Tax Ct. 2013) (STARS litigation treating Barclays payment as effective tax rebate)