143 F. Supp. 3d 827
D. Minnesota2015Background
- In 2001 Barclays marketed "STARS," a cross-border scheme in which U.S. banks (including Wells Fargo) placed U.S. income-producing assets into a U.K. trust so the assets would be taxed in the U.K.; the banks then claimed U.S. foreign-tax credits while Barclays received the U.K. tax benefits and paid the banks a monthly "Bx" payment.
- Wells Fargo contributed roughly $6.688 billion of assets to the trust; Barclays contributed about $1.25 billion (treated as a five‑year loan repayable at fixed price). Most trust income was allocated to Barclays, which reinvested through a blocked account and obtained U.K. tax advantages; Barclays paid Wells Fargo the Bx payment (47.5% of Barclays’ U.K. tax credit).
- The IRS disallowed the claimed foreign-tax credits, treating STARS as a sham lacking economic substance; related appellate decisions reached conflicting conclusions about aspects of STARS (notably the nature of the Bx payment).
- Wells Fargo sued for a refund (~$177 million) and moved for partial summary judgment on multiple issues; the court reviewed objections to the special master and resolved several discrete legal questions, reserving others for trial.
- The court granted Wells Fargo’s motion that 26 U.S.C. § 269 does not apply but denied summary judgment on whether the STARS trust/loan had economic substance, whether the Bx payment is pretax income, reasonable-basis for negligence penalty, and business-purpose issues; Daubert challenges to government experts were denied without prejudice.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Characterization of Bx payment (tax benefit vs. pretax income) | Bx is private-party compensation for services — pretax income not a tax benefit | Bx is effectively a sharing/monetization of Barclays’ U.K. tax benefits and thus a tax effect, not pretax revenue | Denied summary judgment; issue for jury (court inclined toward gov’t/Second Circuit view that Bx is tax benefit) |
| Economic substance / expectation of pretax profit (loan component) | The $1.25B loan produced a reasonable expectation of pretax profit; loan had independent substance and should impart substance to whole deal | Loan may be a sham camouflage; loan’s economics must be evaluated in transaction context | Loan viewed as having independent economic substance if analyzed in isolation, but court refused to deem the entire STARS transaction substantive as a matter of law; jury to decide integration and overall substance |
| Applicability of 26 U.S.C. § 269 | § 269 should not apply because the contested foreign-tax credits would have been available to Wells Fargo even without the Carnation/Rigil acquisitions | § 269 applies because the acquisitions were part of the larger tax‑avoidance scheme that produced the credits | Granted Wells Fargo partial summary judgment: § 269 does not apply because the disputed credits did not "stem from" nor were dependent on the § 269 acquisitions |
| Reasonable-basis for negligence penalty (26 U.S.C. § 6662) | Wells Fargo had reasonable basis (statutory/regulatory compliance; precedent like IES; later conflicting authority and district rulings) | Position lacked reasonable basis given sham-transaction risk and lack of controlling authority supporting Wells Fargo | Denied summary judgment for Wells Fargo; court reserved determination for trial (not ruling either way) |
Key Cases Cited
- Bank of N.Y. Mellon Corp. v. Comm’r, 801 F.3d 104 (2d Cir. 2015) (held STARS trust a sham and treated the Bx payment as a sharing/monetization of tax benefits)
- Salem Fin., Inc. v. United States, 786 F.3d 932 (Fed. Cir. 2015) (held STARS trust a sham but characterized Bx payments as consideration/pretax income and treated loan as having independent substance)
- IES Indus., Inc. v. United States, 253 F.3d 350 (8th Cir. 2001) (third‑party payment of taxpayer’s tax obligation can constitute income to taxpayer)
- WFC Holdings Corp. v. United States, 728 F.3d 736 (8th Cir. 2013) (describes Rice’s Toyota two‑part sham test: objective economic‑substance and subjective business purpose)
- Coltec Indus., Inc. v. United States, 454 F.3d 1340 (Fed. Cir. 2006) (taxpayer bears burden to prove economic substance)
- IES Indus., Inc. v. United States (IES II), 349 F.3d 574 (8th Cir. 2003) (discussion of when related steps may be analyzed together for economic‑substance purposes)