The Court of Federal Claims ruled Sept. 20 that a structured trust advantaged repackaged securities (STARS) transaction engaged in by BB&T Corporation lacked economic substance, making it the latest such court to strike down the foreign tax credit generator transaction.
The STARS transactions were structured in the early 2000s, when Barclays UK entered into the various transactions with six separate banks in a highly structured plan that resulted in the generation of U.S. foreign tax credits, certain UK tax credits and below-market-rate loans from Barclays to the participating bank.
In each case, the steps and structuring were substantially similar. In Bank of New York Mellon Corporation v. Commissioner, 140 T.C. 2 (2013), the taxpayer lost on economic substance grounds. In the BB&T case, Salem Financial, Inc. v. United States, No. 1:10-cv-00192 (Fed. Cl. 2013), the Court of Federal Claims ruled against the taxpayer on economic substance grounds, and, relying on Coltec Industries, Inc. v. United States, 454 F.3d 1340 (Fed. Cir. 2006), the court disaggregated the steps in the transaction to examine whether each step had both objective economic substance (i.e., a profit-making potential), as well as subjective economic substance (i.e., a nontax business purpose).
The court held that one step, the creation of a UK trust that was the lynchpin to generating the foreign tax credits, should be disregarded as a sham transaction that had no profit-making potential or good business purpose on its own. Likewise, when disaggregated, the loan was held to lack economic substance.
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