Tax Shelter STARS dims in Claims Court. The high-priced marketed tax shelter craze that started in the late 1990s by the big national accounting firms and some law firms has produced terrible results in litigation. The latest failure is the KPMG/Sidley Austin tax shleter “STARS,” which was shot down in the Court of Federal Claims last week.
The shelter was designed to generate foreign tax credits against BB&T Corporation’s U.S. taxes. While the shelter was put together by some of the biggest names in the tax profession, the judge was unimpressed:
Applying these principles here, the STARS transaction must be seen for what it really is. By creating a trust arrangement with nothing but circular cash flows, and momentarily placing funds in the hands of a U.K. trustee before it is returned, Barclays and BB&T artificially caused a U.K. tax on U.S.-sourced revenue. There was no substantive economic activity occurring in the U.K. to warrant a U.K. tax. Yet, by subjecting the Trust funds to a U.K. tax, Barclays and BB&T were able to share the benefits of foreign tax credits, which resulted in a 51 percent rebate of a Bx payment to BB&T. The surprisingly low interest rate to BB&T on the $1.5 billion Loan, 300 basis points below LIBOR, was made possible solely because of the fruits of the Trust arrangement. In reality, the U.S. Treasury is funding the monetary benefits realized by BB&T, Barclays, and the U.K. Treasury. No aspect of the STARS transaction has any economic reality.
When taxpayers got involved in tax shelters set up by big-name firms, they often did so believing that reliance on well-known national firms will protect them from penalties. Not here:
KPMG’s overarching advice was that BB&T should engage in an economically meaningless transaction to achieve foreign tax credits for taxes BB&T had not in substance paid. Thus, because KPMG’s advice was based on unreasonable and unsupported assumptions, the Court finds KPMG’s advice unreasonable.
Based on KPMG’s recommendation, BB&T also selected the law firm of Sidley Austin, and in particular, Raymond J. Ruble, to provide tax advice and a formal opinion on STARS… Because Sidley Austin’s tax opinion was premised on the unreasonable and unsupported assumption that technical compliance with U.S. tax law would allow the IRS to give its imprimatur to an economically meaningless transaction, the Court finds Sidley Austin’s advice unreasonable.
So the judge undid $660 million in claimed tax savings and added $112 million in penalties to the bill.
The Moral? Some of the brightest minds in the tax business thought they had finally found the Tax Fairy, the magical sprite that can make your taxes go away with fancy tax footwork. They sold their discovery to folks just as eager to believe in the Tax Fairy as they were. But there is no Tax Fairy.
Related: Jack Townsend, Yet Another B***t Tax Shelter Goes Down; BB&T’s Streak on B***t Tax Shelters Continues
Iowa: an alcohol-dependent nicotine fiend with a gambling problem. From the Sioux City Journal:
In fiscal 2012, Iowa reaped $710.6 million from so-called “sin taxes.” Although that was 4.8 percent of the state’s total revenues of $14.65 billion, it was far less than the $3.7 billion in individual income taxes and $2.1 billion in sales taxes Iowans paid in fiscal 2011.
Still, it greatly exceeds the net take of Iowa’s complex, high rate and futile corporation income tax, which netted $430.4 million of the state’s $7.42 billion in tax revenues in fiscal 2012.
William Perez, Using Tax Refunds to Pay Estimated Taxes. Applying overpayments to the next year’s estimated taxes is a very useful part of any tax planner’s toolkit.
Phil Hodgen, Rental Income and Branch Profits Tax. “
Branch profits tax is computed on the corporation’s taxable income. The branch profits tax does not care about your net operating loss.
This means that you can have years where the corporation pays no income tax (because it has a net operating loss from the prior year that eliminates the taxable profit generated in the current year). But the corporation will pay the branch profits tax.
If you deal with offshore corporations with U.S. activity, you should read this.
TaxProf, WSJ: Offshore Accounts: No Place to Hide?. I think offshore bank secrecy is pretty much done for.
Peter Reilly: TIGTA Finally Stumbles On The Real IRS Scandal Peter seems to think cronies with undue influence on letter rulings is worth than partisans using the power of the IRS to suppress uncongenial political organizations.
Oh Goody. Payroll Taxes May Have to Go Up (Andrew Lundeen, Tax Policy Blog).
Elaine Maag, Senator Lee’s New Reform Plan Focuses on Young Children (TaxVox)
Great moments in energy independence. Biofuels scam ‘the largest tax fraud scheme in Indiana history’ (Biofuels International)
That would do that. Fraud verdict tarnishes Idaho businesswoman’s bio (SFGate.com)
News from the profession: Five Unwritten Rules for Making Partner in a Big 4 Firm (Going Concern). Spoiler: landing great big audit clients helps a lot.
Aw, shucks. Tax Analysts commenter David Brunori says nice things about me today in State Tax Notes ($link):
Many practitioners are gun-shy when it comes to voicing their opinions on tax policy. They have clients, after all, who might disagree with them. Joe Kristan of Roth CPA, a leading tax and accounting firm in Iowa, is an exception. Kristan, writing for the firm’s blog, routinely speaks truth to power. We here at Tax Analysts appreciate that.
That’s the nicest way anybody has ever said that I don’t know when to shut up.
Mr. Brunori then discusses my observations of Iowa economic policy director Debi Durham and State Senator Joe Bolkcom:
Durham talks about the tax-incentive imperative, which only the gods of crony capitalism would recognize. But then one would expect a government official who spends her time doling out government welfare to corporations to defend the idea of doling out welfare to corporations. Citing the state’s blue ribbon commission, Kristan pointed out that there is little evidence that tax incentives work.
Kristan has criticized State Sen. Joe Bolkcom (D) for arguing for targeted tax incentives. Targeted incentives violate every notion of sound tax policy and, as Kristan wisely points out, assume the state can wisely allocate investment capital. We need more people who understand how everything works to weigh in on tax policy.
I would be surprised if you could fill a coffee table at the Capitol cafeteria with legislators who could explain the opportunity costs of targeted tax credits.
Tags: iowa tax policy, tax shelters, economic development, corporate welfare, TaxProf, Kay Bell, Russ Fox, David Brunori, Janet Novack, William Perez, TaxGrrrl, opportunity costs, Phil Hodgen, Jack Townsend, Peter Reilly, tax fairy, Andrew Lundeen