by Brian Mahany
Earlier this week the United States Tax Court ruled in favor of the IRS in a widely watched corporate tax shelter case. The test case, involving Bank of New York Mellon, could cost the bank $800 million. Although BONY has promised to appeal, the loss may create a waive of accounting malpractice claims against some of the Big 4 accounting firms who recommended the shelter.
The shelter at issue is called STARS, short for Structured Trust Advantaged Repackaged Securities. Although not widely used today, back in the late 1990’s it was widely touted by some of the larger accounting firms as a method to generate artificial tax credits. BONY and their advisers argued that the program although complex, was legal. The IRS and ultimately the Tax Court disagreed, however.
BONY was not alone in the program. Wells Fargo, Wachovia, BB&T, WaMu and Sovereign also participated. The IRS says the STARS shelter created $3.4 billion in foreign tax credits. Only WaMu has settled. The other banks have been waiting for a decision in the BONY case.
The STARS program is reportedly the creation of U.K. bank Barclays. Although the IRS has not accused Barclays of any wrongdoing, they say that STARS is illegal for U.S. banks and is nothing more than a complex series of paper transactions designed to help big U.S. banks skirt the tax code. Quoting the judge, “the STARS transaction in essence…was an elaborate series of pre-arranged steps designed as a subterfuge for generating, monetizing and transferring the value of foreign tax credits among the STARS participants.”
KPMG is reportedly the accounting firm that assisted BONY with their program.
STARS isn’t the only elaborate tax shelter being scrutinized by the IRS. Both the agency and many politicians are cracking down on what they believe are abusive tax shelters. Many Democrats want to eliminate questionable shelters in order to collect more tax without raising rates. Some Republicans want to do the same but use the new found revenues to simplify the tax code and lower rates.
Whatever the case, the IRS and Department of Justice have closely scrutinized attempts to use foreign tax credits to lower U.S. taxes owed by businesses. Many of the shelters were designed or recommended by the Big 4 accounting firms. If the IRS continues to win these cases, we expect many businesses will bring malpractice claims against their accountants. KPMG, for instance, has been battered in recent years with a number of claims.
Already, our office has a $40 million claim against a large regional accounting firm for bad tax structuring advice. We think the aggressive advice given a decade ago is beginning to catch up to the businesses that relied on that advice to their detriment.
The fraud lawyers at Mahany & Ertl represent businesses and individuals with claims against accountants and lenders. We are also tax lawyers and can help defend you in Tax Court or if audited by the IRS. Very few firms specialize in tax or fraud. At Mahany & Ertl, that’s all we do.
For more information, contact attorney Brian Mahany at or by telephone at (414) 704-6731 (direct). All inquiries are held in strict confidence.
Mahany & Ertl – America’s Tax and Fraud Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine; Minneapolis, Minnesota and San Francisco, California. Services available in many locations.
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