WASHINGTON, Oct 18 (Reuters) - Banco Santander won a partial victory in a $234 million tax refund fight with the U.S. Internal Revenue Service over controversial tax shelters known as STARS when a Massachusetts district court ruled in favor of the Spanish bank.
In several cases against banks with hundreds of millions of dollars at stake, the IRS is arguing that STARS lacked “economic substance,” citing a key doctrine used by the agency to combat activities it sees as designed chiefly to dodge taxes.
Three other banks fighting with the government over STARS are Wells Fargo, BNY Mellon and BB&T.
In the Santander case, involving the bank’s U.S. division Sovereign Bancorp, District Court Judge George O‘Toole said on Thursday that the STARS transactions did have “economic substance.”
He wrote in a 13-page decision, “The government’s position does not hold up.”
An appeal by the government was likely to follow, tax attorneys said. The ruling was a partial summary judgment. Some legal matters remain outstanding.
A spokeswoman for Santander and one of its lawyers declined to comment.
A Justice Department spokeswoman did not have an immediate comment on Friday.
In court filings, Justice Department lawyers criticized O‘Toole’s opinion, saying the “decision in Santander is an anomaly.”
STARS is short for “structured trust advantaged repackaged securities.” The IRS has accused several banks of generating artificial foreign tax credits through STARS from roughly 1999 to 2006 with the assistance of UK bank Barclays Plc.
Barclays was not a party in any of the STARS cases.
The Santander ruling dealt a blow to the government’s STARS prosecution against other banks, tax lawyers said.
“It will be a setback for the government,” said Robert Probasco, a partner at Thompson & Knight.
Earlier this year, BNY Mellon and BB&T lost STARS cases costing the banks hundreds of millions of dollars, but BNY Mellon in September won a favorable Tax Court ruling.
The Wells Fargo case has not yet gone to trial.
The case is Santander Holdings USA Inc & Subsidiaries v United States; No 1:09-cv-11043.