WASHINGTON Feb 11 A U.S. court on Monday
rejected Bank of New York Mellon Corp's bid to keep $900
million in tax benefits, a decision that could undercut profit
at the world's largest custody bank in 2013.
BNY Mellon previously had warned that it may have to book a
reserve of more than $800 million if it received an adverse
ruling in the high-stakes tax case. Litigation-related reserves
typically hit a company's bottom line. BNY's case was the first
to go to trial since the IRS accused several U.S. banks of
generating artificial foreign tax credits.
BNY Mellon claimed a benefit that stemmed from a $1.5
billion loan from Barclays Plc, funding so cheap, in
fact, that at one point Barclays actually paid BNY Mellon to
take Barclays' money, according to court papers.
The Internal Revenue Service , however, denied Bank of New
York's use of foreign tax credits, expense deductions and trust
income to lower its tax bill. The company filed a lawsuit
against the agency.
But the U.S. Tax Court agreed with the IRS, ruling that the
transactions lacked "economic substance," meaning they were done
solely for tax purposes.
"U.S. tax laws and treaties do not recognize sham
transactions or transactions that have no economic substance as
valid for tax purposes," the court said in its opinion.
BNY Mellon said it would appeal the decision. "We continue
to believe the tax treatment of the transaction was consistent
with statutory and judicial authority existing at the time," BNY
Mellon said in a statement.
The banks in question used foreign tax credits, which are
given to U.S. companies to prevent them from being double-taxed
by two countries for the same income. The banks call it a legal
funding strategy; the government calls them sham tax shelters.
The transaction "was an elaborate series of pre-arranged
steps designed as a subterfuge for generating, monetizing and
transferring the value of foreign tax credits," wrote Tax Court
Judge Diane Kroupa in a 55-page decision.