BNY Mellon loses U.S. tax case, to take $850 million profit hit

Mon Feb 11, 2013 10:02pm EST
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By Tim McLaughlin

BOSTON (Reuters) - BNY Mellon Corp (BK.N: Quote) said on Monday it will take an $850 million charge against first-quarter profit after losing a high-stakes tax case to the U.S. Internal Revenue Service, a move that will also erode some of its capital.

The BNY Mellon case was the first to go to trial since the IRS accused several U.S. banks of generating artificial foreign tax credits through loans with London-based Barclays Plc (BARC.L: Quote).

The IRS challenged a $900 million tax benefit claimed by BNY Mellon that stemmed from a $1.5 billion loan from Barclays. The funding was so cheap that at one point Barclays actually paid BNY Mellon to take Barclays' money, according to court papers.

The bank sued the IRS to keep the benefit, but the tax court ruled that the transactions lacked "economic substance," meaning they were done solely for tax purposes.

Tax Court Judge Diane Kroupa wrote in a 55-page decision that 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."

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," the bank said in a statement.

BNY Mellon and the other banks involved used foreign tax credits in the Barclays transactions. These are given to U.S. companies to prevent them from being double-taxed by two countries for the same income.   Continued...

A BNY Mellon sign is seen on their headquarters in New York's financial district, January 19, 2011. REUTERS/Brendan McDermid