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IRS Victory in Tax Shelter Case May Cost BNY Mellon $800 Million
Author: Scarinci Hollenbeck, LLC
Date: February 27, 2013
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The Internal Revenue Service won a major victory in a high-profile tax shelter case that may carry costly implications for multinational corporations.
A federal U.S. Tax Court handed down a ruling that bars Bank of New York Mellon from claiming millions of dollars in foreign tax credits arranged by Barclays. The case involves complex tax shelters, known as Structured Trust Advantaged Repackaged Securities, which essentially generate artificial tax credits for companies. The IRS has argued against six banks that have participated in this practice, namely because the complexity of these arrangements can leave a great deal of room for potential tax law violations.
The tax court agreed with the IRS and noted that the transaction was the result of “pre-arranged steps designed as a subterfuge for generating, monetizing and transferring the value of foreign tax credits among the STARS participants,” according to the Financial Times.
“The Stars transaction was a complicated scheme centered around arbitraging domestic and foreign tax law inconsistencies,” the court added.
BNY Mellon said it plans to appeal the ruling, but will accept after-tax charges amounting to roughly $850 million as a result of the court decision.
“We will appeal the court’s decision,” a spokesman said, according to the Washington Post. “We continue to believe the tax treatment of the transaction was consistent with statutory and judicial authority existing at the time.”
The court ruling may carry long-term tax implications for other banks that have drawn the ire of the IRS for this practice. The U.S. banks in question that entered into Stars transactions with Barclays participated in these deals between 1999 and 2006. As the IRS seeks to close the $385 billion tax gap, the deals of the other banks the IRS is examining amounts to roughly $2 billion.
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