By Tim McLaughlin
BOSTON, Feb 11 (Reuters) - BNY Mellon Corp 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.
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.
The $850 million charge is more than BNY Mellon has earned
in any single quarter over the past three years. Net income in
the first quarter of 2012 was $619 million.
The bank had previously disclosed that it might have to book
a reserve of up to $850 million in the event of an unfavorable
ruling in the case.
After taking the charge, the bank said it expects it will
continue to be well capitalized. But its Basel III Tier 1 common
equity ratio will decline by about 55 basis points.
At the end of 2012, the bank's Basel III Tier 1 common
equity ratio was 9.8 percent.
The financing Barclays provided the U.S. banks centered on
so-called STARS transactions - or structured trust advantaged
repackaged securities. The arrangements were so opaque and
complicated that a Harvard-trained federal judge in Minnesota
had to call in an outside expert to help him decipher Wells
Fargo's arrangement with Barclays, court papers show.
Experts for the government pounced on the fact that Barclays
sometimes paid the other banks to take its money.
The banks have argued that the loans from Barclays advanced
their core business, according to court papers. Barclays offered
them the opportunity to earn greater profits by providing an
ultra-cheap source of funding. Any profit would be the
difference between their cost of funding and what they earned on
the money they invested or put out in loans, they said.
(Additional reporting by Kim Dixon and Patrick Temple-West)
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