Tax Law-Second Circuit Accurately Applies the Economic Substance Doctrine to Foreign Tax Credits-Bank of New York Mellon Corp. V. C.I.R., 801 F.3d 104 (2D Cir. 2015)

By Lubrano, Christopher J. | Suffolk Transnational Law Review, Summer 2016 | Go to article overview

Tax Law-Second Circuit Accurately Applies the Economic Substance Doctrine to Foreign Tax Credits-Bank of New York Mellon Corp. V. C.I.R., 801 F.3d 104 (2D Cir. 2015)


Lubrano, Christopher J., Suffolk Transnational Law Review


Through the colonial period to the founding of the country, taxation has been an essential part of U.S. history; the U.S. Constitution laid out by the founding fathers gave the federal government the right to tax the citizens of the nation. (1) Taxation has changed substantially throughout U.S. history and has become more complex over the years. (2) Now, all fifty states and the federal government impose income taxes on business transactions that occur both in the United States and abroad. (3) In Bank of New York Mellon Corp. v. C.I.R, (4) the United States Court of Appeals for the Second Circuit considered whether the economic substance doctrine could be applied to the foreign tax credits that the Bank of New York Mellon (BNY) and American International Group (AIG) had taken in their separate cross-border transactions. (5) The Second Circuit held that the economic substance doctrine could be applied to foreign tax credits, determining both corporations' transactions to be sham transactions. (6)

From the 1993 to 1997, AIG entered into six foreign transactions using a subsidiary, AIG Financial Products (AIG-Financial), to set up a special purpose vehicle (SPV) to hold and invest funds in a foreign country. (7) Preferred shares of the SPV were sold to a foreign bank and AIG-Financial committed to repurchasing the shares at a specific future date. (8) The SPV paid taxes on its earnings to the appropriate foreign authority, and AIG claimed that it owned all of the shares of the SPV for U.S. tax purposes. (9) AIG claimed foreign tax credits for the entire amount of taxes paid by the SPV, which it used to offset both the foreign taxes paid as well as taxes due on unrelated transactions. (10) Simultaneously, the foreign banks treated the SPV as its corporate subsidiary and treated the SPV's distributions as tax-exempt dividends, which generated very little tax. (11) Through these transactions, AIG was able to convert interest expenses it would have had to pay to foreign banks into foreign tax credits that it used to reduce its total tax bill. (12)

For a period of five years, 2001 through 2006, BNY engaged in transactions known as Structured Trust Advantaged Repackaged Securities (STARS) with Barclays Bank (Barclays). (13) The first step in the STARS transaction required BNY to create a Delaware trust in which it contributed USD7.8 billion in income producing assets in exchange for shares in the trust; BNY appointed a U.K. trustee in order for the trust to be subject to U.K. taxes. (14) Barclays then purchased class C and D shares in the trust, which BNY agreed to pay back at the end of the five-year period. (15) Throughout the duration of the contract, the trust made monthly payments of income by using a circular multistep process. (16) Both BNY and Barclays generated tax benefits from these transactions; BNY generated a total net gain due to the tax spread and claiming a foreign tax credit for the total amount paid in U.K. taxes, despite Barclays reimbursing it for half. (17)

AIG and BNY appealed the decisions of the lower courts. (18) Both AIG and BNY believe themselves to be entitled to foreign tax credits for transactions entered into abroad. (19) AIG appealed the decision from the United States District Court for the Southern District of New York, which held that the economic substance doctrine applied to foreign tax credits involved in their foreign transaction. (20) The United States Tax Court held that the tax spread in BNY's transaction should be included in taxable income because it lacked economic substance. (21) As both of these cases present issues of economic substance, the Second Circuit heard them in tandem. (22)

The Internal Revenue Code allows for individuals and corporations to receive tax credits for taxes paid to foreign countries; these credits have opened the gate for corporations to search for advantageous transactions to receive further benefits. (23) In order to combat corporations engaging in activities for strictly tax benefit purposes, the common law economic substance doctrine was developed. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

Tax Law-Second Circuit Accurately Applies the Economic Substance Doctrine to Foreign Tax Credits-Bank of New York Mellon Corp. V. C.I.R., 801 F.3d 104 (2D Cir. 2015)
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.