Bank of New York Mellon Corporation, as Successor in Interest to The Bank of New York Company, Inc. v. Commissioner
140 T.C. 15
Tax Ct.2013Background
- Petitioner Mellon Bank, along with its affiliates, engaged in a STARS transaction with Barclays in 2001 to obtain purportedly below-market financing and foreign tax credits.
- STARS moved income-producing assets to a U.K.-taxed trust with a U.K. trustee; Mellon claimed foreign tax credits, deductions, and foreign-source income on 2001–2002 returns.
- Respondent determined deficiencies and disallowed the FTCs, deductions, and foreign-source treatment due to lack of economic substance.
- The structure involved a multi-STEP arrangement including DelCo, InvestCo, a trust, a U.K. trustee, forward sale and zero-coupon swap mechanics, and stripping transactions to accelerate U.K. taxes.
- BNY argued STARS had a legitimate business purpose and economic substance; the court analyzed both objective and subjective prongs of the economic-substance doctrine.
- Ultimately the court held that the STARS transaction lacked economic substance (integrated or bifurcated) and Congress did not intend foreign tax credits for such transactions.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| whether Mellon is entitled to foreign tax credits | Mellon contends STARS had economic substance and foreign credits were proper. | Respondent argues STARS lacked economic substance, so credits are disallowed. | No; STARS lacked economic substance, so FTCs are disallowed. |
| whether Mellon may deduct STARS-related expenses | Expenses tied to STARS were legitimate deductions if STARS were valid. | Because STARS lacks substance, related expenses are not deductible. | No; deductions rejected for lack of economic substance. |
| whether STARS income is U.S. source or foreign source | Resourcing provision may treat income as foreign source. | Treat STARS income as U.S. source since the structure is disregarded for U.S. tax purposes. | U.S. source income; foreign-source treatment rejected. |
Key Cases Cited
- Frank Lyon Co. v. United States, 435 U.S. 561 (U.S. 1978) (economic substance and business purpose principles in tax law)
- Knetsch v. United States, 364 U.S. 361 (U.S. 1960) (economic substance doctrine foundational text)
- Gilman v. Commissioner, 933 F.2d 143 (2d Cir. 1991) (flexible economic-substance analysis distinguishing objective/subjective prongs)
- ACM P’ship v. Commissioner, 157 F.3d 231 (3d Cir. 1998) (economic-substance factors and lack of business purpose analysis)
- Winn-Dixie Stores, Inc. v. Commissioner, 113 T.C. 254 (Tax Court 1999) (circular cashflows indicate lack of economic substance)