The Bank of New York Mellon Corporation
) recently found itself in a tight spot with a tax court judge
ruling against the bank in a high profile case. The case, filed
by U.S. Internal Revenue Service (IRS), will cost BNY Mellon a
loss of $850 million.
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IRS had filed the lawsuit against several banks including
Wells Fargo & Company
), accusing these of creating bogus foreign tax credits through
loans from London-based
). The case against BNY Mellon was the first one to go for the
IRS had accused BNY Mellon of fraudulently generating a tax
credit of $900 million by obtaining a $1.5 billion loan from
Barclays. The loan was obtained at very cheap rates and it is
widely speculated that Barclays paid BNY Mellon to take the loan.
BNY Mellon, in turn sued IRS.
However, the judge found the transactions pertaining to BNY
Mellon and Barclays to be driven by vested interests and devoid
of any meaningful economic goals. The judge further added that
this transaction was designed to create, monetize and shift the
value of foreign tax credits.
BNY Mellon, in its defense, has maintained that all the
transactions carried out were consistent with the statutory and
judicial requirements. Further, the bank is willing to challenge
the verdict in court.
BNY Mellon is planning to charge the $850 million loss against
its first quarter profits. Earlier, it had deliberated to create
a reserve of up to $850 million in the event of an adverse ruling
in the case. However, the bank expects its capital position to
remain robust in spite of a 55 basis points decline in its Basel
III Tier 1 common equity ratio.
American authorities have diverted their focus on deals worth
billions of dollars between the banking giants of U.S. and the
U.K to monitor abusive tax evasion practices. The companies
exploit the loopholes in the international tax systems for their
For instance, foreign tax credits are meant to prevent taxpayers
from being taxed twofold However, as per IRS, some of the deals
involve a one-time tax payment by a company in one country, which
yields tax credit and benefits for two taxpaying companies in two
countries. Foreign tax credit deals are glaring instances of how
global financial institutions over the years have abused tax
arbitrage to boost their own bottom line.
We believe that the charging of estimated losses stemming from
the unfavorable ruling will likely result in losses at BNY Mellon
in the first quarter. However, the company's strong fundamentals
are likely to absorb the spillover effects.
BNY Mellon carries a Zacks Rank #4 (Sell).