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BNY Mellon & AIG Claims Against IRS Dismissed by Court

Attempts of The Bank of New York Mellon Corporation BK and American International Group, Inc. AIG to recover hundreds of millions of dollars related to foreign tax credits suffered a setback after the U.S. court dismissed their arguments yesterday. Both the firms had disputed claims of the transactions being short of economic substance made by the federal government.

While both the companies had cried foul on being incorrectly denied foreign tax credits on billion-dollar loan transactions through the Internal Revenue Service ("IRS"), the 2nd U.S. Circuit Court of Appeals' decision to reject these claims by a 3-0 vote indicated their stance that the deals under debate were "most appropriately characterized as shams" under applicable law.

According to the Circuit Judge Denny Chin, the transactions were made with an intention to steer clear of taxes and did not seem to offer any financial gain. Judith Hagley, a lawyer in the U.S. Department of Justice Antitrust Division, had previously said that BNY Mellon's loan was overpriced.

Earlier in May, BNY Mellon and American International Group defied IRS' verdict to refute the tax credits and were heard by a three-judge panel in separate appeals. The companies defended the transactions at issue as "genuine business transaction."

BNY Mellon had sought $200 million for being double taxed on a $1.5 billion loan from British bank Barclays PLC BCS in 2001 and 2002. According to the company, the deal was penned in order to earn net interest income with the tax treatment of the transaction approved by a U.K. authority known as Inland Revenue.

On the other hand, AIG had claimed $48.2 million of tax credits from loan transactions worth around $1.6 billion from several banks at lower rates in 1997. The intention was to reinvest the funds at a higher rate to earn interest income and not to avoid taxes.

However, according to the court, the companies failed to consider the impact of various taxes paid and tax credits claimed, which wiped out most of the profits expected from these transactions. Moreover, the agreement between BNY Mellon and Barclays seemed like a strategy to exploit the U.S. and U.K. tax benefits. Conclusively, now with the claims rejected by the court, the firms will not be able to recoup any tax credits.

Currently, BNY Mellon holds a Zacks Rank #2 (Buy). Another major regional bank worth considering is Bank of America Corporation BAC , which carries the same rank as BNY Mellon.

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AMER INTL GRP (AIG): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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