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U.S. court rejects AIG, Bank of NY Mellon tax credit appeals

NEW YORK (Reuters) – A U.S. appeals court on Wednesday rejected efforts by American International Group Inc and Bank of New York Mellon Corp to recoup hundreds of millions of dollars of foreign tax credits that the Internal Revenue Service did not allow.

By a 3-0 vote, the 2nd U.S. Circuit Court of Appeals in New York dismissed arguments that the federal government, through the IRS, tried to tax both companies twice by denying them credits on taxes paid to foreign governments.

Circuit Judge Denny Chin said the transactions at issue were “most appropriately characterized as shams” under applicable law, known as the “economic substance” doctrine, because they were taken to avoid taxes, and appeared to offer little or no potential for financial gain.

AIG declined to comment. Bank of New York Mellon did not immediately respond to requests for comment. Both companies are based in New York.

U.S. law lets companies take credits for income taxes paid to foreign governments. The IRS has called foreign tax credit abuse among its top compliance concerns for big companies.

AIG had sought $48.2 million of credits for 1997, following several cross-border transactions in which the insurer borrowed $1.6 billion and reinvested it at higher rates, ostensibly to make a profit, court papers show.

Chin, however, said AIG’s calculation of $168.8 million of pre-tax profit over the life of the transactions did not take into account various taxes paid and tax credits claimed, and that a reasonable fact finder could conclude that the transactions accomplished little.

Meanwhile, court papers show that Bank of New York Mellon had sought $200 million of credits for 2001 and 2002 tied to a Barclays Plc product known as STARS, in which it obtained a low-rate $1.5 billion loan whose proceeds it reinvested at higher rates.

Chin, however, said the “circular cash flow” arising from STARS suggested that the bank entered the “extremely convoluted” arrangement to maximize U.S. and U.K. tax benefits.

Wednesday’s decision upheld rulings denying tax credits to AIG by U.S. District Judge Louis Stanton, and to Bank of New York Mellon by former U.S. Tax Court Judge Diane Kroupa.

AIG had sued to recoup its tax credits, and $306 million of payments overall, in March 2009, six months after receiving a federal bailout. It was effectively suing its owner because the government owned 80 percent of AIG at the time.

The cases are Bank of New York Mellon Corp v. Commissioner of Internal Revenue, 2nd U.S. Circuit Court of Appeals, No. 14-704; and American International Group Inc v. U.S. in the same court, No. 14-765.