Bank of America v. United States

Bank of America (BA) (plaintiff) was paid commissions by foreign banks on transactions related to letters of credit issued in connection with exports from the United States. Typically, a foreign importer asked a foreign bank for a commercial letter of credit. Once its terms were satisfied, the letter of credit required the bank to pay the exporter. After the bank paid, the importer reimbursed the bank. With a sight letter of credit, the exporter was paid when compliance with the letter’s terms was confirmed. With a usance letter of credit, the exporter was paid on a specified date. For both, a draft instructed that payment be made. BA received several types of commissions. For confirmation commissions, BA confirmed sight letters of credit, committing to pay the face amount and waiving commissions if foreign banks prepaid. For negotiation commissions, BA checked exporters’ papers for compliance with the terms of letters of credit. For acceptance commissions, BA committed to pay time drafts when due. BA sued the United States government (defendant) to decide whether BA’s commission income was earned in the United States or abroad. Courts identified the sources of unlisted types of income by analogy to types listed in the Internal Revenue Code (IRC). Under IRC §§ 861(a)(3) and 862(a)(3), the source of income from personal services was where the services were performed. The United States argued that the commissions were earned at BA’s United States office from personal services and that the source was the United States. BA argued that its commissions were analogous to interest on a loans\, which compensated the lender for administrative expenses, credit risk, and the fund’s cost.