Bank of New York Mellon Corp. v. Commissioner

Bank of New York Mellon Corporation (Mellon) (plaintiff) entered into an intricate trust agreement with Barclays Bank, PLC (Barclays), a London-based financial firm. The transaction was effectively a five-year, low-rate loan from Barclays to Mellon, although the loan’s structure was extraordinarily intricate. For example, Barclays did not give Mellon cash. Rather, Barclays contributed income-producing assets to a Delaware trust established by Mellon, with Mellon agreeing to buy certain classes of trust shares back from Barclays over a period of five years. Although the assets never left Delaware, Mellon appointed a United Kingdom (UK) resident as trustee, subjecting the trust to UK tax. Income produced by the trust nominally went to a Barclays account before circularly being redirected back to the trust. Moreover, the transaction contained complicated agreements in which Barclays and Mellon variously shared or reimbursed each other’s United States (US) and UK tax obligations. Under a strict application of both US and UK tax laws, the arrangement resulted in Barclays and Mellon receiving net tax credits in excess of any generated tax liabilities. Effectively, Barclays and Mellon had figured out a way to technically exploit the UK and US tax codes to generate free tax credits. The Internal Revenue Service (IRS) (defendant) denied Mellon use of the tax credits, arguing that the underlying transaction lacked economic substance. Mellon challenged the IRS in the United States Tax Court.