Lehman Feb 18

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Foreign Tax Credits

1. Lehman Tells 2nd Circ. Treaty Entitles It To Tax Credits

   Feb 17, 2016 | Law360

   By Hannah Sheehan
   
   
   Defunct investment bank Lehman Brothers Holding Inc. told the Second Circuit on Tuesday that its bankruptcy administrators are entitled to $67 million in foreign tax credits under the terms of a 1975 U.S-U.K. income tax treaty favoring newly enacted legislation.

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Client Attorney Privileged/Attorney Work Product/At Request of Counsel

Foreign Tax Credits

1. Lehman Tells 2nd Circ. Treaty Entitles It To Tax Credits

   Feb 17, 2016 | Law360

   By Hannah Sheehan

   Defunct investment bank Lehman Brothers Holding Inc. told the Second Circuit on Tuesday that its bankruptcy administrators are entitled to $67 million in foreign tax credits under the terms of a 1975 U.S-U.K. income tax treaty favoring newly enacted legislation.
   
   Lehman argued that a New York federal judge wrongly denied the credits for U.K. withholding taxes, saying a section of the U.S. tax code trumps the bilateral agreement, according to the treaty’s “last-in-time” rule. The company said that treaty provision calls for more recently enacted statutes like the Internal Revenue Code to take precedence over the pact.
   
   Lehman claimed Section 901(k) of the tax code, unlike the government’s interpretation of the 1975 treaty, places no limitation on FTCs from substitute payments related to various stock-loan transactions, which the company says the government has unfairly attempted to classify as dividends.
   
   The company reiterated arguments that the government has misinterpreted the treaty to apply to the payments, which it says are not considered dividends under U.S. law and asked the appeals court to reverse the lower court’s ruling.
   
   “The government’s interpretation of the treaty ... effectively modifies Section 901(k) to apply to substitute payments. Because the treaty antedated Section 901(k), this interpretation violates the last-in-time doctrine,” Lehman said.
   
   The long-bankrupt investment bank is asking the appeals court to strike U.S. District Judge Richard M. Berman’s May ruling that it cannot offset U.S. tax payments on its 1999 and 2000 returns based on U.K. levies imposed on substitute dividend payments. In refusing to allow Lehman to claim the tax credits, Judge Berman adopted the IRS' reading of the U.S.-U.K. Double Tax Treaty, holding that the payments in question were dividends for U.S. tax purposes.
   
   Lehman previously alleged that Judge Berman's interpretation is inconsistent with the plain meaning of the treaty and at odds with the Internal Revenue Code. After the treaty went into effect 1980, the U.S. stated in 1983 that substitute payments can't be considered a dividend for U.S. tax purposes. In 1997, Congress enacted regulations limiting foreign tax credits relating to dividends, but it didn't include substitute payments.
   
   At the time the treaty was signed, the U.K. did not recognize substitute payments as dividends, and the U.S. did not limit foreign tax credits with anything akin to the regulations adopted in 1997, Lehman said.
   
   The substitute dividend payments came from onetime U.K. trading subsidiary Lehman Brothers International (Europe) PLC that are not normally treated as dividends under U.S. tax law. The dispute hinged on whether the treaty overrides and renders those payments dividends that can’t be claimed as credits, according to the May opinion.
   
   The stock loan transactions at issue allowed Lehman’s brokerage unit, Lehman Brothers Inc., to borrow shares of U.K. corporations from U.S.-based lenders that were in turn lent to its U.K. unit, which became the stock's record owner.
   
   Lehman's bankruptcy lawyers sued the IRS in April 2010 seeking a declaration overturning the disallowance of its credits.
   
   In October, Lehman told the circuit court that the judge should have interpreted the term "dividend" in the treaty by its U.S. definition, not the U.K. definition...

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