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Bank of New York Mellon Wins Case Over Interest Deduction

Sept. 24 (Bloomberg) -- Bank of New York Mellon Corp. is entitled to deduct interest on a loan linked to a transaction with a British bank that generated disallowed tax credits, a U.S. Tax Court judge ruled.

The loan “served a purpose beyond the creation of the tax benefits,” Judge Diane Kroupa wrote in an opinion released yesterday.

Kroupa’s decision grew out of her ruling earlier this year that BNY Mellon could not claim $199 million of tax credits and related expense deductions for 2001 and 2002 from a series of transactions with London-based Barclays Banks Plc because they had no economic substance.

BNY Mellon didn’t challenge Kroupa’s ruling on the tax credits and instead argued that since she ruled that the loan proceeds could be used by the bank for business purposes, interest on them is deductible.

Kroupa agreed, writing that “despite being overpriced, the loan proceeds were available” for banking and thus BNY Mellon “is entitled to deduct the interest that accrued on the loan for the years at issue.”

The ruling didn’t indicate the amount of interest at stake.

Kevin Heine, a spokesman for BNY Mellon, declined to comment on the ruling.

The case is Bank of New York Mellon Corp. v. IRS, 09-26683, U.S. Tax Court (Washington).

To contact the reporter on this story: Andrew Zajac in Washington at azajac@bloomberg.net

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