Free Motion for Reconsideration - District Court of Federal Claims - federal

Case 1:95-cv-00758-NBF

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS ____________ No. 95-758 T (Judge Nancy B. Firestone) ____________ NATIONAL WESTMINSTER BANK PLC, Plaintiff v. THE UNITED STATES, Defendant ____________ DEFENDANT'S MOTION FOR RECONSIDERATION OF COURT'S JULY 16, 2004, ORDER, LIMITING SCOPE OF CAPITAL ISSUE ____________

Pursuant to RCFC 7(b) and 59(a), defendant respectfully moves the Court to reconsider the portion of its July 16, 2004, Scheduling Order that limited the scope of the "capital issue." As explained below, (1) a senior official during the years at issue at the U.K.'s bank regulatory authority (the Bank of England) reports that a U.K. bank was required to have capital to support the size and risk of its U.S. operations (generally, around 8% of a U.S. branch's risk-adjusted assets), but there was no accounting requirement specifying where, within the banking organization, such capital should be recorded (i.e., the branch's books versus the books of the organization as a whole) and (2) a Dutch appellate court recently held that capital attributable to a branch under a separate and independent enterprise treaty

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provision similar to Article 7(2) of the U.S.-U.K. Treaty may be computed in a manner comparable to the Bank of England's regulatory approach. This Court, likewise, should determine the U.S. branches' capital by considering the amount of capital actually held within plaintiff's banking enterprise on account of the U.S. branches' operations, independent of plaintiff's accounting decisions regarding the location where such capital was booked. Failing to inquire about capital recorded elsewhere within the banking organization that reflects the branches' operations, and giving conclusive effect to plaintiff's exercise of discretion regarding where capital is recorded, would elevate accounting form over capital substance. As the Court has stated, "if, in fact, capital allotted to the branch was not properly noted on its books as `capital'", additional capital may be allotted. National Westminster Bank PLC v. United States, 58 Fed. Cl. 491, 492 (2003); accord id. at 498 (adjustments to books are necessary to reflect the "real facts".) In further support of this Motion to Reconsider the Court's July 16, 2004, Order, defendant submits the following: 1. Richard Henry Farrant was educated at Oxford and has spent most of his professional

life in the field of banking regulation. He was a member of the Basle Committee of Group of Ten countries' bank supervisors. The Basle Committee, as the Court is aware, was responsible for developing worldwide standards in 1988 for adequate bank capital. Mr. Farrant served with the Bank of England from 1967 to 1994, and during most of the years at issue, he was directly responsible for the Bank of England's regulatory policy, including capital adequacy. Mr. Farrant has prepared a report (attached as Exhibit 1 to this motion), which reaches the following conclusions:

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A U.K. banking organization such as plaintiff was required to hold capital to reflect its worldwide risk adjusted assets, including the risk adjusted assets of its U.S. branches,

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Generally, the required capital ratio for large banks such as plaintiff was in the vicinity of 8% of risk adjusted assets, and

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The Bank of England did not specify where within the banking organization's books the capital that reflects a U.S. branch's risk adjusted assets must be recorded.

2.

Thus, during the years at issue, there was actual capital, computed by reference to the

assets of plaintiff's U.S. branches, that supported the branches' activities. There was no requirement that such capital be recorded on the branches' books, and such capital evidently was recorded on plaintiff's consolidated books. The specific amount of actual capital held with respect to plaintiff's U.S. branches cannot be determined without further inquiry. 3. Attached as Exhibit 2 to this motion is a recent Dutch appellate decision, addressing the

allocation of capital to a Dutch branch of a Belgium bank under Article 7(2) of the BelgiumNetherlands Treaty. Article 7(2) of that treaty, like Article 7(2) of the U.S.-U.K. Treaty, provides a separate enterprise principle and is based on the O.E.C.D. Model Treaty provision. The decision was reported in the International Tax Law Reports (7 ITLR 1) as Re X Bank (Europe) SA (Judgment date 25 February 2004), together with an unofficial English translation. 4. The Belgian Bank filed its Dutch corporate income tax return, claiming interest expense

and a resulting net loss in reliance on the books prepared for the branch. (Ex. B at 20-22.) As in this -3-

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case, the branch's balance sheet showed assets equal to liabilities and no capital. (Id. at 21.) The booked net loss resulted in negative branch capital, but the Bank had substantial capital. (Id. at 22, 26.) 5. The Dutch court attributed capital to the branch and limited deductible interest expense.

The court concluded it was clear that the branch made use of some of the Bank's substantial capital. (Ex. B at 22.)1 In the court's view, it was "not plausible" that the capital prescribed by Belgian authorities served only as surety for the conduct of business in Belgium and not at all the Dutch branch. (Id. at 30.) Analyzing the independence principle in the treaty, the court concluded that the Dutch branch therefore had "own" capital that was recorded elsewhere on the Bank's books and that must be allocated to it. (Id.at 26-32.) 6. The court determined the amount of the branch's "own" capital. It was satisfied that

the Dutch Revenue Department had "established a link" between the Bank's recorded capital and that of its Dutch branch.2 (Ex. B at 30) Likewise, it noted that it was up to the Bank to explain why the branch did not have any recorded own capital and the bank's recorded capital should not serve the branch at all. (Ibid.) The bank failed to produce such evidence (other than to say, as plaintiff offers here, that interest is a normal business cost to banks). The court as a result concluded it was reasonable to calculate the branch's own capital by multiplying its risk adjusted assets by the Bank's

Similarly, this Court ruled that "a branch of a foreign bank relies on the worldwide capital of the enterprise of which it is a part." National Westminster Bank PLC v. United States, 58 Fed. Cl. 491, 494 (2003). Mr. Farrant's report (Ex. A) establishes such a link here between plaintiff's and its U.S. branches' capital.
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ratio of capital to risk adjusted assets (i.e., its BIS ratio). (Id. at 30-31; see also id. at 22-23.) The Bank's calculated BIS-ratio was 10.2%. (Id. at 24, 26.) 7. The Dutch court accordingly sustained the Revenue Department's disallowance of

interest expense, calculated by multiplying the Amsterdam Inter-Bank interest rate by the branch's own capital, determined in the manner described above. (Ex. B at 23-25, 30-31.) Respectfully submitted,

s/Steven I. Frahm Attorney of Record U.S. Department of Justice Tax Division Court of Federal Claims Section Post Office Box 26 Ben Franklin Post Office Washington, D.C. 20044 (202) 307-6504 EILEEN J. O'CONNOR Acting Assistant Attorney General MILDRED L. SEIDMAN Chief, Court of Federal Claims Section November 24, 2004