Riggs Nat'l Corp. v. Commissioner

T.C. Memo. 2001-12

UNITED STATES TAX COURT

RIGGS NATIONAL CORPORATION & SUBSIDIARIES, f.k.a. RIGGS NATIONAL
BANK AND SUBSIDIARIES, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent*

Docket No. 24368-89. Filed January 22, 2001.

Joel V. Williamson, Thomas C. Durham, Kim M. Boylan, Charles

W. Hall, and Stephen M. Feldhaus, for petitioner.

Theodore J. Kletnick, William G. Merkle, Rebecca I.

Rosenberg, and Robert T. Bennett, for respondent.

*
This Memorandum Opinion supplements our Opinion in
Riggs Natl. Corp. & Subs. v. Commissioner, 107 T.C. 301 (1996),
revd. and remanded 163 F.3d 1363 (D.C. Cir. 1999).
 - 2 -

SUPPLEMENTAL MEMORANDUM FINDINGS OF FACT AND OPINION

JACOBS, Judge: This case is before us on remand from the

Court of Appeals for the District of Columbia Circuit. See Riggs

Natl. Corp. & Subs. v. Commissioner, 163 F.3d 1363 (D.C. Cir.

1999), revg. and remanding 107 T.C. 301 (1996).

The crux of the dispute involves petitioner’s entitlement to

foreign tax credits under section 9011 during years 1984 through

1986 for Brazilian income tax purportedly withheld and paid by

Banco Central do Brasil (the Central Bank) with respect to its

restructuring debt interest remittances to petitioner. The

specific issues for decision are: (1) Whether the Central Bank in

fact paid withholding taxes on petitioner’s behalf; and if so, (2)

whether the Brazilian withholding tax potentially creditable to

petitioner must be reduced by the amount of any subsidies that the

Central Bank may have received.

In Riggs Natl. Corp. & Subs. v. Commissioner, 107 T.C. at 360

(Riggs I), we concluded that petitioner was not “legally liable”

for purported Central Bank withholding tax payments, since we

determined that the Central Bank was not required, under Brazilian

law, to pay withholding tax on its restructuring debt interest

remittances to petitioner. We further determined that the

withholding tax purportedly paid by the Central Bank on its

1
All section references are to the Internal Revenue Code
for the years in issue.
 - 3 -

restructuring debt interest remittances to petitioner was a

noncompulsory amount, rather than a tax. Thus, we held that the

purported withholding tax payments were not creditable to

petitioner. See id. As a result, we did not decide whether the

purported withholding tax payments were in fact made by the Central

Bank. See id. at 360-361.

The Court of Appeals concluded that: (1) A March 1984

Brazilian IRS private letter ruling issued to the Central Bank was

a “compulsory order” by the Brazilian Finance Minister to the

Central Bank mandating that the latter pay the purported

withholding taxes, and therefore, (2) petitioner was “legally

liable” for the purported withholding tax payments the Central Bank

made on petitioner’s behalf. The Court of Appeals remanded the

case to us to decide certain matters concerning petitioner’s

entitlement to foreign tax credits as a consequence of petitioner’s

being “legally liable” for the purported withholding tax payments

made by the Central Bank on petitioner’s behalf. Riggs Natl. Corp.

& Subs. v. Commissioner, 163 F.3d at 1369.2

2
Among other things, the Court of Appeals directed us to
determine which of petitioner’s restructuring debt loans were
subject to the March 1984 Brazilian IRS ruling. The parties have
now stipulated in evidence an exhibit that lists those loans and
interest payments. This exhibit also lists and summarizes the
related withholding receipts and other documents in the record
that were issued in connection with each of the withholding tax
payments that petitioner contends the Central Bank made on its
behalf.
 - 4 -

We incorporate herein the findings of fact set forth in Riggs

I by this reference. We also incorporate herein the stipulations

and exhibits in Riggs I by this reference. For ease of

understanding, we repeat those facts set forth in Riggs I we deem

necessary to clarify the supplemental findings set forth herein and

the ensuing discussion resolving the issues for decision.

A. Background

Petitioner was one of hundreds of banks that were involved in

the restructuring of Brazil’s foreign debt in the early to mid-

1980’s. As relevant hereto, the restructuring of Brazil’s foreign

debt was divided into three phases. The Central Bank served as the

borrower under certain agreements entered into in connection with

phase I, phase II, and phase III of Brazil’s foreign debt

restructuring; the Brazilian Government guaranteed the Central

Bank’s obligations under these agreements.

As of the time of the phase I restructuring negotiations,

there were as many as 600 foreign lenders holding outstanding

Brazilian loans. Collectively, these lenders had issued thousands

of outstanding loans to numerous Brazilian borrowers. Because it

was not feasible to have the foreign lenders and their Brazilian

borrowers renegotiate all these loans, the deposit facility

agreement (DFA) mechanism was devised. Prior outstanding loans

were left in place. When a prior loan borrower made a loan

payment, the payment would be deposited with, and held by, the
 - 5 -

Central Bank pursuant to a new loan entered into by the Central

Bank and the foreign lender.

As a part of the restructuring, Brazil needed to obtain

additional foreign capital to enable its economy to function. Much

of this additional foreign capital was furnished under the credit

guaranty agreement (CGA) entered into by the Central Bank and some

of the foreign lenders. Only the 170 foreign lenders holding the

largest amounts of outstanding Brazilian loans participated in the

phase I CGA.3 In contrast, almost all of the foreign lenders

participated in the phase II CGA.4

The loans made to the Central Bank under the phase I DFA,

phase I CGA, phase II DFA, and phase II CGA were net loans5 that

had repayment terms of 7 to 9 years. In the phase I and phase II

DFA’s and CGA’s, provisions were made for funds that would

otherwise be lent to the Central Bank, as borrower, to be

alternatively lent or re-lent to other Brazilian persons and

companies. Many of the foreign lenders wanted their customers to

have some ability to borrow from the large amount of foreign

exchange and capital to be provided by the CGA’s and DFA’s. The

phase I DFA, phase II DFA, phase I CGA, and phase II CGA each

3
Petitioner did not participate in the phase I CGA.
4
No phase III CGA was entered into.
5
Certain consequences to the Brazilian borrower and
foreign lender which result from having a net loan, as opposed to
a gross loan, are more fully discussed infra.
 - 6 -

provided that there would be an initial period of about 16 to 18

months during which DFA or CGA funds could alternatively be lent or

re-lent to other Brazilian persons and companies (the relending

period).6

The phase I restructuring agreements (which included a phase

I DFA that covered the scheduled debt payments due in 1983 on prior

outstanding Brazilian loans and a phase I CGA under which the

Central Bank would be lent up to an additional $4.4 billion) were

entered on February 25, 1983. The phase II restructuring

agreements (which included a phase II DFA that covered the

scheduled debt payments due in 1984 on prior outstanding Brazilian

loans and a phase II CGA under which the Central Bank would be lent

up to an additional $6.5 billion) were entered on January 27, 1984.

The phase III restructuring negotiations began around the

fall of 1984 and continued through July 1986. On July 25, 1986,

Brazil and its foreign lenders signed the phase III DFA. The phase

III DFA covered the scheduled Brazilian foreign debt payments due

in 1985 and 1986. Under the phase III DFA, any 1985 debt payments

would be available for relending to other Brazilian persons and

6
In connection with the phase III restructuring
negotiations, the relending period for the phase II DFA was
extended from June 30, 1985, to April 1986, and the relending
period for the phase II CGA was extended from June 30, 1985, to
March 1986.
 - 7 -

companies during a specified relending period; 1986 debt payments,

on the other hand, would not be available for relending.

The phase I DFA and the phase II DFA did not cover foreign

debt payments that were due after January 1, 1985. During the

phase III negotiations, Brazil and its foreign lenders agreed to

six interim loan arrangements under which debt payments due from

Brazilian borrowers after January 1, 1985, would be held by the

Central Bank as “interim deposits”. These interim arrangements

required the Central Bank to pay the foreign lenders interest on

the interim deposits on a “net quoted” basis (which is discussed

infra). The interim arrangements did not provide for any relending

period, as the Brazilians and the foreign lenders envisioned that

these interim deposits would be rolled over into and covered under

the phase III DFA.

The phase I DFA, phase I CGA, phase II DFA, phase II CGA, and

phase III DFA loans were foreign currency loans. Each loan was

made, and was to be repaid, in a specified foreign currency.

B. Brazilian Regulation of Foreign Lending in General

Brazil imposed restrictions on the receipt and exchange of

foreign currency. By law, all loans from foreign lenders had to be

registered and approved by the Central Bank. Through a

registration process, the Central Bank set the range of acceptable

interest rates, and periodically established the minimum repayment

terms, of loans. Once the Central Bank approved a loan, the lender
 - 8 -

remitted the proceeds (in foreign currency) to the borrower via a

commercial bank in Brazil. The Brazilian bank converted the

foreign currency into Brazilian currency by means of an exchange

contract, whereby the borrower sold the foreign currency to the

bank for Brazilian currency at the official exchange rate

periodically set by the Central Bank.

The Brazilian borrower received a certificate of registration

that enabled the borrower to effect payment of interest, and

principal, in the foreign currency in which the loan was made. On

each payment date, the borrower purchased foreign currency from a

Brazilian bank at the official exchange rate. The Brazilian bank

then tendered the foreign currency to the foreign lender.

C. Payment of the Withholding Tax Generally

Where withholding tax was required, Brazilian law prohibited

remittance of an interest payment to a foreign lender without proof

of payment of the withholding tax on the interest remitted abroad.

Under Brazilian law, the borrower initiated payment of the

withholding tax by submitting a Documento de Arrecadacao de

Receitas Federais (DARF) and the accompanying tax payment to a

commercial Brazilian bank. The bank making the interest payment in
 - 9 -

foreign currency (which was subject to Brazilian tax) required the

borrower to submit a completed DARF and the tax payment as evidence

that the proper amount of the tax had been paid.7

D. Net Loans and Gross Loans

As previously indicated, phase I DFA, phase I CGA, phase II

DFA, phase II CGA, and phase III DFA loans were net loans.

In making loans to borrowers in Brazil and other countries, it

was an accepted and common practice among foreign lenders to

require that interest payments be made to them on a “net quoted”

basis. A net loan is a loan in which the lender and the borrower

agree that all payments of principal and interest to the lender,

under the loan contract, will be made net of any applicable

Brazilian taxes.

Under Brazilian law, when the Brazilian borrower under a net

loan assumes the burden of withholding tax, the amount of interest

remitted is considered net of tax and an adjustment known as a

7
The borrower would prepare the DARF and deliver a copy
of it, and the registration certificate, to the Brazilian bank
handling the payment of interest through a foreign exchange
contract. The bank would then record the amount of interest and
tax on the certificate of registration and submit the
certificate, exchange contract, and DARF to the Central Bank for
approval. Following approval by the Central Bank, the bank would
remit the interest to the foreign lender and return to the
borrower a stamped copy of the DARF, the certificate of
registration (stamped), and a copy of the exchange contract. The
borrower would send a copy of the DARF to the foreign lender,
which then had proof (the DARF) that the withholding tax had been
paid.
 - 10 -

“gross up” is required for purposes of computing the withholding

tax. This gross-up adjustment is computed as follows:

Grossed-up interest = Net interest
1 - Withholding tax rate

In contrast to a net loan, a gross loan is a loan in which

there is no contractual agreement between the borrower and the

foreign lender to pay taxes imposed by the borrower’s country. With

a gross loan, the Brazilian borrower deducts withholding taxes that

are due from the interest specified under the loan contract and pays

the lender the gross interest net of taxes.

From 1970 through 1986, net loans generally were the

predominant type of loan extended by foreign lenders to borrowers

in Brazil. With a net loan, the foreign lender shifts the risk of

any increase in taxes imposed by the borrower’s country to the

borrower. Correspondingly, in a net loan, the borrower, not the

foreign lender, benefits from any reduction in or waiver of taxes

imposed by the borrower’s country.

E. Institution of the Subsidy/Pecuniary Benefit

Under Decree-law 1,215, enacted May 4, 1972, the Brazilian

Minister of Finance was given discretion to grant a reimbursement

or reduction of, or exemption from, the withholding tax on interest

provided: (1) The borrower’s costs were reduced; (2) the loan was

of national interest; (3) the loan met the minimum repayment term
 - 11 -

set by the National Monetary Council;8 and (4) the loan complied

with other conditions set forth by the Ministry of Finance.

Decree-law 1,351, which was enacted on October 24, 1974,

authorized the National Monetary Council to temporarily reduce the

income tax on interest, commissions, and expenses remitted to

persons residing or domiciled abroad. On the same date that Decree-

law 1,351 was enacted, the Central Bank issued Resolution 305, which

temporarily reduced the tax on interest, commissions, and expenses

received on currency loans registered with the Central Bank from 25

percent to 5 percent.

Decree-law 1,411, enacted July 31, 1975, amended Decree-law

1,351 and allowed the National Monetary Council to: (1) Reduce the

income tax on interest, commissions, and expenses remitted to

persons resident or domiciled abroad, or (2) grant pecuniary

benefits to Brazilian borrowers receiving loans in foreign currency.

On August 5, 1975, the Central Bank issued Resolution 334,

which revoked Resolution 305, thereby reinstating the 25-percent

withholding tax on interest, commissions, and expenses paid on

currency loans registered with the Central Bank. The withholding

8
The National Monetary Council is a Government agency
responsible for economic programs. Its members include the
Finance Minister, the Central Bank’s president, and
representatives of the largest Brazilian commercial banks. The
Finance Minister presides over the council’s meetings. The
council acts through the Central Bank.
 - 12 -

tax rate remained at 25 percent throughout the years relevant to

this case.

F. Mechanics and Amount of the Subsidy/Pecuniary Benefit

On the same day that the 25-percent tax on interest was

reinstated (i.e., August 5, 1975), the Central Bank issued

Resolution 335, which provided that borrowers taking out foreign

loans duly registered with the Central Bank would receive a

pecuniary benefit equal to 85 percent of the tax paid on interest,

commissions, and expenses due on such loans.

Also on August 5, 1975, the Central Bank issued Circular 266,

which provided in part:

a. a DARF would be issued for the payment of the 25-percent

income tax on interest resulting from foreign currency loans;

b. on the date of payment, the banking establishment

receiving the payment would, by means of a credit to the borrower’s

account, pay the borrower the equivalent of 85 percent of the income

tax; and

c. the banking establishment receiving the tax payment would

debit its own account entitled “Pecuniary Benefit-D.L. 1,411,” and

would charge the total value of the pecuniary benefit against the

Central Bank.

On July 26, 1979, the pecuniary benefit was reduced to 50

percent of the tax; on December 7, 1979, the pecuniary benefit was
 - 13 -

increased to 95 percent of the tax; and on May 8, 1980, the

pecuniary benefit was reduced to 40 percent of the tax.

On June 28, 1985, the pecuniary benefit was reduced to zero

through the issuance of Resolution 1,033 by the Central Bank.9

Resolution 1,033 provided, in pertinent part:

BANCO CENTRAL DO BRASIL

Resolution no. 1,033

* * * the BANCO CENTRAL DO BRASIL hereby makes it
public knowledge that, at a meeting held on this date,
the NATIONAL MONETARY COUNCIL * * *

RESOLVED:

I - The pecuniary benefit specified in Resolution
no. 335, dated 08.05.75, with later alterations, is
hereby reduced to 0 (zero).

II - This Resolution will go into effect on the date
of its publication.

Brasilia (DF), June 28, 1985
Antonio Carlos Braga Lewgruber
PRESIDENT

9
The parties have stipulated and agreed to use June 28,
1985, as the date relating to the reduction of the pecuniary
benefit to zero. As will be discussed infra, in the tax payment
documentation issued to foreign lenders in connection with the
Central Bank’s post-June 28, 1985, interest remittances to them,
the Central Bank continued to report that it was receiving a
pecuniary benefit equal to 40 percent of the withholding tax the
Central Bank was purportedly paying on the foreign lenders’
behalf. As a result, petitioner, on its tax returns, reduced by
40 percent the foreign tax credits it claimed for Brazilian tax
on the Central Bank’s and other Brazilian borrowers’ post-June
28, 1985, loan remittances to it, even though after June 28,
1985, no Brazilian borrower (including the Central Bank) actually
received a pecuniary benefit in connection with its loan
remittances made abroad.
 - 14 -

G. The March 1984 Brazilian IRS Ruling Issued to the Central Bank

In March 1984, the Brazilian IRS issued a private ruling to the

Central Bank that provided: (1) Beginning January 1, 1984, under

a borrowers-to-be theory, the Central Bank would be required to pay

withholding tax on its restructuring debt interest remittances to

the foreign lenders during the relending periods of the DFA’s and

CGA’s; (2) the Central Bank would have to pay this Brazilian income

tax on or before the last business day of the month following the

month in which the withholding was made; and (3) the Central Bank

would be entitled to receive any pecuniary benefit applicable to

such withholding tax payments the Central Bank made.

On March 28, 1988, the Brazilian Finance Minister issued

Portaria 164, holding that future restructuring debt interest

remittances of the Central Bank would not be subject to withholding

tax. Portaria 164 provided, in pertinent part:

The Minister of State of Finance, exercising the
authority conferred on him by Decree-law No. 1215 of May
4, 1972, resolves:

I - Exemption from withholding of income tax is granted
for remittance of interest, fees, expenses, discounts and
other charges owed to parties resident or domiciled
abroad, as a result of loan transactions, when the tax
burden has been assumed [i.e., there is a net loan] by a
legal entity of public internal law.

II - The provisions of the preceding item shall apply to
foreign currency deposits made at the Central Bank
according to regulations of the National Monetary
Council.
 - 15 -

H. The Central Bank’s Payment of Withholding Tax on Its
Restructuring Debt Interest Remittances and the Caixa Unico System

In Brazil, Banco do Brazil, which among other things operated

as a commercial bank, was the Brazilian National Treasury’s agent

for payment of taxes. During 1980 through 1986, the Central Bank

collected and paid over to Banco do Brazil, for the account of the

National Treasury, withholding taxes, export taxes, taxes on

financial operations, and social security taxes. The withholding

taxes the Central Bank collected and paid over included withholding

tax on the salaries of its employees and withholding tax on its

interest remittances to foreign lenders.

Before 1980, the Central Bank made tax payments to Banco do

Brazil by issuing an administrative check. The check would be

physically delivered to Banco do Brazil and then cashed through the

normal check liquidation and payment procedure. Beginning in 1980,

there was a change in the manner by which the Central Bank made tax

payments. Rather than issuing an administrative check, the Central

Bank credited Banco do Brazil’s Banking Reserves Account at the

Central Bank with the amount of the tax payment.

By law, all commercial banks were required to maintain a

Banking Reserves Account at the Central Bank with a minimum balance

equal to 20 percent of their demand deposits. Banco do Brazil,

however, was not subject to this requirement because the Central
 - 16 -

Bank would frequently credit and advance substantial funds to Banco

do Brazil’s Banking Reserves Account, because of the governmental

functions and operations Banco do Brazil carried out.

Until 1965, when the Central Bank was formed, Banco do Brazil

served as the country’s sole monetary authority. During the times

relevant to this case, Banco do Brazil was owned 51 percent by the

Brazilian Government and 49 percent by private shareholders. From

1965 through 1986, Banco do Brazil had four primary functions: (1)

Commercial banking, (2) monetary authority, (3) management, control,

and distribution of currency, and (4) responsibility for bank

clearing. Like the Central Bank, Banco do Brazil functioned as:

(1) A lender of last resort to public-sector entities, (2) a

development bank responsible for various subsidized credit programs

of the Brazilian Government, and (3) a fiscal authority that managed

the Brazilian Government’s budget. Banco do Brazil and the Central

Bank together performed a number of governmental functions,

including their unified management and operation of Brazil’s

monetary and financial system under what was known as the caixa

unico system.10

To perform its various governmental functions, Banco do Brazil

needed access to funds. Funding was provided by the Central Bank.

When Banco do Brazil, in carrying out its governmental functions,

10
The Brazilian term “caixa unico” means a unified system
of cash or financial management.
 - 17 -

would draw down its Banking Reserves Account at the Central Bank

below the legally required minimum level, the Central Bank would

advance Banco do Brazil funds sufficient to replenish and maintain

its reserves account at the required level. The Central Bank would

level Banco do Brazil’s reserves account daily. (Banco do Brazil

and the Central Bank each maintained a movement account in which

they kept track of the funds the Central Bank advanced to Banco do

Brazil.)

The Central Bank financed the Brazilian Government’s operations

and the governmental functions that Banco do Brazil carried out

through its issuance of (1) Brazil’s currency and (2) governmental

securities in the name of the National Treasury. Essentially, the

automatic transfer mechanism previously described (whereby the

Central Bank provided funds to Banco do Brazil though crediting its

Banking Reserves Account) recognized and reflected that the

Brazilian Government ultimately financed the governmental functions

that Banco do Brazil and the Central Bank carried out.11

11
The record does not reveal whether daily surplus funds
in the Banking Reserves Account were turned over to Banco do
Brazil or whether the Central Bank kept such surpluses in
repayment of the funds it had advanced. When the caixa unico
system ended in 1987, the Central Bank was owed several billions
of dollars by Banco do Brazil. The liability of Banco do Brazil
to the Central Bank, however, was offset by an equivalent
liability that the National Treasury owed to Banco do Brazil. In
ending the caixa unico system, a novation was effected whereby
Banco do Brazil’s liability to the Central Bank was canceled and
the National Treasury directly assumed the liability that Banco
do Brazil owed to the Central Bank.
 - 18 -

On its books, Banco do Brazil made entries reflecting: (1)

Transfers of Central Bank tax payments to Banco do Brazil’s Banking

Reserves Account at the Central Bank, (2) collections of Federal

Government tax receipts, and (3) deposits of Federal Government tax

revenues payable upon demand to the National Treasury.

From the record presented, we cannot determine whether or what

entries were made on the respective books of the Central Bank and

the National Treasury to reflect the Central Bank’s payment of

withholding tax on the restructuring debt remittances.

Consequently, we are unable to determine: (1) Whether the Central

Bank was reimbursed by the National Treasury for the withholding tax

payments; or (2) whether the Central Bank received the pecuniary

benefit based on the withholding tax payments. These two matters

were raised in the Central Bank’s ruling request and were discussed

in the March 1984 Brazilian IRS ruling to the Central Bank.

Beginning in 1984, the Central Bank issued DARF’s to the agent

banks of the foreign lenders to whom it transmitted loan payments

under the DFA’s and CGA’s, reflecting its withholding tax payments

on restructuring debt interest remittances during the relending

periods of the DFA’s and CGA’s. From 1984 through 1988, the Central

Bank issued a total of 324 DARF’s to these agent banks. As

explained more fully infra, these 324 DARF’s were group DARF’s.

In connection with remitting a particular DFA or CGA interest

payment to an individual foreign lender, the Central Bank did not
 - 19 -

issue a separate DARF to that foreign lender specifying the

withholding tax that had been paid by the Central Bank on that

foreign lender’s behalf on the interest remittance. Rather, the

aforementioned 324 DARF’s the Central Bank issued to the foreign

lenders and their agent banks were group DARF’s. Each DARF covered

the collective withholding tax the Central Bank had paid on behalf

of an entire group of foreign lenders subject to a particular

withholding tax rate (i.e., a 12.5-percent withholding tax rate, a

15-percent withholding tax rate, or a 25-percent withholding tax

rate). In its ruling request, the Central Bank, among other things,

requested and received the Brazilian IRS’s permission to issue these

group DARF’s. These group DARF’s and other supporting documentation

the Central Bank issued to the foreign lenders in connection with

its restructuring debt interest remittances are discussed infra.

As previously indicated, no withholding tax payments were made

by the Central Bank on the foreign lenders’ behalf on restructuring

debt interest remittances after March 28, 1988, the date the

Brazilian Finance Minister issued Portaria 164, which provided that

future interest payments on the restructured debt would not be

subject to withholding tax.

I. The Central Bank’s Continued Reports to the Foreign Lenders That
It Received a “Pecuniary Benefit” on Its Withholding Tax Payments
on Post-June 28, 1985, Restructuring Debt Interest Remittances to
Them

Notwithstanding that on June 28, 1985, the pecuniary benefit

had been reduced to zero, the Central Bank, in issuing DARF’s to the
 - 20 -

foreign lenders in connection with its post-June 28, 1985,

restructuring debt interest remittances to them, continued to report

to the foreign lenders that it received a “pecuniary benefit” equal

to 40 percent of the withholding tax imposed. For example, by

letter dated November 19, 1985, Mancel Borges de Oliveira (Mr.

Oliveira), a division head of the Central Bank’s Department of

Foreign Capital Fiscalization and Registration (FIRCE), forwarded

to Morgan Bank (which served as the agent bank of the foreign

lenders for the phase II CGA) group DARF’s covering purported

withholding tax the Central Bank had paid on behalf of numerous

foreign lenders with respect to its phase II CGA interest

remittances to them on September 27, 1985. Mr. Oliveira’s November

19, 1985, letter to Morgan Bank stated, in pertinent part:

We refer to the * * * [phase II CGA], among Banco
Central do Brasil (the “Borrower”), Republica Federativa
do Brasil (the “guarantor”), certain financial
institutions (the “Banks”) and * * * [Morgan Bank] (the
“Agent”). Terms in this letter have the same meaning
described to them in the * * * [phase II CGA].

In this respect, in compliance with section 6.3 of
the * * * [phase II CGA], we hereby provide you certified
copies of [withholding] tax receipts evidencing the
payment by Banco Central do Brasil, effected on
September/85, which are attached.

In his November 19, 1985, letter, Mr. Oliveira provided the

exchange rates the Central Bank had used in calculating the

purported withholding tax imposed with respect to these interest

remittances to various foreign lenders. Mr. Oliveira also enclosed

supporting schedules the Central Bank had prepared setting forth
 - 21 -

with respect to each specific September 27, 1985, Central Bank

interest remittance to a foreign lender: (1) The withholding tax

imposed, (2) the “40-percent pecuniary benefit” the Central Bank

received, and (3) the “60-percent balance of actual withholding tax

paid”. For instance, with respect to the Central Bank’s September

27, 1985, phase II CGA, tranche I interest remittance to petitioner,

the Central Bank schedule reflected the following:

Net Interest Grossed-Up “Pecuniary “Balance
Remittance Int. Paid Tax Benefit” Tax Paid”
(U.S. $) (Cruzeiros)1 (Cruzeiros) (Cruzeiros) (Cruzeiros)

17,441.66 180,742,108.69 45,185,527.17 18,074,210.86 27,111,316.30

1
The Central Bank used the following formula to compute this amount:

Net int. remittance
Grossed-up = (foreign currency) x Applic. exchange rate
int. paid 1 - Withholding tax rate
(cruzeiros)

(On Sept. 27, 1985, the Central Bank used an exchange rate of
$1 (U.S.) to 7,772 cruzeiros.)

On or about January 21, 1986, Morgan Bank forwarded copies of

the aforementioned DARF’s and schedules that the Central Bank had

issued in connection with its September 27, 1985, phase II CGA

interest remittances to each of the foreign lenders participating

in the phase II CGA. The letter, dated January 21, 1986, by which

Morgan Bank enclosed these documents to the foreign lenders, stated,

in pertinent part:
 - 22 -

Re: [Phase II CGA] with * * * [Morgan Bank]
as Agent.

Dear Sirs:

Enclosed please find withholding tax receipts and
supporting schedules evidencing the payment in Cruzeiros
to the National Treasury of Brazil with respect to the
above referenced loan. The tax receipts and schedules
apply to Tranches I thru VII for the interest period June
28, 1985 to September 27, 1985.

In the past, the schedules (Item Number 3 below) were
sorted out for each bank [i.e., participating foreign
lender]. In order to expedite mailing, we have enclosed
a complete printout, as received from the Central Bank.
Please disregard schedules not pertaining to your
participation.

* * * * * * *

Very truly yours,
/s/ Vincent J. Montano
[Vice President of Morgan Bank]

Enclosures:

1. Conversion rate chart for loan currency to Cruzeiros.
2. Three tax receipts - one for each applicable
[withholding tax rate] percentage (12.5, 15, and 25
percent) for each of the 7 tranches.
3. Corresponding supporting schedules for each of the 7
tranches (an explanation of each column is listed
below):

1st column represents - Interest paid
2nd column represents - Cruzeiros equivalent of
interest paid [i.e., grossed-up interest paid]
3rd column represents - Tax in cruzeiros
4th column represents - 40% cruzeiros tax rebate
amount [i.e., pecuniary benefit]
5th column represents - Balance (60%) of actual tax
paid

The record contains a substantially similar letter of Morgan

Bank, dated August 1986, relating to the Central Bank’s respective
 - 23 -

phase II CGA restructuring debt interest remittances to the foreign

lenders on December 30, 1985, and on March 26, 1986. In this August

1986 letter, Morgan Bank discussed certain group DARF’s and

supporting schedules the Central Bank had issued (copies of which

Morgan Bank was forwarding to the foreign lenders) to evidence the

Central Bank’s withholding tax payments on those respective interest

remittances. Among other things, Morgan Bank’s August 1986 letter

stated that the Central Bank schedules reflected that in connection

with the withholding tax imposed on each specific interest

remittance to a foreign lender: (1) The Central Bank received a

“40% cruzados tax rebate amount” (i.e., pecuniary benefit);12 and

(2) there was a resulting “balance (60%) of actual tax paid”.

On the basis of the aforementioned and other similar Central

Bank tax payment documents issued to the foreign lenders (which

erroneously reported the Central Bank was continuing to “receive”

a “40-percent pecuniary benefit” in connection with its post-June

28, 1985, restructuring debt interest remittances to the foreign

lenders), petitioner mistakenly believed the Central Bank had

received a “40-percent pecuniary benefit” in connection with all of

the Central Bank’s restructuring debt interest remittances to

petitioner from July 1985 through at least January 1987. Indeed,

in a memorandum dated February 20, 1986, to petitioner’s

12
By this time, the cruzado had replaced the cruzeiro as
Brazil’s new currency.
 - 24 -

comptroller, petitioner’s International Division reported that a

total foreign tax credit of $22,714.14 (equal to 60 percent of the

25-percent withholding tax imposed on the grossed-up interest

payments) should be claimed by petitioner for the Central Bank’s

withholding tax payments on petitioner’s behalf on the Central

Bank’s September 27, 1985, phase II CGA, tranche I through tranche

VII interest remittances to petitioner. This February 20, 1986,

memorandum stated, in pertinent part:

Re: Tax Receipts - Borrower: Banco Central do Brasil

Country: Brazil

Tax Rate: 60% of 25% grossed up

* * * * * * *

Attached are withholding receipts as follows:
Period Of Interest Principal Interest Withholding Tax Exchange
From To US $ US $ US Cruzeiros Rate

6-28-85 9-27-85 (Tranche I) $613,333.00 $17,441.66 $3,488.25 27,111,316.30 $7,772.00
6-28-85 9-27-85 (Tranche II) 613,333.00 17,441.66 3,488.25 27,111,316.30 7,772.00
6-28-85 9-27-85 (Tranche III) 613,334.00 17,441.69 3,488.33 27,111,362.93 7,772.00
6-28-85 9-27-85 (Tranche IV) 540,000.00 15,326.25 3,071.25 23,869,755.00 7,772.00
6-28-85 9-27-85 (Tranche V) 533,725.61 15,177.82 3,035.56 23,592,403.40 7,772.00
6-28-85 9-27-85 (Tranche VI) 540,000.00 15,356.25 3,071.25 23,869,755.00 7,772.00
6-28-85 9-27-85 (Tranche VII) 540,000.00 15,356.25 3,071.25 23,869,755.00 7,772.00

Total Tax Withheld 22,714.14

As a result (as will be discussed more fully infra),

petitioner, on its tax returns, reduced by 40 percent (for the

“pecuniary benefit” that petitioner mistakenly believed the Central

Bank had received) the foreign tax credits it claimed with respect

to all of the Central Bank’s restructuring debt interest remittances

to it from July 1985 through January 1987. Specifically, in two

separate memoranda (each dated March 30, 1987) to petitioner’s
 - 25 -

comptroller on the foreign tax credit to be claimed with respect to

a January 1987 phase III DFA interest remittance, petitioner’s

International Division stated that a Brazilian tax rate of “60% of

25%” had been applied to the grossed-up January 1987 phase III DFA

interest payment.

J. Foreign Tax Credits in Dispute on Remand

On its income tax returns, petitioner generally reported its

interest income and withholding tax payments with respect to its

Brazilian loans on a cash basis. Petitioner claimed a foreign tax

credit and reported interest income gross-up when it received a

DARF. On its returns (including those for 1980 through 1986, which

were the years originally in issue in this case), petitioner reduced

the amount of the foreign tax credit it claimed in connection with

its Brazilian loans by the pecuniary benefit provided by the

Brazilian Government to Brazilian borrowers.

On its returns covering the period from January 1, 1980,

through June 28, 1985, petitioner reduced the amount of its claimed

foreign tax credits attributable to Brazilian loans by an amount

equal to the pecuniary benefit available to Brazilian borrowers.

Petitioner made this reduction in its claimed foreign tax credits

for both nonrestructured and restructured Brazilian loans.

On its returns covering the period after June 28, 1985, through

at least January 1987, petitioner continued to reduce its amount of

claimed foreign tax credits attributable to Brazilian net loans by
 - 26 -

40 percent, the amount of the pecuniary benefit before June 28,

1985. After June 28, 1985, petitioner continued to reduce its

amount of claimed foreign tax credits by 40 percent for

withholding taxes claimed on interest payments from Brazilian loans,

even though the pecuniary benefit had been reduced to zero as of

June 28, 1985.

In its amended petition, petitioner asserted, among other

things, that the foreign tax credit otherwise allowable to it for

1980 through 1986 should not be reduced by the pecuniary benefit

provided to Brazilian borrowers.

In the Stipulation Of Settled Issues filed with the Court on

May 30, 1996, the parties agreed:

A. On June 28, 1985, the Brazilian government
effectively eliminated the subsidy/pecuniary benefit
program by reducing the amount of the subsidy from 40% to
zero.

B. On its income tax returns for the taxable years
ended December 31, 1985 and December 31, 1986, Petitioner
reduced the amount of its claimed foreign tax credits for
Brazilian tax on interest paid by Brazilian borrowers by
an amount representing the subsidy/pecuniary benefit,
even though Brazil reduced the subsidy/pecuniary benefit
from 40% to zero on June 28, 1985.

C. To the extent otherwise allowable, Petitioner’s
foreign tax credits for taxes paid after June 28, 1985
through December 31, 1986 are not subject to * * * [any
reduction for a pecuniary benefit]

The total foreign tax credits in dispute between the parties

in connection with the Central Bank’s restructuring debt interest

remittances to petitioner are as follows:
 - 27 -

Year Credit

1984 $166,415
1985 181,272
1986 528,365

Following the Court of Appeals’ remand of this case, we

instructed the parties to file written reports advising how we

should implement the Court of Appeals’ mandate. The parties then

submitted to the Court their agreed proposal regarding the

procedures to be used in implementing the mandate. In accordance

with the parties’ agreement, we issued an order on May 12, 1999,

directing that the record in this case would not be reopened to

allow either party to introduce additional factual information,

documents, or testimony.

OPINION

Section 901 allows a domestic corporation to claim the amount

of any income taxes paid or accrued during the taxable year to a

foreign country as a credit against its Federal income tax (subject

to certain limitations not applicable herein). See sec. 901(b)(1).

The purpose of the credit is to reduce international double

taxation. See American Chicle Co. v. United States, 316 U.S. 450,

452 (1942). In general, the person by whom foreign income tax is

considered paid is the person upon whom foreign law imposes legal

liability for the tax, even if another person (e.g., a withholding

agent) remits the tax. See sec. 1.901-2(f)(1), Income Tax Regs.

Foreign income tax generally may be considered paid by a taxpayer
 - 28 -

even if another party to a transaction agrees, as part of the

transaction, to assume the taxpayer’s foreign tax liability on the

taxpayer’s behalf. See sec. 1.901-2(f)(2), Income Tax Regs.

Issue 1. The Payment Issue

Petitioner bears the burden of proving that the Brazilian

income taxes for which it claims a credit were paid. See secs.

901(b)(1), 905(b);13 see also Continental Ill. Corp. v.

Commissioner, 998 F.2d 513, 516-517 (7th Cir. 1993) (the taxpayer

must establish foreign taxes for which it claims credit were not

only withheld, but paid), affg. on this point T.C. Memo. 1991-66;

Lederman v. Commissioner, 6 T.C. 991, 998-999 (1946) (holding that

pursuant to Treasury regulations, proof of the amount of the foreign

income tax withheld at the source will support a taxpayer’s claim

13
Sec. 905(b) provides:

SEC. 905(b). Proof of Credits.–-The credits
provided in this subpart shall be allowed only if the
taxpayer establishes to the satisfaction of the
Secretary --

(1) the total amount of income derived
from sources without the United States,
determined as provided in part I,

(2) the amount of income derived from
each country, the tax paid or accrued to
which is claimed as a credit under this
subpart, such amount to be determined under
regulations prescribed by the Secretary, and

(3) all other information necessary for
the verification and computation of such
credits.
 - 29 -

for credit, regardless of whether the credit claimed is for foreign

tax paid or foreign tax accrued, but that the provisional or interim

credit will be subject to adjustment if that withheld foreign tax

is not actually paid to the foreign taxing authority);14 Norwest

Corp. v. Commissioner, T.C. Memo. 1995-453.

Section 1.905-2(a)(1), Income Tax Regs., mandates that tax

credit claims made by corporations for foreign taxes be accompanied

by Form 1118, Computation of Foreign Tax Credit--Corporations.

Section 1.905-2(a)(2), Income Tax Regs., provides, in pertinent

part:

Except where it is established to the
satisfaction of the district director that it
is impossible for the taxpayer to furnish such
evidence, the form must have attached to it (i)
the receipt for each such tax payment if credit
is sought for taxes already paid, or (ii) the
return on which each such accrued tax was based
if credit is sought for taxes accrued.

Section 1.905-2(b), Income Tax Regs., provides for the use of

secondary evidence if a receipt or direct evidence of the amount of

tax withheld at the source cannot be supplied for taxes already

paid. Thus, pursuant to section 1.905-2(b), Income Tax Regs., while

taxpayers in the first instance must submit direct evidence of

14
However, as the Court of Appeals for the Seventh
Circuit noted in Continental Ill. Corp. v. Commissioner, 998 F.2d
513, 516 (7th Cir. 1993), affg. in part and revg. in part T.C.
Memo. 1991-66, where a net loan arrangement is involved and no
funds are ever paid over to the foreign taxing authority by the
borrower, difficulty exists in positing that there was a
“withholding” of funds inasmuch as there is no subtraction of
funds due and payable to the U.S. lender.
 - 30 -

foreign tax withholding and payment, if possible, the district

director may, in his discretion, accept secondary evidence that

foreign withholding was in fact withheld and paid.

A. The Parties’ Contentions

In its opening brief on remand, petitioner contends that

through direct and secondary evidence it has established that the

withholding taxes in issue were actually paid by the Central Bank

on petitioner’s behalf.

In his answering brief on remand, respondent contends that

petitioner has failed to establish that the withholding taxes in

issue were paid. Respondent maintains that (1) the evidence

petitioner relies upon is manifestly unreliable, and (2) the Central

Bank’s continuing reports that it received a “pecuniary benefit”

after June 28, 1985, suggests that the DARF’s the Central Bank

issued memorialized sham accounting entries. In this connection,

respondent argues:

Central Bank correspondence suggests that the DARFs
memorialized sham accounting entries. If someone
received a pecuniary benefit of 40% of the tax it paid,
it is reasonable to expect some level of awareness. If
the pecuniary benefit were eliminated, the taxpayer
should know that it was paying 40% more in taxes. This
is especially true when payments of hundreds of millions
of cruzeiros are involved.

Just the opposite occurred. The Central Bank
provided letters conveying the DARFs to the agent banks.
Schedules attached to each letter from the Central Bank
report each bank’s share of the relevant tax receipt and
an amount of pecuniary benefit received by the Central
Bank. * * * After June 28, 1985, the pecuniary benefit
(subsidy) rate had been reduced to zero through
 - 31 -

Resolution 1033. Yet, the Central Bank continued to
issue its letters and schedules (printouts) to the agent
banks reporting its receipt of the pecuniary benefit
(subsidy) through at least March 5, 1987, over a year and
eight months after the pecuniary benefit (subsidy) was
reduced to zero. * * * Exhibit 692-ZN(23) [the Nov. 19,
1985, letter from Mr. Oliveira to Morgan Bank discussed
in our findings] clearly shows the Central Bank issuing
an erroneous printout to the agent bank on November 19,
1985, reporting the “receipt” of a pecuniary benefit that
should never have been paid. * * * Petitioner continued
to report its Brazilian tax receipts net of a 40% subsidy
through at least January, 1987, relying upon erroneous
letters and underlying Central Bank printouts. * * * By
continuing to generate DARFs that reported pecuniary
benefit over a year and one half after its elimination,
the Central Bank has provided evidence showing that its
representations were, at best, inaccurate.

Respondent notes that in addition to Mr. Oliveira’s letter of

November 19, 1985, there were two Morgan Bank letters, respectively

dated January 21, 1986, and August 1986, each of which was discussed

supra.

In its reply brief on remand, petitioner denies that a

substantial inconsistency exists in the evidence it offered to

substantiate the Central Bank’s actual payment of the withholding

tax in issue. Specifically, petitioner denies that the Central Bank

reported to the foreign lenders that it had continued to “receive”

a “pecuniary benefit” in connection with its post-June 28, 1985,

restructuring debt remittances and asserts:

Respondent identifies several letters which he
claims reflect receipt of the pecuniary benefit by the
Central Bank after June 28, 1985, when the pecuniary
benefit was reduced to zero. * * * An examination of the
documents * * * shows the claimed inaccuracies do not
exist. * * *
 - 32 -

Exhibits 694-ZP(6) [the Jan. 21, 1986, Morgan Bank
letter] and 694-ZP(7) [the August 1986 Morgan Bank
letter] are both form letters from Morgan, not the
Central Bank. * * * No printouts were attached to these
Exhibits and thus they also cannot support Respondent’s
claim that the printouts showed the pecuniary benefit.

Finally, the parties have stipulated that Exhibit
692-ZN(23) relates to an interest payment for January
1985, well before the pecuniary benefit was eliminated.
(Exhibit 697-ZS, p. ST004989)[15] * * * Therefore, this
document [Exhibit 692-ZN(23)], like the others, cannot
support Respondent’s claim.

B. Substantial Inconsistency Concerning the Central Bank’s
Purported Withholding Tax Payments on Petitioner’s Behalf

We agree with respondent that there is a substantial

inconsistency in the evidence concerning the Central Bank’s

15
Petitioner’s argument overstates the parties’
stipulation regarding Joint Exhibit 697-ZS. As indicated supra,
Joint Exhibit 697-ZS lists the restructuring debt loans and
interest payments subject to the March 1984 Brazilian IRS ruling.
This exhibit further lists and summarizes the related DARF’s and
other documentation in the record that were issued in connection
with each of the purported withholding tax payments petitioner
contends the Central Bank made on petitioner’s and the other
foreign lenders’ behalf. In that regard, the parties stipulated:

683. The Court of Appeals for the D.C. Circuit,
163 F.3d 1363, 1369 (D.C. Cir. 1999) remand requires
that the Court determine, among other things, “which of
Riggs’ loans were subject to the Minister’s ruling.”
The parties agree that Joint Exhibit 697-ZS shows the
amount of claimed withholding tax in the column
captioned “Petitioner’s Tax Amount (without subsidy
reduction)” relating to loans which are subject to the
Minister of Finance’s ruling * * *

684. Joint Exhibit 697-ZS summarizes the
information set forth on the DARFs associated with the
CGA and DFA interest payments which are subject to the
Minister of Finance’s ruling. The DARFs and
accompanying documents are included in the record as
Joint Exhibits 661-YI through 694-ZP.
 - 33 -

purported payment of withholding tax on petitioner’s behalf. As

determined in our findings, the Central Bank reported that it was

continuing to “receive” a “pecuniary benefit” in connection with its

purported withholding tax payments on the foreign lenders’ behalf

on its post-June 28, 1985, restructuring debt interest remittances

to them, notwithstanding that the Brazilian Government had reduced

the pecuniary benefit to zero on June 28, 1985. In arguing to the

contrary, petitioner misinterprets the evidence of record. Further,

petitioner erroneously asserts that Mr. Oliveira’s letter of

November 19, 1985 (Joint Exhibit 692-ZN(23)), covers an earlier

January 1985 phase II CGA interest payment. Petitioner’s erroneous

assertion regarding that letter rests solely upon an incorrect entry

and likely typographical error in the parties’ summary exhibit,

Joint Exhibit 697-ZS.

Curiously, petitioner overlooks the seven September 1985 phase

II CGA interest payments that were remitted after the Brazilian

Government had reduced the pecuniary benefit to zero on June 28,

1985. Joint Exhibit 697-ZS correctly lists Joint Exhibit 692-ZN(23)

(Mr. Oliveira’s letter of November 19, 1985, and its attachments)

as covering those seven September 1985 interest payments. Moreover,

the Central Bank schedule pages in Exhibit 692-ZN(23)16 show that,

16
These include Central Bank schedule pages covering the
phase II CGA, tranche I, tranche II, tranche IV, tranche V,
tranche VI, and tranche VII interest payments made to petitioner
and other foreign lenders on Sept. 27, 1985.
 - 34 -

in computing and setting forth the Central Bank’s purported

withholding tax payments on its September 1985 phase II CGA interest

payments to various foreign lenders (including petitioner), the

Central Bank used exchange rates that were applicable on September

27, 1985, and not exchange rates applicable in January 1985. For

instance, in computing the “withholding tax imposed” on the

September 27, 1985, phase II CGA, tranche I interest remittance of

$17,441.66 (U.S.) to petitioner, the Central Bank employed an

exchange rate of 7,772 cruzeiros to $1 (U.S.). A copy of the

Central Bank foreign currency conversion rate chart (in Joint

Exhibit 692-ZN(23)) enclosed in Mr. Oliveira’s letter of November

19, 1985, is contained infra in appendix A. See also infra note 19

concerning the exchange rate of 3,381 cruzeiros to $1 (U.S.) that

the Central Bank used to compute the “grossed-up interest paid” on

its January 16, 1985, phase II CGA interest remittance to

petitioner.

Contrary to petitioner’s argument, the Central Bank schedule

pages in Joint Exhibit 692-ZN(23) reflect that the Central Bank

itself continued to report to the foreign lenders that it received

a “pecuniary benefit” equal to 40 percent of the “withholding tax

imposed” on its September 1985 phase II CGA interest payments to

them, even though after June 28, 1985, no Brazilian borrower

actually received a pecuniary benefit in connection with its

interest remittances abroad. A copy of the Central Bank schedule
 - 35 -

page in Joint Exhibit 692-ZN(23), setting forth (1) the “withholding

tax imposed”, (2) the “40-percent pecuniary benefit” the Central

Bank received, and (3) the purported “balance (60 percent) of actual

withholding tax paid” by the Central Bank, on its September 1985

phase II CGA, tranche I interest payments to petitioner and other

foreign lenders, is contained infra in appendix B. (The information

from this schedule page concerning the Central Bank’s September 27,

1985, phase II CGA, tranche I net interest remittance of $17,441.66

(U.S.) to petitioner, is discussed in our findings.) Indeed, (1)

the Morgan Bank letter dated January 21, 1986 (Joint Exhibit 694-

ZP(6), pertinent portions of which are quoted in our findings), and

(2) petitioner’s own “comptroller’s memorandum” dated February 20,

1986 (Joint Exhibit 695-ZQ(4), pertinent portions of which are

quoted in our findings), reflect that these Central Bank schedule

pages enclosed in Mr. Oliveira’s November 19, 1985, letter, covered

phase II CGA, tranche I through tranche VII interest payments for

the period from “June 28, 1985 to September 27, 1985". The Morgan

Bank letter and the comptroller’s memorandum each further confirm

that the Central Bank had reported “receiving” a “40-percent

pecuniary benefit” in connection with its purported withholding tax

payments on those September 27, 1985, phase II CGA interest

payments.

Although Joint Exhibit 697-ZS (which summarizes and lists the

related DARF’s and other documents issued in connection with the
 - 36 -

Central Bank’s restructuring debt interest remittances from 1984

through early 1988) lists Joint Exhibit 692-ZN(23) as covering an

earlier January 1985 phase II CGA interest payment to the foreign

lenders, an examination of various underlying documents shows this

summary listing to be a misstatement and possibly a typographical

error. We note that November 19, 1985, not September 6, 1985, is

the date of the Central Bank letter in Joint Exhibit 692-ZN(23).

Yet, in erroneously listing Joint Exhibit 692-ZN(23) as the Central

Bank letter transmitting the DARF’s covering the January 1985 phase

II CGA interest payment, Joint Exhibit 697-ZS incorrectly states the

date of the Central Bank letter in Joint Exhibit 692-ZN(23) to be

September 6, 1985. We also note that Joint Exhibit 697-ZS lists,

immediately after the January 1985 phase II CGA interest payment,

later March, April, and June 1985 phase II CGA interest payments.

With respect to those later March, April, and June 1985 phase II CGA

interest payments, Joint Exhibit 697-ZS correctly lists Joint

Exhibit 692-ZN(22) (consisting of a Central Bank letter dated

September 6, 1985, and some of that letter’s attachments) as the

Central Bank letter transmitting the DARF’s pertaining to those

interest payments.17 Moreover, with respect to the January, March,

April, and June 1985 phase II CGA interest payments, Joint Exhibit

17
The Central Bank’s Sept. 6, 1985, letter transmitted
DARF’s purporting to evidence various withholding tax payments,
including those tax payments effected in January, March, April,
and June 1985.
 - 37 -

697-ZS correctly lists Exhibit 694-ZP(5) as the December 5, 1985,

agent bank letter covering those interest payments.18 In contrast,

in connection with the various September 1985 phase II CGA payments,

Joint Exhibit 697-ZS correctly lists Joint Exhibit 694-ZP(6) as the

January 21, 1986, agent bank letter covering those September 1985

interest payments. As discussed supra, by this January 21, 1986,

letter (which is quoted in our findings), Morgan Bank was forwarding

DARF’s and supporting schedules purporting to evidence the Central

Bank’s alleged withholding tax payments on the foreign lenders’

behalf for the “interest period June 28, 1985 to September 27,

1985".

Further examination of Joint Exhibit 692-ZN(23) discloses that

Mr. Oliveira, by his November 19, 1985, letter, was transmitting

DARF’s covering only the phase II CGA interest payments the Central

Bank had made on September 27, 1985, not the January 1985 phase II

CGA interest payment. Mr. Oliveira’s letter makes no mention of any

January 1985 phase II CGA interest payment; the letter states only

that DARF’s for “withholding tax payments” effected “September /85"

were attached. Joint Exhibit 692-ZN(23) also contains no Central

Bank schedule page covering any January 1985 phase II CGA interest

18
Indeed, the Dec. 5, 1985, Morgan Bank letter (in Joint
Exhibit 694-ZP(5)) stated DARF’s and supporting schedules were
enclosed covering phase II CGA interest payments made on the
following specified dates in 1985: January 16; March 7; March
11; March 12; March 27; April 16; June 12; June 18; June 27; and
June 28.
 - 38 -

payments. See supra note 16. In comparison, as was noted supra

note 17, the Central Bank’s letter of September 6, 1985 (Joint

Exhibit 692-ZN(22)), states the Central Bank was transmitting DARF’s

covering phase II CGA interest payments that had been made by the

Central Bank in January, March, April, and June 1985. Indeed, one

of the Central Bank schedule pages in Exhibit 692-ZN(22) covers

various interest payments made to petitioner and other foreign

lenders on January 16, 1985. In preparing this schedule page

covering those January 16, 1985, interest payments, the Central Bank

used an exchange rate of 3,381 cruzeiros to $1 (U.S.), not an

exchange rate of 7,772 cruzeiros to $1 (U.S).19 As was previously

discussed, the latter exchange rate of 7,772 cruzeiros to $1 (U.S.)

applicable on September 27, 1985, was used in preparing the Central

Bank schedules in Exhibit 692-ZN(23). See infra appendices A and

B.

Notwithstanding petitioner’s argument to the contrary, the

Central Bank schedules that Mr. Oliveira (a FIRCE division head)

19
This Central Bank schedule page (in Exhibit 692-ZN(22))
reflects that with respect to the Jan. 16, 1985, phase II CGA
interest payment of $18,465 (U.S.) to petitioner, the Central
Bank computed the “grossed-up interest paid” to be 83,240,220
cruzeiros. Considering the gross-up formula the Central Bank
employed, we calculate the Central Bank on Jan. 16, 1985, had
used an exchange rate of 3,381 cruzeiros to $1 (U.S.). In other
words, that was the applicable exchange rate the Central Bank
used in order to compute as follows that amount of “grossed-up
interest paid” on its $18,465 (U.S.) net interest remittance to
petitioner:

83,240,220 cruzeiros = $18,465 (U.S.) X 3,381 (cruzeiros per dollar)
1 - 25% withholding tax rate
 - 39 -

enclosed in his November 19, 1985, letter, establish conclusively

that the Central Bank itself erroneously reported to the foreign

lenders its “receiving” a nonexistent “pecuniary benefit” on its

purported withholding tax payments on post-June 28, 1985,

restructuring debt interest remittances to them. See infra appendix

B.

The record further reflects that for a substantial period after

June 28, 1985, the Central Bank continued to report to the foreign

lenders that it was “receiving” a nonexistent “pecuniary benefit”

in connection with its post-June 28, 1985, restructuring debt

interest remittances to them. This evidence includes a Morgan Bank

letter, dated August 1986, relating to the Central Bank’s respective

phase II CGA interest remittances on December 30, 1985, and March

26, 1986. In discussing the group DARF’s and supporting schedules

the Central Bank had issued to the foreign lenders on those interest

payments, Morgan Bank’s August 1986 letter stated the enclosed

Central Bank schedules reflected the Central Bank to have received

a “40% cruzados tax rebate amount”. As a result of these and other

documents issued erroneously reporting the Central Bank’s “receipt”

of a “pecuniary benefit” in connection with its post-June 28, 1985,

restructuring debt remittances to the foreign lenders, petitioner

mistakenly believed the Central Bank and other Brazilian borrowers

were continuing to “receive” a “pecuniary benefit” well after June

28, 1985. In various memoranda to petitioner’s comptroller on the
 - 40 -

foreign tax credits petitioner should claim in connection with these

post-June 28, 1985, restructuring debt interest remittances,

petitioner’s International Division reported that a Brazilian tax

rate of “60 percent of 25 percent” had been imposed on the grossed-

up interest payments. On its 1985 through 1987 returns, petitioner

thus reduced by 40 percent its claimed foreign tax credits for

Brazilian tax on interest paid by Brazilian borrowers after June 28,

1985.

C. Certain Other Payment Evidence Offered by Petitioner

As Joint Exhibit 697-ZS reflects, in addition to the DARF’s the

Central Bank issued, the record contains a number of purported

letters the Central Bank issued to Banco do Brazil in connection

with the Central Bank’s alleged restructuring debt withholding tax

payments. In these letters, the Central Bank ostensibly advised

Banco do Brazil that it had credited Banco do Brazil’s Banking

Reserves Account at the Central Bank with the amount of the

purported tax payments covered in the copies of the DARF’s the

Central Bank was also enclosing to Banco do Brazil.

Petitioner has further offered the testimony of Rolf von

Paraski, its expert on how Banco do Brazil (the Brazilian

Government’s agent for payment of taxes) accounted for its

withholding tax collections. Mr. von Paraski examined one purported

withholding tax payment of the Central Bank on its July 1985 phase

II DFA interest remittances to the foreign lenders, which he
 - 41 -

selected at random. Mr. von Paraski verified that certain entries

had been made on Banco do Brazil’s books reflecting Banco do

Brazil’s collection of this purported withholding tax payment from

the Central Bank.

We find Mr. von Paraski’s testimony far from dispositive in

establishing actual payment by the Central Bank of the purported

withholding tax payments in issue. As stated earlier in our

findings, on the basis of the record before us, it is impossible to

determine whether or what entries were made on the respective books

of the Central Bank and the National Treasury to reflect the Central

Bank’s purported restructuring debt withholding tax payments.

Further, we are unable to determine what, if any, entries were made

to determine: (1) Whether the Central Bank was reimbursed by the

National Treasury for its purported withholding tax payments, or (2)

whether the Central Bank received the pecuniary benefit based on

those alleged withholding tax payments.

Moreover, we find Mr. von Paraski’s testimony to be unhelpful

in other important respects. Among other things, Mr. von Paraski

did not specifically address whether the Central Bank had received

a “pecuniary benefit” in connection with its alleged withholding tax

payment on the July 1985 phase II DFA interest remittances.20

20
See infra note 21. On its return, petitioner reduced
the foreign tax credit it claimed for Brazilian tax on this July
1985 phase II DFA interest payment by the “40-percent pecuniary
benefit” it mistakenly believed the Central Bank to have
(continued...)
 - 42 -

Although petitioner notes certain testimony by Mr. von Paraski in

which he mentioned offhand not knowing of any “refund” being made

to the Central Bank of the alleged restructuring debt withholding

tax payments, Mr. von Paraski did not actually inquire into (1)

whether the Central Bank received the pecuniary benefit, or (2)

whether any other transactions took place resulting in a “refund”

being made of the Central Bank’s “withholding tax payment”. Mr. von

Paraski examined the books and records of Banco do Brazil only to

confirm that appropriate entries had been made on those books

reflecting Banco do Brazil’s ostensible collection of withholding

tax from the Central Bank in connection with the July 1985 phase II

DFA interest payment Mr. von Paraski had chosen to examine. He did

not examine the respective books of the Central Bank and National

Treasury to determine how the purported tax payment had been

reflected and treated on their books. Hence, we accord little

weight to Mr. von Paraski’s testimony that he was unaware of such

“refund” transactions having taken place, as he did not conduct a

full inquiry into these matters.21

20
(...continued)
received.
21
In this connection, on direct examination, Mr. von
Paraski testified:

Q. Are you familiar with the pecuniary benefit
that used to be paid to Brazilian borrowers of foreign
currency loans?

(continued...)
 - 43 -

At any rate, Mr. von Paraski’s testimony sheds no light on the

Central Bank’s substantially inconsistent behavior in erroneously

reporting to the foreign lenders that it continued to “receive” a

nonexistent “pecuniary benefit” in connection with its post-June 28,

1985, interest remittances to them. See supra note 20.

21
(...continued)
A. Yes, I do.

Q. If you assume that the pecuniary benefit
reduced the amount of taxes that were collected, are
you aware of any other type of transaction that
resulted in a partial or total refund of the tax
amounts paid by the Central Bank on the restructured
debt?

A. No, I have no knowledge of that.

Q. To your knowledge, other than in the case of
the pecuniary benefit, were there any accounting
entries made that negated, eliminated or reduced Banco
do Brasil’s collection of taxes from the Central Bank?

A. No, I have no knowledge.
 - 44 -

D. Conclusions22

We have substantial doubts as to (1) the reliability of the tax

payment documentation and other evidence presented to substantiate

the Central Bank’s purported payment of withholding tax on

petitioner’s and the other foreign lenders’ behalf in connection

with its restructuring debt interest remittances to them, and (2)

22
In its opening and reply briefs on remand, petitioner
alternatively argues that even if the tax was not, in fact, paid
to the Brazilian National Treasury, in the case of a net loan to
a governmental borrower, like the Central Bank, petitioner
should, for purposes of sec. 901, be deemed to have paid the
foreign tax liability where that liability has been assumed by
the governmental borrower. In arguing that actual payment is
unnecessary and can be dispensed with where the foreign tax
liability has been assumed by a governmental borrower, petitioner
cites and heavily relies upon sec. 1.901-2(f)(2)(ii), Example
(3), Income Tax Regs. In his answering brief on remand,
respondent, among other things, (1) disagrees that actual payment
is unnecessary, and (2) disputes petitioner’s interpretation of
Example (3) of sec. 1.901-2(f)(2)(ii), Income Tax Regs.
Notwithstanding the parties’ foregoing arguments, we do not
consider the deemed payment issue to be properly before us on
remand because it is an issue outside the scope of the Court of
Appeals’ mandate. In remanding Riggs I, the Court of Appeals
directed us solely to determine “in the first instance which of
Riggs’ loans were subject to the Minister’s ruling, whether the
taxes were in fact paid by the Central Bank, and whether Riggs’
credits must be reduced by the amount of any subsidies that the
Central Bank may have received.” Riggs Natl. Corp. & Subs. v.
Commissioner, 163 F.3d at 1369. Indeed, petitioner’s position on
appeal (which the Court of Appeals accepted) was that, pursuant
to his Mar. 14, 1984, decision, the Brazilian Finance Minister
had issued a “compulsory order”, id. at 1368, to the Central Bank
to pay this Brazilian income tax “on or before the last business
day of the month following the month in which the withholding is
made”, Riggs Natl. Corp. & Subs. v. Commissioner, 107 T.C. at
329. It appears difficult to conceive of the Minister’s decision
as being a “compulsory order” if the Central Bank did not
actually have to pay this “tax” (as petitioner now alternatively
argues).
 - 45 -

whether the Central Bank actually paid the withholding taxes in

issue. Petitioner offered no explanation as to why the Central Bank

erroneously continued to report to the foreign lenders that it had

received a “pecuniary benefit” in connection with its post-June 28,

1985, interest remittances to them, even though the pecuniary

benefit had been reduced to zero through the Central Bank’s issuance

of Resolution 1,033 on June 28, 1985. In its erroneous reports to

the foreign lenders, the Central Bank provided the lenders with

detailed schedules in which it had computed with respect to each

restructuring debt interest remittance made to a foreign lender:

(1) The “40-percent pecuniary benefit” the Central Bank received,

and (2) the “60-percent balance of actual withholding tax paid”.

If, as petitioner asserts, the Central Bank actually had paid

withholding taxes on petitioner’s and the other foreign lenders’

behalf on its restructuring debt interest remittances to them, we

then find inexplicable the Central Bank’s erroneous actions well

after June 28, 1985, in continuing to report its having received a

nonexistent “pecuniary benefit”. This is especially so in light of

the Central Bank’s prior issuance of Resolution 1,033 to make it

“public knowledge” that the pecuniary benefit had been reduced to

zero effective June 28, 1985.

Petitioner has failed to establish that the withholding taxes

in issue were paid by the Central Bank on petitioner’s behalf. The

evidence presented leads us to conclude that the group DARF’s are
 - 46 -

untrustworthy and were concocted to substantiate legerdemain; i.e.,

they were devised to portray the appearance of the fictitious

payments of taxes. Accordingly, we find that the group DARF’s do

not constitute direct or secondary evidence that the Central Bank

paid withholding taxes on petitioner’s behalf. Moreover, we find

nothing else in the record that constitutes credible direct or

secondary evidence that the purported withholding tax payments were

in fact made. Consequently, we hold that petitioner is not entitled

to foreign tax credits, during 1984 through 1986, under section 901

for the purported withholding tax payments by the Central Bank on

its restructuring debt interest remittances to petitioner. See sec.

905(b).

Issue 2. The Subsidy/Pecuniary Benefit Issue

In light of our holding on the payment issue, we need not reach

the issue of whether the Central Bank’s purported “withholding tax

payments” on petitioner’s behalf (that are potentially creditable

to petitioner) must be reduced by the amount of any pre-June 28,

1985, pecuniary benefit the Central Bank may have received and

whether that benefit constitutes an indirect subsidy under section

1.901-2(e)(3)(ii), Income Tax Regs. Compare Continental Ill. Corp.
 - 47 -

v. Commissioner, T.C. Memo. 1991-66, with Amoco Corp. v.

Commissioner, T.C. Memo. 1996-159, affd. 138 F.3d 1139 (7th Cir.

1998).

Decision will be

entered as previously

entered on October 15,

1997.
 - 48 -

APPENDIX A

Central Bank Foreign Currency Conversion
Rate Chart In Joint Exhibit 692-ZN(23)

BANCO CENTRAL DO BRASIL
CONVERSION RATE ON 09.27.85

MOEDA

220 US$ 7.772.00
470 Y 35.369
361 BF 142.19
335 f. 2.564.09
595 Lit 4.2830
610 DM 2.895.25
919 ECU 6.395.19
165 CAN$ 5.682.53
425 Sw.Fr. 3.530.48
540 £ 10.882.35
 - 49 -

APPENDIX B

CENTRAL BANK SCHEDULE PAGE IN JOINT EXHIBIT 692-ZN(23)
BANCO CENTRAL DO BRASIL
DIRETORIA DA AREA EXTERNA
FIRCE
BRAZILIAN FINANCING PLAN-PHASE II/PROJECT A
IMPOSTO DE RENDA INCIDENTE SOBRE JUROS PAGOS EN 27.09.85.

CONTRAVALOR
JUROS BRUTO IMPOSTO DE BENEFICIO RECOMINENTO
AL JOUSTO PROJ. A EN CRS RENDA PECUNIARIO LIQUIDO
NOME DO CREDOR MOEDA I.R. TRANCHE I DOS JUROS S/JUROS SOBRE JUROS DE I.R. S/JUROS

NORWEST BANK MINNEAPOLIS 220 .2500 5755.75 59644918.66 14911229.66 5964491.86 8946737.80
PANAMERICAN BANK INTL. 220 .2500 3128.13 32415768.48 8103942.12 3241576.84 4862365.27
PARTNERSHIP PACIFIC BANK N.V. 220 .2500 5704.59 59114764.64 14778691.16 5911476.46 8867214.69
PHIBROBANK AG-ZUG 220 .2500 .00 .00 .00 .00 .00
PHILADELPHIA NAT. CORP.-PHIL. 220 .2500 .00 .00 .00 .00 .00
PHILIPPINE NAT. BANK 220 .2500 719.47 7455627.70 1863906.94 745562.77 1118344.16
PHILLIP BROS. AG 220 .2500 .00 .00 .00 .00 .00
PICTET CIE 220 .2500 2558.11 26508841.22 6627210.30 2650884.12 3976326.18
PIERSON HELBRING PIERSON NV-AMST. 220 .2500 1492.22 15463378.45 3865844.61 1546337.84 2319506.76
PITTSBURGH NAT. BANK-PITTS. 220 .2500 .00 .00 .00 .00 .00
PR CHRISTIANIA BANK (UK) 220 .2500 .00 .00 .00 .00 .00
POSTIPANKI (UK) LTD. 220 .2500 12335.62 127829918.18 31957479.54 12782991.81 19174487.72
PRIVATBANKEN AG 220 .2500 3575.20 37048405.86 9262151.46 3704860.58 5557290.88
PROVIDENT NAT. BANK-PHIL. 220 .2500 10901.03 112963740.21 28240935.05 11296374.02 16944561.03
RAINIER NAT. BANK, SEATTLE 220 .2500 .00 .00 .00 .00 .00
REPUBLIC NAT. BK OF NEW YORK 220 .2500 25313.29 262313186.50 65578296.62 26231318.65 39346977.97
REPUBLICBANK DALLAS 220 .2500 .00 .00 .00 .00 .00
RHODE ISLAND HOSPITAL TRUST NT BK 220 .2500 5761.41 59703571.36 14925892.84 5970357.13 8955535.70
RIGGS NAT. BK. OF WASHINGTON 220 .2500 17441.66 180742108.69 45185527.17 18074210.86 27111316.30
RIYAD BANK LTD. 220 .2500 9302.22 96395805.12 24098951.28 9639580.51 14459370.76
ROYAL BANK OF CANADA-TORONTO 220 .2500 .00 .00 .00 .00 .00
ROYAL BANK OF SCOTLAND-LONDON 220 .2500 14939.21 154810053.49 38702513.37 15481005.34 23221508.02
ROYAL TRUST CO. OF CANADA 220 .2500 .00 .00 .00 .00 .00
SAMUEL MONTAGU AND CO. (JERSEY) 220 .2500 1279.06 13254472.42 3313618.10 1325447.24 1988170.86
SAMUEL MONTAGU CO. LTD. 220 .2500 8685.39 90003801.44 22500950.36 9000380.14 13500570.21
SAUDI AMERICAN BANK-RIYADH 220 .2500 14389.38 149112348.48 37278087.12 14911234.84 22366852.27
SAUDI BRITISH BANK 220 .2500 2558.11 26508841.22 6627210.30 2650884.12 3976326.18
SAUDI CAIRO BANK 220 .2500 852.70 8836245.86 2209061.46 883624.58 1325436.88
SAUDI INTL. BANK 220 .2500 71925.13 745336147.14 186334036.78 74533614.71 111800422.07
SCANDINAVIAN BANK LTD. 220 .2500 .00 .00 .00 .00 .00
 - 50 -

C0NTRAVALOR
JUROS BRUTO IMPOSTO DE BENEFICIO RECOMINENTO
ALJOUSTO PROJ. A EM CRS RENDA PECUNIARIO LIQUIDO DE
NOME DO CREDOR MOEDA DO I.R. TRANCHE I DOS JUROS S/JUROS SOBRE JUROS I.R. S/JUROS

SEATTLE FIRST NATIONAL BANK-INT. 220 .2500 33530.71 347467570.82 86866892.70 34746757.08 52120535.62
SECURITY PACIFIC NAT. BANK-L.A. 220 .2500 .00 .00 .00 .00
SHANGAI COMMAL. BANK LTD. 220 .2500 426.34 4418019.30 1104504.82 441801.93 662702.89
SHAMMUT BANK OF BOSTON 220 .2500 7034.21 72893173.49 18223293.37 7289317.34 10933976.02
SHAMMUT WORCESTER COUNTY BANK 220 .2500 239.81 2485071.09 621247.77 248507.10 372760.66
SINGAPORE NOMURA MERCHANT BK 220 .2500 852.70 8836245.86 2209061.46 883624.58 1325436.88
SINGER FRIEDLANDER LTD. 220 .2500 35.64 369325.44 92331.36 36932.54 55398.81
SOCIETY NATIONAL BK OF CLEVELAND 220 .2500 1308.13 13555715.14 3388928.78 1355571.51 2033357.27
SOC. FIN. EUROP. FIN. CO. N.V. 220 .2500 .00 .00 .00 .00 .00
SOUTHEAST BANK N.A.-MIAMI 220 .2500 .00 .00 .00 .00 .00
SOUVRAIN BANK N.A. 220 .2500 683.27 7080499.25 1770124.81 708049.92 1062074.88
SPAREKASSEN SDS, CAYMAN BRANCH 220 .2500 852.70 8836245.86 2209061.46 883624.58 1325436.88
STANDARD CHARTERED BANK LTD. 220 .2500 44040.19 456373808.90 114093452.22 45637380.89 68456071.33
STANDARD CHARTERED MERCHANT BANK 220 .2500 .00 .00 .00 .00 .00
STATE BANK OF INDIA-NV 220 .2500 10377.78 107541474.88 26885368.72 10754147.48 16131221.23