Bank of America v. United States

• Decision Date: 02 June 1982
• Docket Number: No. 402-71.,402-71.
• Parties: BANK OF AMERICA, an Edge Act corporation, v. The UNITED STATES.
• Court: U.S. Claims Court

680 F.2d 142

BANK OF AMERICA, an Edge Act corporation, v. The UNITED STATES.

No. 402-71.

United States Court of Claims.

June 2, 1982.

Stephen J. Swift, San Francisco, Cal., atty. of record, for plaintiff; Charles R. Conradi, San Francisco, Cal., of counsel.

Kenneth R. Boiarsky, with whom was Asst. Atty. Gen. Glenn L. Archer, Jr., Washington, D. C., for defendant; Theodore D. Peyser and Donald H. Olson, Washington, D. C., of counsel.

Before DAVIS, KASHIWA and SMITH, Judges.

OPINION

KASHIWA, Judge:

This case is before the court on the defendant's exceptions to the findings of fact and recommended opinion of Trial Judge John P. Wiese. We are faced with the question whether certain commissions received by the plaintiff, Bank of America, an Edge Act corporation, should be characterized as United States or foreign source income for purposes of the Internal Revenue Code. The trial judge held that all the commissions at issue should be classified as income from sources without the United States. We have given careful consideration to the trial judge's report, the parties' submissions, and oral argument. We find that although we agree with the result reached by the trial judge as to acceptance and confirmation commissions, our reasoning differs. With regard to negotiation commissions, we reverse the trial judge and hold such commissions are income from sources within the United States.

I.

Plaintiff is an Edge Act corporation organized and existing under the laws of the United States, 12 U.S.C. §§ 611-614 (1976).¹ The Edge Act amended the Federal Reserve Act in 1919 to allow national banks to participate in international banking through qualified subsidiaries. These subsidiaries, such as plaintiff, are domestically organized corporations which are permitted to offer international banking services. As an Edge Act corporation, plaintiff is only permitted to transact international business and therefore is actively involved in financing of international trade. The financing of international trade often occurs through the issuance of short-term loans, confirmed letters of credit, and the issuance of banker's acceptances. We are concerned here with the commissions charged by the plaintiff for confirmed letters of credit, banker's acceptances, and negotiations in connection with export letters of credit. These commissions were paid to the plaintiff in the years 1958 through 1960 by foreign banks located in Germany, France, Guatemala, and Singapore.

The transactions at issue involve commercial letters of credit issued by a foreign bank on behalf of a foreign purchaser for the benefit of an American exporter. Such a transaction begins with an agreement by an American exporter to sell goods to a foreign purchaser. The foreign purchaser then requests a commercial letter of credit from a foreign bank. A commercial letter of credit is a mechanism whereby trade is facilitated; it is a document issued by a bank on behalf of its customer. This document commits the bank to pay the beneficiary of the letter when certain terms have been met. By issuing a letter of credit, a bank has substituted its credit for that of its customer. The bank issuing the letter of credit is commonly referred to as the opening bank. An opening bank will only issue a letter of credit when it has evaluated its customer's credit and found it satisfactory. Thus, the foreign bank issues the letter of credit for the benefit of the American seller if it finds the foreign purchaser creditworthy. The terms of such a letter typically include some of the terms of the sales agreement between the merchants. By issuing such a letter of credit, the foreign opening bank agrees to pay the American seller a specified amount when the American seller meets the terms of the letter of credit. The foreign opening bank, in turn, expects its customer, the foreign importer, to reimburse it.

The letter of credit the opening bank issues may be one of two different types known as sight and usance (or time) letters of credit. The beneficiary of a sight letter of credit is entitled to payment once it is determined he has met the terms of the letter. The beneficiary of a usance letter of credit, on the other hand, is not entitled to payment immediately upon the determination he has met the terms of the letter but, instead, will be entitled to payment at a specified time in the future. Plaintiff's transactions in the years in question involve both sight and usance letters of credit. A draft is the specific document that directs payment be made to the beneficiary. There are both sight and time drafts.

Any letter of credit a foreign bank issues on behalf of a foreign purchaser for the benefit of an American exporter can be advised by the plaintiff as a courtesy to the foreign bank. When a letter of credit is advised by the plaintiff, plaintiff simply informs the American beneficiary of the letter that a letter of credit has been issued in his favor and forwards the letter. The plaintiff does not undertake any credit commitment and so informs the letter's beneficiary. Uniform Customs & Practice for Commercial Documentary Credits Fixed by the Thirteenth Congress of the International Chamber of Commerce, Article 6 (effective January 1, 1952) (hereinafter UCP).² See generally U.C.C. § 5-103. During the years 1958 through 1960, no fee was charged by the plaintiff for advisement.

Alternatively, a foreign bank can request that plaintiff confirm a sight letter of credit. If plaintiff agrees to confirm a sight letter of credit, it not only advises the letter but it irrevocably commits itself to pay the face amount of the letter. Payment is only made if the beneficiary has met the terms of the letter of credit. UCP, Article 5. Under ordinary circumstances, plaintiff is reimbursed by the foreign bank for paying the draft. Whether or not plaintiff agrees to confirm a letter of credit depends upon its evaluation and credit analysis of the opening bank. When plaintiff does agree to confirm, it notifies the beneficiary. At the time of notification, plaintiff becomes obligated to pay the beneficiary regardless of any changes that might take place affecting the ability of the opening bank to reimburse the plaintiff. Subsequent to notification, a beneficiary can present the letter of credit and supporting documents for payment at any time.

After plaintiff has paid the amount of the draft to the beneficiary, it will ordinarily debit the foreign bank's account. Occasionally, a foreign bank will prepay the amount of the draft. When prepayment occurs, plaintiff usually waives the confirmation commissions. During the years 1958 through 1960, plaintiff charged the opening foreign bank a commission for confirmation of 1/20 of 1 percent of the face amount of the draft for each calendar quarter or fraction thereof the draft was outstanding. If this amount was less than $2.50, a minimum commission of $2.50 was charged. Confirmation commissions are charged the opening bank upon confirmation.

A foreign bank can also request that plaintiff negotiate a letter of credit. This can be done with either advised or confirmed letters of credit. Negotiation is the process by which the beneficiary's papers are checked to see whether they meet the terms of the letter of credit. This process takes place at the offices of the plaintiff in the United States. The papers are then forwarded to the opening bank which independently checks the papers. Neither bank inspects the merchandise. In cases involving confirmed letters of credit, negotiation is always required. A separate commission was charged for negotiation of 1/10 of 1 percent of the face amount of the draft. If this amount was less than $5, a minimum of $5 was charged. With confirmed letters of credit, the negotiation commission is charged at the time the sight draft is honored.

The third type of commission we are concerned with is acceptance commissions. Acceptance financing can be used to obtain money directly, to finance the storage of goods, to refinance sight letters of credit, and to finance export/import trade. The acceptance commissions involved in this case were paid to plaintiff by foreign banks as a result of plaintiff's acceptance of time drafts drawn pursuant to usance letters of credit issued by those foreign banks or pursuant to lines of credit extended by plaintiff to the foreign banks. When a foreign bank requests plaintiff's involvement in acceptance, plaintiff first undertakes a credit analysis of the foreign bank. If plaintiff agrees, the following procedures take place.

In circumstances involving usance letters of credit, when the beneficiary presents the letter of credit and accompanying documents to the plaintiff, plaintiff examines the documents to see whether they conform to the terms of the letter of credit. If the documents conform, plaintiff places its acceptance stamp upon the draft. By placing its stamp upon the draft, plaintiff obligates itself to pay the face amount of the draft on the day the draft becomes due. Once the plaintiff's acceptance is stamped, the draft becomes a money market obligation and is freely tradeable. Plaintiff is obligated to pay any holder in due course on the date the draft becomes due.

Customarily, the foreign bank pays the plaintiff the face amount of the time draft on the day preceding the date of its maturity. This normally is done by debiting the account of the foreign bank. Whether or not the foreign bank makes the payment, plaintiff is obligated to pay the holder in due course of the draft. The acceptance commission charged by the plaintiff would vary from 1.5 percent to 2.5 percent per year of the face amount of the draft, depending upon the creditworthiness of the foreign bank.

In circumstances involving lines of credit, these lines of credit are first established by plaintiff for its customer, the foreign bank, after a thorough credit evaluation is conducted by the plaintiff. Typically,...