Capital One Wins ‘Significant’ Tax Victory on Fees (Update3)

By Ryan J. Donmoyer and Peter Eichenbaum



(Bloomberg) -- Capital One Financial Corp. won a decade-long battle to defer paying taxes on a portion of its transaction income, a decision that affects an estimated $48 billion in fees U.S. credit-card issuers collect each year.



A U.S. Tax Court ruled yesterday that the bank’s income from interchange fees that merchants pay on customer purchases should be regarded as interest subject to tax-deferral rules. The Internal Revenue Service argued the fees are taxable upon receipt.



“This is a significant victory for the industry and a crushing, albeit predictable, defeat for the IRS,” said Robert Willens, founder of Robert Willens LLC, which advises investors on accounting and tax rules. “It’s always better to defer income for tax purposes for obvious reasons. The company has the use of the money it would otherwise pay out in taxes for a longer time.”



Capital One, the third-biggest issuer of Visa Inc. credit cards, is challenging $318 million in taxes and penalties assessed by the IRS for tax years 1995-1999. The verdict may wipe out part of the bank’s liability, although the IRS can appeal.  

“We’re pleased with the decision; however, it’s premature to discuss any details resulting from this ruling,” Tatiana Stead, a spokeswoman for McLean, Virginia-based Capital One, said in an e-mailed statement.  IRS spokesman Dean Patterson declined to comment.

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