Riggs National Corporation & Subsidiaries (f.k.a. Riggs National Bank and Subsidiaries) v. Commissioner , 107 T.C. No. 18 ( 1996 )


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    107 T.C. No. 18
    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.                     December 10, 1996.
    P regularly made and participated in loans to
    borrowers located in foreign countries, including Brazil.
    It was one of hundreds of banks that were involved in the
    restructuring of Brazil's foreign debt.
    As required by Brazilian law, various non-tax-immune
    Brazilian borrowers paid Brazilian withholding tax on
    their net loan interest remittances to P during 1980
    through 1986. Although the Brazilian Supreme Court had
    held   that,   under   Article   19   of  the   Brazilian
    Constitution, tax-immune Brazilian governmental entities,
    like the Central Bank, were not liable to pay withholding
    tax on their net loan interest remittances to foreign
    lenders, beginning in 1984, the Central Bank purportedly
    paid withholding tax on its Brazilian restructuring debt
    interest remittances to P.
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    On its income tax returns for 1980 through 1986, P
    claimed a foreign tax credit under sec. 901, I.R.C., for
    the purported withholding tax payments made by the
    Central Bank and other Brazilian borrowers on their net
    loan interest remittances to P.
    1.   Held:   The withholding tax paid by non-tax-
    immune Brazilian borrowers is potentially creditable to
    P but must be reduced, under sec. 4.901-2(f)(3)(ii),
    Temporary Income Tax Regs., 45 Fed. Reg. 75653 (Nov. 17,
    1980), and sec. 1.901-2(e)(3)(ii), Income Tax Regs., by
    the pecuniary benefit the borrowers received from the
    Brazilian Government.      Nissho Iwai Am. Corp. v.
    Commissioner, 
    89 T.C. 765
    (1987); Norwest Corp. v.
    Commissioner, T.C. Memo. 1992-282, affd. 
    69 F.3d 1404
         (8th Cir. 1995); Continental Ill. Corp. v. Commissioner,
    T.C. Memo. 1988-318, affd. without published opinion sub
    nom. Citizens & S. Corp. & Subs. v. Commissioner, 
    919 F.2d 1492
    (11th Cir. 1990), affd. in part and revd. in
    part 
    998 F.2d 513
    (7th Cir. 1993), followed.
    2.   Held, further: P is not legally liable for
    Brazilian tax on the Brazilian restructuring debt
    interest remittances it received from the Central Bank.
    Under Brazilian law, P was not required to pay Brazilian
    tax, and neither it nor the Central Bank had a legal
    liability to pay the withholding tax. The purported
    Central Bank withholding tax payments are not creditable
    to P because these purported payments were noncompulsory
    amounts and not a tax to Brazil. Sec. 1.901-2(e)(1),
    (5), Income Tax Regs.
    Joel V. Williamson,   Thomas C. Durham, Scott M. Stewart,
    Richard M. Timmel, Patricia Anne Flaming, and Kim Marie Boylan, for
    petitioner.
    Theodore J. Kletnick, William G. Merkle, Diane P. Thaler, Paul
    S. Manning, Rajiv Madan, Mary Ann Amodeo, and Janice E. Lamartine,
    for respondent.
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    JACOBS, Judge:     Respondent determined deficiencies in the
    Federal income tax of petitioner Riggs National Corporation &
    Subsidiaries,    formerly    known     as   Riggs   National   Bank     and
    Subsidiaries.
    The dispute involves petitioner's entitlement to foreign tax
    credit under section 9011 for Brazilian taxes withheld on interest
    income petitioner received, during the years 1980 through 1986, as
    a result of its loans to Brazilian borrowers.        The primary issues
    for decision are as follows:         (1) Whether petitioner is legally
    liable for the Brazilian withholding tax purportedly paid by its
    Brazilian borrowers on their net loan interest remittances to
    petitioner (the legal liability issue); (2) whether the alleged
    withholding tax paid by the Banco do Central Brazil (Central Bank)
    on   its   Brazilian   restructuring    debt   interest   remittances    to
    petitioner is a noncompulsory amount and thus not a tax to Brazil
    (the Central Bank issue); and (3) whether a subsidy, equal to a
    percentage of the tax withheld, that borrowers received from the
    Brazilian Government during the period from January 1, 1980,
    through June 28, 1985, reduces the amount of foreign tax credit
    allowable to petitioner (the subsidy/pecuniary benefit issue).
    To a major extent, the legal liability and subsidy/pecuniary
    benefit issues have been previously dealt with in Norwest Corp. v.
    1
    Unless otherwise indicated, all statutory references
    are to the Internal Revenue Code in effect for the years in
    issue, and all Rule references are to the Tax Court Rules of
    Practice and Procedure.
    - 4 -
    Commissioner, T.C. Memo. 1992-282, affd. 
    69 F.3d 1404
    (8th Cir.
    1995); First Chicago Corp. v. Commissioner, T.C. Memo. 1991-44;
    Continental Ill. Corp. v. Commissioner, T.C. Memo. 1988-318, affd.
    without published opinion sub nom. Citizens & S. Corp. & Subs. v.
    Commissioner, 
    919 F.2d 1492
    (11th Cir. 1990), affd. in part and
    revd. in part 
    998 F.2d 513
    (7th Cir. 1993) and Nissho Iwai Am.
    Corp. v. Commissioner, 
    89 T.C. 765
    (1987).         However, none of those
    cases involved withholding tax paid by a tax-immune Brazilian
    governmental entity/borrower, like the Central Bank here, on its
    Brazilian restructuring debt interest remittances.
    FINDINGS OF FACT
    Some   of   the   facts   have   been   stipulated   and   are   found
    accordingly.      The parties have further stipulated in evidence
    portions of the trial transcripts in the Continental Illinois and
    Nissho Iwai cases and various exhibits related to the testimony of
    certain witnesses in those cases.
    A.   Background
    Petitioner's principal place of business was in Washington,
    D.C., at the time the petition was filed.
    Riggs National Corporation is the parent company of a group of
    corporations which filed consolidated income tax returns for the
    years in issue.     Its wholly owned subsidiary Riggs National Bank
    regularly made and participated in loans to borrowers located in
    foreign countries, including Brazil.
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    B.    Foreign Loans and the Brazilian Economy in General
    In 1974, Brazil incurred a trade deficit of $4.7 billion as a
    result of higher prices charged for oil due to the energy crisis.
    At that time, a trade deficit of this size was large for Brazil.
    After 1974, Brazil greatly increased its reliance on foreign debt.
    Its foreign debt increased dramatically from 1974 to 1983, and the
    ratio of Brazil's total foreign debt to its foreign currency
    reserves grew larger.      The Brazilian Government sought to reduce
    Brazil's trade deficit by decreasing imports, increasing exports,
    and    encouraging     foreign       borrowing     for     internal     domestic
    development.      It   hoped   to    increase     the    country's    productive
    capacity by stimulating greater investment in steel, oil, pulp and
    paper,   aluminum,     petrochemical     products,       fertilizers,    capital
    goods, and other capital items.
    Brazil's   currency,    the    cruzeiro,    was    not   convertible   to
    foreign currency in international markets.               Although the cruzeiro
    was freely tradeable, as a practical matter, foreign parties
    outside of Brazil would not accept payment in cruzeiros.
    Brazil needed to maintain adequate foreign currency reserves
    to engage in international trade to finance its trade deficit.
    During 1974 through 1975, the Brazilian Government sought to
    maintain a foreign currency reserve of about $6 billion for this
    purpose.
    During 1974, Brazilian borrowers generally were reluctant to
    take out foreign loans because the Central Bank required a minimum
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    term for foreign loans which varied from 5 to 12 years.              Although
    the   Brazilian     Government    sought    to   decrease   the    effects   of
    inflation through an indexing system, in taking out a long-term
    foreign loan, a Brazilian borrower incurred a substantial risk that
    a decline in the exchange rate for the cruzeiro as a result of
    domestic inflation could increase the cost of the loan.
    To    increase   foreign   borrowing,     the   Brazilian   Government
    provided incentives to Brazilian borrowers in order to overcome
    their reluctance to take out foreign loans.                 These incentives
    included the pecuniary benefit, the Resolution 63 loan program, and
    the Resolution 432 loan program, all of which are more fully
    discussed infra.
    Until about 1982, lending to Brazilian borrowers was quite
    profitable for many foreign lenders, including some major U.S.
    banks.      The interest rate spreads (i.e., the interest rate charged
    on a loan, less the cost of the loan funds to the lender) on
    Brazilian loans were higher than the interest rate spreads on loans
    made in many other countries.        In addition, the ability to claim
    foreign tax credits significantly enhanced the after-tax income
    some foreign lenders derived with respect to their Brazilian loans.
    C.    Brazilian Regulation of Foreign Lending
    Brazil imposes restrictions on the receipt and exchange of
    foreign currency.        By law, all loans from foreign lenders to
    Brazilian borrowers must be registered with and approved by the
    Central Bank.      Through the registration process, the Central Bank
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    sets the range of acceptable interest rates and periodically
    establishes the minimum repayment terms of loans. Once the Central
    Bank approved a loan, the lender 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.
    D.   Payment of the Withholding Tax Generally
    Where withholding tax is required, Brazilian law prohibited
    remittance of an interest payment to a foreign lender without proof
    of payment of the withholding tax on 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.          Any bank making an interest payment in
    foreign currency which was subject to Brazilian tax would require
    - 8 -
    a completed DARF and payment of the tax as evidence that the proper
    amount of the tax had been paid.2
    E.   Net Loans and Gross 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
    have agreed that all specified 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 the withholding tax, the amount of
    interest remitted is considered net of tax and an adjustment known
    as a "gross-up" is required to be made for purposes of computing
    the withholding tax. This gross-up adjustment would be computed as
    follows:
    Grossed-up interest =          Net interest
    1 - Withholding tax rate
    2
    The borrower prepared the DARF and delivered a copy of
    it and the registration certificate to the Brazilian bank
    handling the payment of interest through a foreign exchange
    contract. The bank recorded the amount of interest and tax on
    the Certificate of Registration and submitted the certificate,
    exchange contract, and DARF to the Central Bank for approval.
    Upon approval by the Central Bank, the bank remitted the interest
    to the foreign lender and returned to the borrower a stamped copy
    of the DARF, the Certificate of Registration (stamped), and a
    copy of the exchange contract. The borrower sent a copy of the
    DARF to the foreign lender which then had proof (the DARF) that
    the withholding tax was paid. The lender performed no act in
    Brazil for the collection of tax.
    - 9 -
    In contrast to a net loan, a gross loan is a loan in which
    there is no contractual agreement between the borrower and foreign
    lender to pay taxes imposed by the borrower's country.            With a
    gross loan, the Brazilian borrower will deduct withholding taxes
    that are due from the interest specified under the loan contract
    and will pay 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, will benefit from any reduction in or waiver of
    taxes imposed by the borrower's country.
    F.   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
    set by the National Monetary Council;3 and (4) the loan complied
    with other conditions set forth by the Ministry of Finance.
    3
    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.
    - 10 -
    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 (October 24, 1974), 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.
    G.   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.
    - 11 -
    Also on August 5, 1975, the Central Bank issued Circular 266,
    which provided in part:
    a.   a DARF would be used 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
    increased to 95 percent of the tax; on May 8, 1980, the pecuniary
    benefit was reduced to 40 percent of the tax; and on June 28,
    1985,4 the pecuniary benefit was reduced to zero.
    H.   Resolution 63 Loans
    Many Brazilian companies that needed working capital were not
    able to provide foreign lenders with adequate financial information
    or proper guaranties to obtain a loan.              To provide Brazilian
    companies with the funds needed for their development, and in
    keeping with the Brazilian Government's efforts to develop the
    country's economy and generate foreign exchange, the Central Bank
    issued Resolution 63 on August 21, 1967.        Resolution 63 permitted
    certain   Brazilian   banks   to   borrow   funds   from   abroad   for   the
    4
    The parties have stipulated and agreed to use June 28,
    1985, as the date for all purposes relating to the reduction of
    the subsidy to zero in this case.
    - 12 -
    specific    purpose     of    relending         (repassing)      the       corresponding
    borrowed funds in Brazilian currency to Brazilian companies (repass
    borrowers).    The charges paid by a repass borrower to a Brazilian
    bank were in the same proportion as the charges paid by the
    Brazilian bank to the foreign lender.                The loan between the foreign
    lender and the Brazilian bank was independent of the loan between
    the Brazilian bank and the repass borrower. The foreign lender had
    no legal relationship with the repass borrower and in general did
    not know the repass borrower's identity.
    Foreign loans which were repassed under Resolution 63 were
    subject to the same restrictions on the receipt and exchange of
    foreign currency as other foreign loans.                   Circular 266 provided
    that in the case of a Resolution 63 loan, the bank receiving the
    foreign loan was required to transfer the total value of the
    pecuniary benefit to the borrower receiving the repass funds, and
    in cases in which the foreign loan was transferred to several
    repass     borrowers,        the     pecuniary        benefit        was     transferred
    proportionately to each of such borrowers.
    I.   Details of Repass Borrowing Under Resolution 63
    Generally, a foreign lender was concerned only with the credit
    risk of the Brazilian bank. The initiative to borrow foreign funds
    for lending to local companies under Resolution 63 was that of the
    Brazilian    bank,    which        would    repass    loans     if    and    when   local
    borrowers    were    available.            In   making   Resolution         63   loans   to
    - 13 -
    Brazilian   banks,   foreign       lenders    generally      assumed   that   the
    Brazilian bank would repass its cost of funds (the cost of the
    foreign lender's loan) and charge a spread or commission to the
    repass borrower.
    The Brazilian bank was allowed to charge its borrower only a
    repass commission. The repass commission was usually calculated as
    a set percentage per year of the principal balance of the repass
    loan.   The amount of the repass commission was the same as the
    commission charged for other types of loans.              During the years in
    issue, there was no limit on repass commissions, and the commission
    was as high as 10 percent, depending upon the individual repass
    borrower's credit.
    Except   for    the    term   of   the    loan,   all    other    financial
    conditions of the loan between the Brazilian bank and the repass
    borrower had to be the same as those between the foreign lender and
    the Brazilian bank.        If the interest rate charged by the foreign
    lender to the Brazilian bank was net of the Brazilian withholding
    tax, then the interest rate payable by the repass borrower was
    likewise net of the Brazilian withholding tax.                If the Brazilian
    bank was entitled to a pecuniary benefit, then it passed on the
    benefit to the repass borrower.              The transfer of the pecuniary
    benefit from the Brazilian bank to the repass borrower reduced the
    repass borrower's cost of the repass loan and thus encouraged
    foreign borrowing.
    - 14 -
    Beginning in 1974, Resolution 63 funds not utilized in repass
    operations could be deposited with the Central Bank.     When such
    funds were deposited, the Central Bank paid the interest on the
    foreign loan; and if there was a net loan involved, no withholding
    tax was paid with respect to the Central Bank's interest payment.
    J.   Resolution 432
    As a result of the historically high inflation in Brazil and
    the periodic currency exchange devaluations, the National Monetary
    Council issued, on June 23, 1977, Resolution 432, which authorized
    borrowers of registered foreign currency loans to hedge cruzeiros
    (intended to be used for payments on the loans) against currency
    exchange devaluations by depositing foreign funds at the borrower's
    Brazilian bank.   Pursuant to Resolution 432, the borrower would
    purchase the funds to be deposited at its Brazilian bank at the
    official exchange rate.    The foreign funds remained on deposit
    until such time as the borrower was required to make payment to the
    lender.   The foreign currency deposited at the borrower's bank was
    then transferred to the Central Bank which paid (2 days prior to
    the date the borrower was required to make payment to the lender)
    interest on the deposited funds at a rate equal to that payable by
    the Brazilian borrower to the foreign lender (as set forth in the
    certificate of registration). To the extent that interest was paid
    to the foreign lender with funds deposited in the Central Bank, the
    Brazilian borrower had no obligation to withhold income taxes
    - 15 -
    thereon;   correspondingly,   the   Brazilian   borrower   received   no
    subsidy.
    If the 432 program loan was a gross loan, the Central Bank
    would pay the withholding tax due on the interest payable to the
    foreign lender during the period the funds were deposited in the
    Central Bank.   If the 432 program loan was a net loan, the Central
    Bank would pay no withholding tax with respect to the interest
    payable to the foreign lender.
    K.   Brazilian Tax Law in General
    The Brazilian tax system is divided into three types of
    authority:    The   Federal   Constitution      of   Brazil   (Federal
    Constitution), the National Tax Code, and ordinary Federal, State,
    and municipal legislation.5
    The Federal Constitution divides the authority to tax among
    the Federal Government, the States, and the municipalities of
    Brazil.    Pursuant to Article 21 of the Federal Constitution, the
    Federal Government has authority to impose all types of taxes,
    including a tax on income, except as otherwise granted by the
    Federal Constitution to the States or municipalities.
    5
    The National Tax Code is a complementary law and has an
    authoritative status below that of the Federal Constitution but
    above that of ordinary laws. Where the National Tax Code
    conflicts with an ordinary law, the National Tax Code will
    prevail.
    - 16 -
    Article 19 of the Federal Constitution provides that the
    Federal      Government,       States,     and    municipalities      are    to   enjoy
    immunity from taxation of their income, assets, and operations.
    Article      19    further     extends     this    immunity    from    taxation      to
    "autarquias" (i.e., autonomous governmental entities) like the
    Central Bank.
    The National Tax Code establishes the parameters within which
    the   taxing       authority    of   the    Federal    Government,     States,      and
    municipalities may be exercised.                 It does not, in and of itself,
    create or impose any taxes.
    Article 4 of the National Tax Code specifies that the legal
    nature of a tax is determined by its generating factor (that is,
    the taxable event); the name and other formal characteristics of
    the tax are irrelevant to the legal nature of the tax.
    Article 9 of the National Tax Code generally provides that an
    entity's immunity or exemption from tax will not relieve it of its
    obligation to collect withholding taxes that are due with respect
    to its income remittances to third parties.
    Article 113 of the National Tax Code divides tax obligations
    into principal and accessory obligations. The principal obligation
    is created by the taxable event and has as an objective the payment
    of    tax.        The   accessory    obligation       is   derived    from    the   tax
    legislation and has as its objective the performance of specific
    acts (e.g., maintaining books and records, filing tax returns) in
    - 17 -
    the interest of collection of tax.            The taxable event which gives
    rise to the tax on income is the economic or legal availability of
    such income.
    Under Article 45 of the National Tax Code, the person entitled
    to "the economic or legal availability of income" is called the
    contribuente, or taxpayer. However, the status of contribuente can
    be attributed to the holder of assets producing the income or
    earnings. In addition, the source making payment of the income can
    be liable for the tax if the source is required by law to withhold
    and pay such tax to the Brazilian Treasury.
    Under   Article    121   of     the   National   Tax   Code,   the   person
    obligated to make the payment of tax is called the "passive
    subject" of the principal obligation.            The passive subject of the
    principal obligation is either:            (1) The contribuente, when he has
    a direct and personal relationship with the taxable event or (2)
    the responsavel (responsible person or person liable) when, without
    having the status of contribuente, he has an obligation to pay the
    tax by an express provision of law.
    Article 122 of the National Tax Code defines the passive
    subject of an accessory obligation as the person obligated to
    perform the duties which make up the accessory obligation.
    Article 123 of the National Tax Code specifies that, except as
    otherwise    provided   by    law,    private    agreements   concerning    the
    liability to pay taxes are not binding on the public treasury.
    - 18 -
    Article    128    of    the   National    Tax   Code    provides    that   the
    liability for a tax claim may be assigned to a third party who is
    related   to   the     taxable     event   which     gives   rise   to   the    tax
    obligation.
    Since     1943,   Brazilian     Federal     legislation     generally      has
    provided for withholding tax imposed on interest paid by Brazilian
    borrowers to foreign entities, at the following rates:
    Rate          Years
    10%       1944-47
    15        1948-54
    20        1955-58
    25        1959-74
    5        1974-75
    25        1975-Present
    Article 11 of Decree-law 401,6 which was enacted on December
    30, 1968, provides as follows:
    Subject to the deduction of the Income Tax at source
    is the value of interest remitted to a foreign country,
    payable by virtue of purchase of goods on installment,
    even when the beneficiary of the revenue is the actual
    seller.
    6
    Prior to Decree-law 401, the Brazilian Supreme Court,
    in several decisions, held that remitted interest with respect to
    goods purchased abroad on an installment basis could not be
    taxed, because the interest was part of the purchase price and
    had been earned abroad. Decree-law 401 was passed to clarify
    that generally such interest was taxable under Brazilian law.
    Its provision in Article 11 that the taxable event was the
    remittance of the interest and the borrower was the contribuente,
    generated considerable controversy, because that provision seemed
    contrary to the normal rules of Brazilian tax law. In a June 14,
    1972, decision, however, the Brazilian Supreme Court upheld the
    validity of Decree-law 401.
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    For purpose of this article, the remittance to a
    foreign country is considered the generative fact of tax,
    and the remitter is considered the contribuente.
    L.   SRF 368 and FIRCE 80
    On June 10, 1980, Secretary Francisco Dornelles (Dornelles),
    the head of the Brazilian equivalent of the Internal Revenue
    Service (Brazilian IRS), issued SRF 368 to the head of the Central
    Bank's Department of Foreign Capital Fiscalization and Registration
    (FIRCE).      SRF 368 was an "officio", a formal written communication
    between       two   governmental   agencies   that   is   binding       upon   the
    governmental agencies.        SRF 368 stated, in pertinent part:
    Subject:       Notification of waiver of payment of income
    tax on remittances abroad
    Ref. Off. Let. FIRCE-1-0-80/059, dated 6/3/80
    Dear Sir:
    In reply to the above mentioned official letter, of
    interest to your Department, I hereby inform you, for
    such measures as you may deem necessary, that, in the
    exercise of the powers delegated to me by MF
    Administrative Ruling 648/79, I AUTHORIZE the waiver of
    payment of withholding income tax incident on the
    remittance of interest and other legal charges on behalf
    of Banco do Brasil S/A-Grand Cayman Branch with respect
    to the foreign loan transaction in the amount of $60
    million contracted by the Federative Republic of Brazil,
    Ministry of Foreign Relations at that bank.
    *          *       *        *        *          *         *
    2.   I would also like to take this opportunity to inform
    you of the directive contained in SRF Official Letter no.
    1016 dated 12/26/79 addressed to DECAM (Departmento de
    Cambio) [Department of Foreign Exchange], according to
    which the Central Bank of Brazil, independently of any
    prior statements made by this Secratariat, is authorized
    - 20 -
    to waive the withholding of said tax on remittances
    abroad made by public-sector entities that prove they
    have assumed the tax burden [(i.e., have net loans)].
    The Brazilian IRS's above position in paragraph 2 of SRF 368
    was supported by certain decisions of the Brazilian Supreme Court
    which held that public-sector entities were not required to pay
    withholding tax with respect to their net loan interest remittances
    abroad, because of their immunity from taxation under Article 19 of
    the Federal Constitution.7
    As a result of receiving SRF 368, the head of FIRCE issued
    FIRCE Service Instruction No. 80 (FIRCE 80) on May 19, 1981.     FIRCE
    80 stated, in pertinent part:
    We hereby inform the Central and Regional Divisions
    that as per Official Letters SRF no. 368 and DRF
    (Departmento da Receita Federal) * * * [Brazilian
    IRS] no. 040/81, dated 6/10/80 and 2/4/81 respectively,
    the * * * [Brazilian IRS] authorized this bank to
    waive the payment/collection of withholding income tax in
    the case of remittances abroad of interest and other
    charges originating from currency loans and financing for
    the importing of goods, when the domestic contracting
    party fulfills the following requirements:
    (a) it is a public-sector legal entity;
    (b) it has proven that it has assumed the tax burden
    [(i.e., has a net loan)];
    7
    Brazil is a civil law, as opposed to a common law,
    country. Court decisions are technically binding only upon the
    litigants of the case. Prior similar cases are not considered to
    be strictly binding as precedents, although both the courts and
    litigants will frequently cite such prior cases as representing
    the correct legal reasoning to be applied and the proper holding
    to be made.
    - 21 -
    For purposes of clarification, the following are
    public-sector entities:
    -the   Union, States,       Federal   District,   and
    Municipalities * * * ;
    -federal territories   *   *   * ;
    -federal, state, and municipal autonomous government
    agencies * * * .
    Consequently, we recommend that, in the case of
    transactions with the characteristics outlined above, the
    corresponding Certificates be issued with the additional
    observation:
    "Payment/collection of withholding tax on income
    is waived on remittance(s) (indicate the nature of
    the remittance) covered by this Certificate
    (Official Letter SRF no. 368, dated 6/10/80)."
    M.   Latin Debt Crisis
    A number of Latin American countries, including Brazil and
    Mexico, incurred large foreign debts. Beginning in about the early
    1980's, some of these countries experienced problems in paying
    their foreign debts. This Latin debt crisis persisted for a number
    of years.
    In about 1982, a large number of Mexico's foreign lenders
    (including some major international banks in the G-7 countries) and
    the Mexican Government agreed to a restructuring of Mexico's
    foreign debt.
    Brazil began experiencing similar problems in paying its
    foreign debt in 1982.     In late 1982, the Brazilian Government
    declared a moratorium with respect to the repayment of Brazil's
    foreign debt.
    - 22 -
    As a practical matter, the major international banks, like
    Citibank, that held large amounts of outstanding loans in Latin
    American countries were compelled to help Brazil, Mexico, and other
    Latin American countries work out their financial problems.                   These
    major international banks and the governmental banking regulators
    in the G-7 countries feared that a default by a Latin American
    country, especially a major debtor country like Brazil, on its
    foreign debt could trigger a collapse of the international banking
    system.     The banks and the regulators believed that a default by
    one Latin American country on its foreign debt could lead to
    worsening    economic    conditions     which       would   cause    other    Latin
    American countries to default on their foreign debts. For instance,
    in 1982, Citibank held about $4.6 billion in total outstanding
    Brazilian loans, an amount equal to an extremely high percentage of
    Citibank's then net equity.           Citibank thus could not afford to
    write down its Brazilian loans, as such a writedown might lead to
    its becoming insolvent for bank regulatory accounting purposes.
    For its part, Brazil had to obtain considerable financial help
    from the major international banks in attempting to work out its
    financial problems.          Brazil was desperately short of the foreign
    currency needed for imports to keep its economy functioning.
    N.   Brazilian Foreign Debt Restructuring in General
    As   relevant      to    this   case,    the    Brazilian      foreign    debt
    restructuring that took place was divided into three phases: Phase
    I, phase II, and phase III.           Initially, the major international
    - 23 -
    banks involved in negotiating phase I of the Brazilian foreign debt
    restructuring believed that Brazil's financial problems could be
    resolved if Brazil were given some relatively short-term financial
    assistance in overcoming its present shortage of foreign currency,
    as Brazilian borrowers generally were continuing to make payments
    in cruzeiros on their foreign loans.              In imposing the foreign debt
    repayment moratorium, the Brazilian Government and the Central Bank
    were blocking remission of these loan payments because Brazil
    lacked     sufficient     foreign       currency       reserves    with   which      to
    effectuate the foreign loan payments.                  This belief of the major
    international banks proved to be erroneous, and Brazil continued to
    require    yet    additional     financial       assistance    from     its   foreign
    lenders,    including     the    later    phase    II    and   phase    III   of    the
    Brazilian foreign debt restructuring.
    Officials at the highest levels of the Brazilian Government
    were concerned with and kept informed of the status of the phase I,
    phase    II,     and   phase    III    restructuring      negotiations.       Of    the
    individuals representing the Brazilian Government and the Central
    Bank during these negotiations (the Brazilians), the principal
    negotiators      were   Finance       Ministry    officials    and     Central     Bank
    officials.
    O.   Mechanics and Negotiations of the Brazilian Foreign Debt
    Restructuring
    The    Central      Bank    served    as    the    borrower     under    certain
    agreements entered into in connection with phase I, phase II, and
    - 24 -
    phase III of the Brazilian foreign debt restructuring, with the
    Brazilian Government being the guarantor of the Central Bank's
    obligations under these agreements.               The major international banks
    involved in negotiating the Brazilian debt restructuring wanted the
    Central Bank to be the borrower, as the Central Bank, unlike the
    Brazilian     Government,        could      be     sued       in     foreign      courts.
    Additionally,    the    Central      Bank    held       all    of    Brazil's     foreign
    currency reserves.
    There were perhaps as many as 600 foreign lenders holding
    outstanding Brazilian loans.                Collectively, these lenders had
    issued    thousands    of    outstanding         loans    to       numerous    Brazilian
    borrowers.
    As 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.        The   prior
    outstanding loans would be left in place.                           When a prior loan
    borrower made a loan payment, the payment would be deposited with
    and held by the Central Bank pursuant to a new loan entered into by
    the Central Bank and the foreign lender.
    As a further part of the restructuring, Brazil also needed to
    obtain    additional     foreign     capital       to     enable      its     economy   to
    function. Much of this additional foreign capital or new money 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
    - 25 -
    Brazilian loans participated in the phase I CGA.                In contrast,
    almost all of the foreign lenders participated in the phase II
    CGA.8
    The loans made to the Central Bank under the phase I and phase
    II DFA's and CGA's were net loans that had repayment terms of 7 to
    9 years.        In the phase I and phase II DFA's and CGA's, provision
    was made for funds that would otherwise be lent to the Central
    Bank, as borrower, to be alternatively lent or relent to other
    Brazilian persons and companies.              Many of the foreign lenders
    wanted to maintain their business relationships with their longtime
    Brazilian customers. They thus wanted their customers to have some
    ability to borrow and take out loans from the large amount of
    foreign exchange and capital to be provided by the foreign lenders
    to the Central Bank pursuant to the DFA's and CGA's.             The phase I
    DFA, phase II DFA, phase I CGA, and phase II CGA each provided that
    there would be an initial period of about 16 or 18 months during
    which DFA and CGA funds could be alternatively lent or relent to
    other Brazilian persons and companies (the relending period).9
    Phase I
    After    the   Brazilian   Government   imposed   its   foreign   debt
    repayment moratorium in December of 1982, Citibank and Morgan Bank,
    8
    No phase III CGA was entered.
    9
    As part of the later phase III restructuring discussed
    more fully infra, 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.
    - 26 -
    two major international banks holding the largest amounts of
    outstanding Brazilian loans, took the lead in negotiating the phase
    I   restructuring    of   Brazil's    foreign    debt.      The   phase   I
    restructuring agreements were entered into by Brazil and its
    foreign lenders on February 25, 1983.
    The phase I restructuring included:         (1) A phase I DFA that
    covered   the   scheduled   debt     payments   due   in   1983   on   prior
    outstanding Brazilian loans, (2) a phase I CGA under which the
    Central Bank would be lent up to an additional $4.4 billion in new
    money, (3) a phase I trade receivable commitment agreement, and (4)
    a phase I interbank commitment agreement.10
    As indicated previously, only the 170 foreign lenders holding
    the largest amounts of outstanding Brazilian loans participated in
    the phase I CGA.    Their shares of this $4.4 billion of new money to
    be provided to Brazil were based on their relative holdings of
    outstanding Brazilian loans.
    In negotiating the phase I restructuring, Citibank, Morgan
    Bank, and the Brazilians were under extreme time pressure to
    conclude an agreement quickly because of the Brazilian Government's
    debt repayment moratorium. If a restructuring agreement were not
    concluded, then many of the foreign lenders' Brazilian loans would
    10
    Under the phase I and later phase II trade receivable
    commitment agreements and interbank commitment agreements the
    major international banks pledged to provide short-term credit to
    Brazil in connection with certain trade receivables and interbank
    lines of credit at the same levels which existed prior to the
    Brazilian foreign debt crisis.
    - 27 -
    have to be placed into nonperforming status.   (Generally, for bank
    regulatory accounting purposes, once a bank loan is placed into
    nonperforming status and a specified period of time elapses, among
    other things, previously accrued but uncollected interest income
    with respect to the loan must be written down by the bank.    Such
    writedowns could cause the international financial community to
    lose confidence in Brazil's ability to repay its foreign debt.)
    Moreover, if any foreign lender were to declare its outstanding
    Brazilian loans to be in default, Brazil's foreign debt crisis then
    could well escalate out of control, with disastrous consequences
    for a number of major international banks and the international
    banking system.
    Phase II
    During the first half of 1983, Brazil and its foreign lenders
    realized that the phase I restructuring would not be sufficient to
    solve Brazil's financial problems.   They thus began negotiation of
    what became known as the phase II restructuring.     At about this
    time, the head of the International Monetary Fund (IMF) announced
    that he was conditioning Brazil's receipt of any further financial
    assistance from the IMF upon at least 90 percent of Brazil's
    outstanding foreign debt that was owed to private foreign lenders
    being restructured.
    On January 27, 1984, Brazil and its foreign lenders entered
    into four agreements to effectuate the phase II restructuring of
    Brazil's foreign debt:    (1) A phase II DFA that covered the
    - 28 -
    scheduled debt payments due in 1984 on prior outstanding Brazilian
    loans, (2) a phase II CGA under which the Central Bank would be
    lent up to an additional $6.5 billion in new money, (3) a phase II
    trade receivable commitment agreement, and (4) a phase II interbank
    commitment agreement.
    During the phase II restructuring negotiations, Brazil did not
    declare another moratorium with respect to the repayment of its
    foreign debt.   As a result, although there was pressure for Brazil
    and its foreign lenders to conclude a phase II restructuring deal,
    the time pressure they were under was not as severe as that which
    they had experienced during the phase I restructuring negotiations.
    Many of the foreign lenders were unhappy with Citibank's and
    Morgan Bank's negotiation of the phase I restructuring.   They felt
    that they had no input into the phase I negotiations and that the
    phase I restructuring agreements had been forced upon them by
    Citibank and Morgan Bank.
    As a result, the major international banks and Brazil decided
    that a Bank Advisory Committee for Brazil (BAC) should be formed to
    negotiate the phase II restructuring on behalf of the foreign
    lenders.   The BAC was formed on June 16, 1983.   It had 14 members,
    Citibank, Morgan Bank, Lloyd's Bank, Arab Banking Corporation, Bank
    of America, Bank of Montreal, the Bank of Tokyo, Bankers Trust,
    Chase Manhattan Bank, Chemical Bank, Credit Lyonnais, Deutsche
    Bank, Manufacturers Hanover Trust, and Union Bank of Switzerland.
    Citibank served as the BAC's chairman; Morgan Bank and Lloyd's Bank
    - 29 -
    served as its deputy chairmen.       A senior executive at Citibank,
    William Rhodes (Rhodes), represented Citibank in its role as the
    BAC's chairman.
    The BAC also appointed certain coordinating banks in various
    sectors of the international financial community.           The BAC members
    and coordinating banks would advise foreign lenders of the status
    of the negotiations.      Also, any foreign lender could raise any
    issue in connection with the proposed phase II restructuring that
    it wished with the BAC.
    The BAC adopted a set of operating rules concerning its
    deliberations and its negotiation of the phase II restructuring.
    The BAC would formulate its position only by reaching a unanimous
    consensus among the BAC members.      It would further negotiate with
    the Brazilians    only   those   issues   pertaining   to    the   phase   II
    restructuring that it considered to be of importance to all of the
    foreign lenders, as a group, in effectuating the restructuring; it
    would not negotiate with the Brazilians those issues that it felt
    concerned only some of the foreign lenders.            However, on those
    issues which it would not negotiate, but which it believed were
    important issues to certain foreign lenders, the BAC would advise
    the Brazilians of the issue's existence and its importance to some
    of the foreign lenders.
    During the phase II negotiations, perhaps the most contentious
    issue the BAC dealt with was the issue of new money to be provided
    to Brazil. Under the proposed phase II CGA, all foreign lenders
    - 30 -
    holding outstanding Brazilian loans were being asked to contribute
    their pro rata share of the new money.                 However, a number of
    foreign   lenders       were    reluctant   to   contribute     any       new   money
    whatsoever. The BAC then informed the foreign lenders that, in its
    negotiation   of    a    phase    II   restructuring   deal    on     the    foreign
    lenders' behalf, there would be "no free riders".                   Although each
    foreign lender would still have to consent to the terms of any
    restructuring deal the BAC negotiated on its behalf with the
    Brazilians,   the       BAC's    official   position   was    that    a     phase   II
    restructuring would be "all or none".             The BAC feared that if a
    large number of foreign lenders refused to contribute any new
    money, its (the BAC's) efforts to conclude a phase II restructuring
    deal between Brazil and Brazil's foreign lenders might unravel and
    fail.   While the BAC could not be certain that all of the foreign
    lenders would ultimately agree to participate, it hoped to obtain
    as close to 100 percent participation as possible, as any shortfall
    of new money resulting from some foreign lenders' nonparticipation
    and refusal to contribute would have to be made up by the other
    participating foreign lenders.
    On October 6, 1983, 60 major international banks agreed on a
    framework for the phase II restructuring.              Under this framework,
    Brazil would be provided $6.5 billion in new money.
    On October 12, 1983, the BAC issued to the foreign lenders its
    term sheet with respect to the proposed phase II restructuring.
    - 31 -
    The     term   sheet     outlined    the   major    terms     of    the    proposed
    restructuring that the BAC had negotiated with the Brazilians.
    From about November 1983 through January 27, 1984, virtually
    all of the foreign lenders submitted their individual written
    commitments to the term sheet that the BAC had negotiated on their
    behalf with the Brazilians.          Prior to and during this period, some
    foreign     lenders,     including     Commercial    Credit        Corporation,      a
    subsidiary of Control Data Corporation, initially indicated that
    their approval of the term sheet would be conditional upon the
    Brazilians' resolving the withholding issue favorably to them,
    which issue is discussed more fully infra.
    Phase III
    The phase III negotiations began in about the fall of 1984 and
    continued      through    July   1986.     Originally,        the    BAC     and   the
    Brazilians     contemplated      restructuring      the   scheduled        Brazilian
    foreign debt payments due in the 7-year period from January 1,
    1985,    through   December      31,   1991.       However,    no     such    7-year
    restructuring agreement was ultimately concluded.
    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 companies during a specified relending
    period; 1986 debt payments, on the other hand, would not be
    available for relending.
    - 32 -
    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
    about six interim loan arrangements under which debt payments due
    after January 1, 1985, being made by Brazilian borrowers would be
    held by the Central Bank as "interim deposits". These interim
    arrangements required the Central Bank to pay the foreign lenders
    interest on such interim deposits, on a "net quoted" basis.    The
    interim arrangements themselves did not provide for any relending
    period, as the Brazilians and the BAC envisioned that these interim
    deposits would ultimately be rolled over into and covered under the
    phase III DFA they anticipated would be concluded.
    P. Various Foreign Lenders' Efforts During the Phase I and Phase
    II Restructuring Negotiations To Have the Central Bank Issue Them
    DARF's With Respect to Its Net Loan Interest Remittances
    For certain U.S. and other foreign lenders who were in a
    position to claim and utilize them, foreign tax credits potentially
    represented a significant further source of tax benefits, with
    respect to their Brazilian loans.   Although, in the case of a net
    loan, the U.S. lender would have to pay U.S. income tax with
    respect to the additional interest income resulting from the gross-
    up, a foreign tax credit equal in amount to the additional interest
    income could be utilized to reduce the lender's U.S. income tax
    liability on a dollar-for-dollar basis.11
    11
    See Nissho Iwai Am. Corp. v. Commissioner, 
    89 T.C. 765
    ,
    772-773 (1987).
    - 33 -
    As indicated previously, the Central Bank paid withholding tax
    on its gross loan interest remittances abroad, but not on its net
    loan   interest   remittances,    including   its   Resolution   432   loan
    program net loan interest remittances. Prior to 1982, some foreign
    lenders,    including   certain    major   international    banks,     like
    Citibank, sought to have the Central Bank pay withholding tax and
    issue them DARF's with respect to the Central Bank's 432 loan
    program net loan interest remittances, as this would enable these
    foreign lenders to claim potential foreign tax credits.          However,
    their efforts were unsuccessful, as officials at the Central Bank
    rejected the foreign lenders' requests to have the Central Bank
    issue such DARF's to them.        Central Bank officials advised the
    foreign lenders that the Central Bank was not required to pay
    withholding tax with respect to its net loan interest remittances
    abroad because it was a tax-immune governmental entity under the
    Brazilian Constitution.
    At about the time of the negotiation of the phase I Brazilian
    debt restructuring, a number of foreign lenders (including some
    major international banks, like Citibank) intensified their efforts
    to have the Central Bank issue DARF's on its net loan interest
    remittances to them, including DARF's with respect to (1) the
    Central Bank's 432 loan program net loan interest remittances and
    (2) the Central Bank's proposed phase I DFA and phase I CGA
    interest remittances (the withholding issue).          These intensified
    efforts by the foreign lenders to have the Central Bank issue them
    - 34 -
    such     DARF's   continued   until   about    the   time   the    phase   II
    restructuring agreements between Brazil and its foreign lenders
    were entered into in late January 1984.12
    During the phase I negotiations, the Brazilians indicated that
    they would have the Central Bank issue DARF's to the foreign
    lenders      on   the   Central   Bank's    restructuring   debt    interest
    remittances on some limited basis, but they also indicated that
    they needed additional time in which to study and arrange for the
    implementation of the Central Bank's payment of such withholding
    tax.13      On or about December 28, 1982, the Central Bank requested
    a ruling from the Brazilian IRS with respect to its payment of
    withholding tax during the relending periods of the proposed phase
    I DFA and phase I CGA. The ruling request and the March 1984
    12
    Alexandre Leite (Leite), the head of Citibank-Brazil's
    tax division, testified that he and Citibank had been seeking
    DARF's from the Central Bank on 432 program net loan interest
    remittances since at least 1979. Leite related that the Central
    Bank officials he met with rejected Citibank's request to have
    the Central Bank issue such DARF's to it. Following the Central
    Bank's issuance of FIRCE 80 in May 1981, Leite had concluded that
    Citibank would not be able to persuade the Central Bank to issue
    such DARF's, as FIRCE 80 was authorized and sanctioned by SRF
    368.
    13
    The parties disagree over whether the Central Bank was
    legally liable for and actually paid withholding tax with respect
    to its restructuring debt interest remittances during the
    relending periods of the DFA's and CGA's. The terms "payment"
    and "withholding tax" are used herein for convenience and are not
    intended as ultimate findings or conclusions concerning the
    Central Bank's liability for and payment of such withholding tax.
    Similarly, the use herein of terms indicating that DARF's or
    withholding receipts were issued by the Central Bank to the
    foreign lenders should not be construed as our conveying any
    legal conclusion concerning the Central Bank's liability for and
    payment of such withholding tax.
    - 35 -
    private ruling that ultimately was issued by the Brazilian IRS to
    the Central Bank are discussed more fully infra.
    During   the   phase   II   negotiations,       some   foreign     lenders,
    including Citibank, wanted the BAC to negotiate the withholding
    issue with the Brazilians.             The BAC decided that it could not
    negotiate     the   withholding    issue    with      the   Brazilians,      as   the
    withholding issue, although important to a number of foreign
    lenders, did not concern all of the foreign lenders.14                 Even those
    BAC    members,     like    Citibank     and    Lloyd's     Bank,     that    would
    substantially benefit from being able to claim potential foreign
    tax credits realized that they could not afford to be accused of
    using their positions on the BAC to further their own individual
    interests at the expense of other foreign lenders.15                      The BAC,
    instead, advised the Brazilians that the withholding issue was a
    very important issue to a number of foreign banks, and that the
    Brazilians would have to resolve the withholding issue as a matter
    of    the   applicable     Brazilian    law.    The   BAC   further    created      a
    subcommittee to study the withholding issue.
    14
    Some foreign lenders operated in countries which did
    not allow foreign tax credits with respect to Brazilian
    withholding tax payments. Still other lenders were not in a tax
    position to benefit from claiming potential foreign tax credits.
    15
    To a significant extent, Citibank sought to segregate
    the activities and functions of Rhodes (the Citibank senior
    executive who acted as the BAC's chairman) from the individual
    concerns and matters which Citibank pursued during the phase II
    restructuring negotiations. At various BAC meetings, other
    Citibank employees (principally the top employees of Citibank-
    Brazil), and not Rhodes, would represent and present Citibank's
    position.
    - 36 -
    Until   about   the    signing    of    the   phase   II   restructuring
    agreements    in   January   1984,     Citibank     continued    to   press   the
    Brazilians to reach a favorable resolution of the withholding
    issue.     Top employees of Citibank-Brazil utilized virtually every
    opportunity available to them, outside of the BAC's meetings, to
    lobby Brazilian Government officials and Central Bank officials on
    the   withholding     issue.16       Other    foreign    lenders,     including
    Commercial Credit Corporation, also pressed the Brazilians to
    resolve the withholding issue favorably to these foreign lenders.
    On December 8, 1983, Citibank's in-house tax counsel met with
    the general counsel of the Central Bank and presented Citibank's
    position on the withholding issue. During the meeting, the Central
    Bank's general counsel indicated that DARF's would be issued by the
    Central Bank on its restructuring debt interest remittances but
    refused to address whether the Central Bank would issue DARF's on
    its 432 loan program net loan interest remittances.17
    On January 22, 1984, the Brazilian Planning Minister, the
    Central Bank's general counsel, and other Brazilian officials met
    16
    Job Maats, who functioned as Citibank-Brazil's
    financial controller, served on the BAC's withholding issue
    subcommittee and played a central role in Citibank's efforts to
    obtain DARF's from the Central Bank, testified that Brazilian
    officials were told that a favorable resolution of the
    withholding issue would also benefit Brazil and be in Brazil's
    interest, because it would improve the climate to conclude a
    restructuring deal.
    17
    Citibank estimated that, for 1979 through 1983, a
    potential foreign tax credit of $30 million could be claimed by
    Citibank with respect to the Central Bank's 432 program net loan
    interest remittances.
    - 37 -
    with Rhodes (the Citibank senior executive who functioned as the
    BAC's chairman) and certain other BAC members to advise the BAC
    with respect to how the Brazilians had decided to resolve the
    withholding issue.     During the meeting, the Planning Minister
    initially asked the Central Bank's general counsel to review and
    discuss the generally applicable Brazilian law with respect to the
    payment of withholding tax on interest remittances made abroad.
    The   Planning   Minister   then   telephoned    the   Brazilian   Finance
    Minister to find out whether the applicable Brazilian law had been
    clarified with respect to the Central Bank's payment of withholding
    tax on its restructuring debt interest remittances.           He learned
    that the Brazilian IRS would issue a ruling to the Central Bank,
    which would hold that the Central Bank was required to withhold on
    interest remittances during the relending periods of the phase I
    DFA, phase II DFA, phase I CGA, and phase II CGA, beginning January
    1, 1984.18   The Planning Minister advised Rhodes and the other BAC
    members of this anticipated ruling.         He indicated that the Finance
    Ministry would shortly send a telex to the BAC confirming this,
    which telex was received by Rhodes on or about January 24, 1984.
    This anticipated ruling discussed at the January 22, 1984, meeting
    18
    The foreign lenders who were seeking DARF's from the
    Central Bank wanted to receive DARF's with respect to the 1983
    restructuring debt interest payments made to them. In addition
    to enabling them to claim potential foreign tax credits for 1983,
    they believed that the Internal Revenue Service was more likely
    to challenge the foreign tax credits claimed by them with respect
    to the 1984 restructuring debt interest payments if no similar
    foreign tax credits had been claimed by them for 1983.
    - 38 -
    was the March 1984 private ruling that the Brazilian IRS ultimately
    issued to the Central Bank, which ruling is more fully discussed
    below.
    Notes of the January 22, 1984, meeting taken by the lead
    attorney of the law firm that served as the BAC's counsel,
    stated:
    Rhodes
    (1)   Banks think 83 will be solved.
    (2)   IRS won't accept 84 if don't get 83.
    (3)   negative feeling for banks in the future.
    Sobreira [Central Bank's general counsel]
    (1)   Tax owed by anyone paying interest or fees
    abroad.
    (2)   Authority that remits charged with deduction
    & paying.
    (3)   Cent Bk agrees to pay on acct of Banks.
    (4)   Only way CB can pay is if law is interpreted
    to require payment.    Interpretation is from
    Treasury which has issued the interpretation.
    (5)   Treasury legal opinion applies to 1984 but
    not to 1983.
    Waiting for     XXXXXX
    (1)   Delfim [the Brazilian Planning
    Minister] says decree will be solved by
    inserting limit.
    (2) Wh tax.     Phase I and phase II from 1/1/84 on
    during reborrowing period.
    º     Agreement of Delfim.
    Rhodes + Coleman [the Morgan Bank senior
    executive who functioned as the BAC's deputy
    chairman] accept #1.
    Rhodes says he can't guarantee Bank acceptance        of
    #2.
    - 39 -
    Q. The Brazilian IRS's March 1984 Private Ruling to the Central
    Bank
    On or about December 28, 1982, the head of FIRCE submitted a
    "consulta" or ruling request by the Central Bank to the Brazilian
    IRS.       The December 28, 1982, consulta stated, in pertinent part:
    Subject:          Withholding tax levied on interest on
    *    *    *       [proposed phase I DFA and phase I CGA].
    Mr. Secretary,
    In the next few days, the Central Bank of Brazil will
    enter into, with the international financial community,
    * * * [the proposed phase I DFA and phase I CGA].
    *             *         *       *         *     *         *
    2.   In contracting these * * * [agreements], the
    Central Bank * * * will act in the capacity of Agent
    of the Federal Government in implementing the foreign
    exchange policy determined by the National Monetary
    Council.
    3.   Therefore, all the financing charges resulting from
    the above agreements will be for the account of the
    National Treasury, which will be responsible for the
    respective services related to payments and remittances.
    4.   During the negotiations for such Agreements, the
    Brazilian Authorities assumed the commitment to provide
    the creditors with withholding receipts (DARF's) for the
    withholding tax paid on the interest payable by the
    Central Bank on the funds of * * * [the phase I DFA
    and phase I CGA], during the period in which such funds
    remain deposited at the Central Bank and available for
    relending to borrowers in Brazil.
    5.   In view of the special characteristics of these
    transactions, we hereby request your opinion on the
    matter, pointing out that the following has already been
    negotiated with the creditor bankers:
    (a) issuance of the DARF's in the names of
    the agent bank of * *        * [the proposed
    phase I DFA and phase I CGA], considering that
    - 40 -
    the large number of lender bankers makes it
    impractical to issue one DARF in the name of
    each of them;
    (b) the payments are to be made individually
    per agent/taxable event/tax rate in view of
    the different tax rates available under
    double-taxation treaties.
    6.   In view of the foregoing, we hereby ask also for
    your opinion regarding the following aspects:
    (a) if the Central Bank, in this case, is
    entitled to the pecuniary benefit * * * ;
    (b) the possibility of establishing a period
    of 15 (fifteen) days for the payment of the
    tax, such period to start as of the date of
    remittance of the interest to the foreign
    creditors,   on   account  of  the   complex
    calculation of the interest and consequently
    of the tax itself;
    (c) the possibility of indicating "Brazilian
    Financing Plan" as the reference in space 31
    of the DARF as there is no Certificate of
    Registration for these transactions;
    (d) in the event that the withholding tax is
    paid late:
    (i) whether the Central Bank would
    nevertheless be entitled to such
    pecuniary benefit;
    (ii) whether it would be possible to
    waive the ancillary charges (default
    interest and monetary correction),
    particularly as regards the penalty.
    (e) whether the position to be adopted by
    your Office can be extended to agreements of
    identical characteristics that may be executed
    in the future in a possible development of the
    present negotiation phase.
    (7) Finally, we point out that the matter is of special
    importance  for  the   completion   of  the   mentioned
    Agreements.
    - 41 -
    Following the Central Bank's submission of the above ruling
    request, by around June or July 1983, certain employees of the
    Brazilian IRS prepared a proposed draft ruling which held that the
    Central   Bank    was   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, because it was
    subject to the same withholding tax collection and payment rules
    that were applicable to non-public-sector entities (the Doniak-
    Kahan draft ruling).        The Doniak-Kahan draft ruling was hotly
    debated within the Brazilian IRS and the Brazilian Government
    because of its conflict with SRF 368 and existing Brazilian Supreme
    Court decisions. As a result, Dornelles (the head of the Brazilian
    IRS) decided he could not approve the issuance of the Doniak-Kahan
    draft ruling to the Central Bank.
    In about early January of 1984, Dornelles directed two top-
    level Brazilian IRS officials to redraft and revise the Doniak-
    Kahan draft ruling.       He instructed them to reach the same holding
    as in the Doniak-Kahan draft ruling (i.e., that the Central Bank
    was 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) but to keep their revised ruling
    within the provisions of SRF 368.            In revising the Doniak-Kahan
    draft   ruling,   these    two   Brazilian     IRS   officials   devised    and
    formulated a new theory that the Central Bank was required to pay
    withholding tax on its restructuring debt interest remittances
    - 42 -
    during the relending periods of the DFA's and CGA's because until
    the expiration of the applicable relending period the loan funds
    were not yet irrevocably committed to the Central Bank, and it,
    therefore,   had   to   pay    withholding   tax   on   behalf   of   future,
    unidentified "borrowers-to-be" (the borrowers-to-be theory).             They
    incorporated this borrowers-to-be theory into the revised draft
    ruling they prepared, which revised draft ultimately became the
    final version of the ruling the Brazilian IRS issued to the Central
    Bank in March 1984.
    By letter dated March 14, 1984, the Brazilian Finance Minister
    forwarded to the Central Bank's President the Finance Minister's
    decision on the ruling request and the ruling the Brazilian IRS had
    issued.   The March 14, 1984, letter stated, in pertinent part:
    I refer to the inquiry made by your Bank regarding the
    tax treatment for the Agreements called * * * [CGA
    and DFA].
    2. In this respect, I enclose a copy of the opinion of
    * * * [the Brazilian IRS] on the matter, as well as of
    the decision I issued on this date on account of the
    discussions I had jointly with you for the negotiation of
    such agreement.
    The ruling issued to the Central Bank was a private ruling that was
    given limited circulation.        The ruling was not made available to
    the public and was not published in the Brazilian Government's
    Official Gazette.
    The Finance Minister's decision stated:
    Case No.:
    Interested Party:        CENTRAL BANK OF BRAZIL
    - 43 -
    DECISION:   I agree fully with the conclusions of the
    attached opinion of the * * * [Brazilian IRS]. In
    view of item 13 of said opinion, I direct the Central
    Bank of Brazil to implement the payment of income tax on
    or before the last business day of the month following
    the month in which the withholding is made.
    Brasilia, March 14, 1984
    /Ernane Galveas/
    ERNANE GALVEAS
    Minister of Finance
    The Brazilian IRS ruling, which he enclosed to the Central
    Bank, stated:
    Federal Government Service
    Ministry of Finance
    * * * [Brazilian IRS]
    OPINION
    Income tax withheld on interest due
    to parties resident or domiciled
    abroad
    * * * [FIRCE] of the Central Bank of Brazil requests
    an opinion about the tax treatment of Agreements called
    * * * [CGA and DFA] under which such government agency
    [autarquia] is liable for the payments and remittances
    pertaining to them, in the period of availability of such
    funds for relending.
    (2) By virtue of the special characteristics of these
    transactions, the question arises as to whether there is
    an incidence of income tax, in view of the government
    agency's [autarquia's] assumption of the burden, and if
    so whether,
    (a) the DARF's may be issued in the name of the agent
    bank centralizing each project, considering that the
    large number of lenders makes it impractical to complete
    one DARF for each of them;
    (b) the tax rates established in the treaties signed by
    Brazil to avoid double taxation may be applied;
    (c)   the pecuniary benefit   *     *   *   applies;
    - 44 -
    (d) it is possible to establish another period for the
    payment of the tax, as from the date of remittance of the
    interest to the foreign lenders, because of the complex
    calculation of the interest and consequently of the tax
    itself;
    (e) it is possible, in space 31 of the DARF, to indicate
    "Brazilian Financing Plan" as a reference, given the
    absence of a Certificate of Registration for these
    transactions;
    (f)   in the event that the income tax is paid late:
    (f)(1)    whether the Bank will nevertheless be entitled
    to the above-mentioned pecuniary benefit;
    (f)(2)    whether it would be possible to waive the
    monetary correction, delinquent interest and penalty.
    (3) Interest received by individuals or legal entities,
    resident or domiciled abroad, from individuals or
    entities resident or domiciled in Brazil, or received
    from a permanent establishment located in Brazil, owned
    by individuals or legal entities resident or domiciled
    abroad, is subject to withholding tax at the rate of 25%
    * * * . The * * * [contribuente] of this tax is an
    individual or legal entity, resident or domiciled abroad,
    which has the legal availability of the interest. Said
    tax must be withheld at the time of payment or credit by
    the interest paying source bearing in mind that the * *
    * [contribuente] individual or legal entity, resident or
    domiciled abroad - does not file an income tax return in
    Brazil. Said tax must be withheld even if the paying
    source is a legal entity of public law with tax immunity,
    because this is not a tax on the entity of public law
    that has immunity but rather on parties resident or
    domiciled abroad.
    (4) It is obvious that, if the party resident or
    domiciled abroad, the interest creditor, is immune or
    exempt from this tax, on account of international treaty
    or domestic legislation, the tax should not be withheld.
    In the case of the interest paid by the Central Bank of
    Brazil * * * , there is an atypical situation. * *
    *   [The Central Bank] is a federal government agency
    [autarquia] responsible, among other duties, for issuing
    currency, acting as depositary of the official gold and
    foreign currency reserves, providing for the placement of
    domestic and foreign loans, furthering the normal
    function of the exchange market, acting as a monetary
    - 45 -
    policy instrument of the Government      and   exercising
    control over credit in all its forms.
    (5) The financial transactions conducted by * * *
    [the Central Bank] are, in general, conducted on behalf
    of the Federal Union or in its interest.        In loan
    transactions, agreed upon with a net interest rate, the
    financial burden of the tax is transferred to the
    borrower. When the borrower assumes the tax burden, what
    actually happens is a gross-up of the income of the
    beneficiary lender.    For this reason and in order to
    calculate the gross income obtained, the law determines
    that the basis of calculation of the tax - the amount of
    interest - be grossed up. In this way, the borrower pays
    the income tax to the Union on behalf of the lender,
    ensuring the net rate promised to the lender by means of
    the payment of a greater amount.
    (6) Following the same reasoning,      *   *   *  it is
    possible to deduct, as an expense of a legal entity, the
    amount of tax incident on income tax paid to third
    parties, when the legal entity contractually assumes the
    burden as it is a supplemental expense and not a
    withholding tax.
    (7) Now, when    *   *   *  [the Central Bank] acts on
    behalf of the interest of the Federal Union, in cases of
    transactions agreed upon with net interest rates, it
    could claim a reimbursement for the amount paid in the
    form of income tax. In reality, * * * [the Central
    Bank] would pay the tax to the Federal Union and the
    Federal Union could return it to * * * [the Central
    Bank]. Under this scenario, the payment of tax, as it
    would be a simple accounting transaction, could be
    waived.
    (8) It should be noted that, as regards the possibility
    mentioned -    loans of funds which must be relent to
    borrowers in Brazil - said Bank must, in substitution of
    the future not yet identified debtors of the tax, pay the
    income tax on the interest paid during the period in
    which the funds remained available for relending. The
    fact is that, since the loan benefits persons which have
    not yet been identified from whom the payment of
    withholding tax is stipulated law, * * * [the Central
    Bank] must in practice perform these acts on behalf of
    such persons.
    (9) Considering, therefore, the peculiarity of the
    relationship * * * the Central Bank/Federal Union and
    - 46 -
    the Central Bank/Final borrowers of the relent funds, I
    believe that, as regards the funds that must be released
    to those as yet unidentified borrowers in Brazil, * *
    *   [the Central Bank] must as a substitute for such
    borrowers pay the income tax incident on the interest
    from January 1, 1984 to the end of the period of
    availability for such funds to be relent.
    (10) On account of the foregoing, there are the following
    consequences to the transactions in question:
    (a) payment of withholding tax is         due and the
    calculation base should be adjusted *      * * [i.e.,
    grossed-up];
    (b) as there are innumerable lenders and income is
    received through an agent bank which will then distribute
    it, the DARF may be issued in the name of the agent to
    simplify the payment;
    (c) if there is a Convention to avoid double income
    taxation signed with countries in which beneficiaries are
    domiciled, the rates established in the conventions shall
    be applied to that portion of the income corresponding to
    each;
    (d) once the tax has been made, the pecuniary benefit
    * * * is applicable * * * ;
    (e) in completing the DARF, the code to be used is code
    0393 and, as no certificate of registration is issued in
    these transactions, "Brazilian Financing Plan" may be
    indicated in the appropriate space, as the reference to
    the certificate is merely a control requirement.
    (11) As regards the delay in paying the tax not withheld,
    if the taxable event occurs while the inquiry is pending,
    the tax must be paid with monetary correction and without
    penalties * * * .
    (12) As the term for payment of the tax is suspended, as
    far as the taxable events occurring while the inquiry is
    pending are concerned, as a consequence, the pecuniary
    benefit will be applicable in relation to the tax paid by
    the thirtieth day from the date of knowledge of the
    decision.
    (13) As far as the extension of the tax payment period is
    concerned, this matter falls under the authority of the
    Minister of Finance * * * .
    - 47 -
    For higher consideration.
    Brasilia,
    /Eivany Antonio da Silva/
    Assistant Secretary of *     *   * [the Brazilian IRS]
    I agree with the above Opinion, which I approve.
    For the consideration of the Minister of Finance.
    Brasilia,
    /Luiz Romero Patury Accioly/
    Acting Secretary of * * * [the Brazilian IRS]
    R. Foreign Lenders' Efforts During the Phase III Negotiations To
    Have the Central Bank Issue Them DARF's in Other Situations Not
    Covered in the March 1984 Brazilian IRS Ruling
    During the phase III negotiations, a number of foreign lenders
    sought to have the Central Bank issue them DARF's with respect to
    all of its net loan interest remittances to them, and not just on
    its restructuring debt interest remittances during the relending
    periods of the DFA's and the CGA's.      The Brazilians rejected these
    efforts to have the Central Bank issue DARF's to the foreign
    lenders   in   additional   situations   outside   the   scope   of   the
    borrowers-to-be theory employed in the March 1984 Brazilian IRS
    ruling to the Central Bank.    However, the Brazilians did indicate
    some willingness to negotiate a longer relending period with
    respect to the proposed phase III DFA.
    On January 5, 1985, the Brazilians submitted their written
    comments to a proposed draft of certain phase III basic business
    terms that had been prepared by the BAC.           Their comments with
    respect to the Central Bank's provision of DARF's were as follows:
    WITHHOLDING TAX RECEIPTS
    In the first place, Pricing and Withholding Tax Receipts
    are intimately linked and shall be dealt with altogether.
    - 48 -
    There is no room for any change as regards * * * [the
    Central Bank's] tax immunity. As on Phases I and II,
    withholding tax receipts shall only be provided to the
    creditors for the initial period during which the amounts
    remain deposited with the Central Bank for relending to
    borrowers in Brazil (Relending Period), based on the
    concept of "borrowers to be". No withholding tax shall be
    collected on amounts redeposited with the Central Bank as
    a result of the relending flexibility referred to above,
    as occurs with other similar deposits held by the Central
    Bank. Politically speaking, there is no ground for any
    material change in the Brazilian withholding tax system,
    when Mexico negotiated their debt rescheduling without
    having to make any change on their fiscal policies. In
    fact, around 75% (US $36 billion) of the total amount of
    debt to be rescheduled (US $48 billion) is exempt from
    withholding tax on the grounds of being considered
    governmental debt.
    Furthermore, were the Central Bank to provide the
    creditors with tax receipts during the Relending Period,
    this would disencourage [sic] the relendings themselves,
    with negative consequences over the necessary regular
    flow of funds for the financing of the Public and Private
    Sectors. As to the subject of withholding tax on loans
    with Phase III funds, the possibility of determination of
    a higher limit (over 10 years) for withholding is under
    consideration and tax exemption shall be dealt with
    altogether with the level of spread. It must always be
    kept in mind that it is essential to keep in relation
    both the domestic interest rates and the financial costs
    of external borrowing. The increase in the latter will
    lead to an increase in domestic interest rates, in real
    terms, which is detrimental to the economic development
    and to the degree of freedom of monetary policies.
    S. 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 the years in issue, 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
    - 49 -
    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.
    Prior to 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 to Banco do Brazil. 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
    Bank would, on a frequent basis, credit and advance substantial
    funds to Banco de Brazil's Banking Reserves Account, due to 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)
    A commercial bank, (2) a monetary authority, (3) management control
    and distribution of currency, and (4) responsibility for bank
    - 50 -
    clearing.     Like the Central Bank, Banco do Brazil also 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.           Together, Banco do
    Brazil and the Central Bank 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.19
    To perform its various governmental functions, Banco do Brazil
    needed access to funds.       Such funding was provided by the Central
    Bank.      When Banco do Brazil, in carrying out its governmental
    functions, 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 sufficient funds to replenish
    and maintain its reserves account at the required level.             The
    Central Bank would level Banco do Brazil's reserves account on a
    daily basis.     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)
    19
    The Brazilian term "caixa unico" means a unified system
    of cash or financial management.
    - 51 -
    governmental securities in the name of the National Treasury.
    Essentially, the automatic transfer mechanism described above,
    whereby the Central Bank provided funds to Banco do Brazil through
    crediting its Banking Reserves Account, recognized and reflected
    that, under the caixa unico system, the Brazilian Government
    ultimately financed the governmental functions and operations Banco
    do Brazil and the Central Bank carried out.20
    On its books, Banco do Brazil made entries reflecting the
    following:    (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 revenues payable upon demand to the National
    Treasury.
    On the record presented in this case it is impossible to
    determine 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
    20
    The record is not entirely clear whether daily
    surpluses or excess funds in the Banking Reserves Account were
    turned back 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 was ended in 1987, the Central Bank
    was owed several billions of dollars by Banco do Brazil as a
    result of its advancement of funds to Banco do Brazil over the
    years. This 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 previous liability that Banco do
    Brazil had owed to the Central Bank.
    - 52 -
    interest remittances.      We are unable to ascertain what, if any,
    entries were made to determine:       (1) Whether the Central Bank was
    reimbursed   by   the   National   Treasury   for   its   withholding   tax
    payments; or (2) whether the Central Bank received the pecuniary
    benefit based on those withholding tax payments.              The Central
    Bank's ruling request raised these two matters, and the March 1984
    Brazilian IRS ruling discussed the two possibilities.21
    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.
    T. Foreign Tax Credit Claimed by Petitioner in Dispute Between The
    Parties
    On its 1980 through 1986 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 covering the period from
    1980 through June 28, 1985, petitioner reduced the amount of
    21
    An expert witness for petitioner acknowledged that the
    Central Bank might be entitled to reimbursement from the National
    Treasury for its restructuring debt withholding tax payments, as
    the Central Bank was acting on the Brazilian Government's behalf
    and in the national interest. However, he claimed that the
    Central Bank would have to ask the Brazilian Government for
    reimbursement and that any such expenditure would require the
    Brazilian Congress' approval.
    - 53 -
    foreign tax credit it claimed in connection with its Brazilian
    loans by an amount equal to the pecuniary benefit provided by the
    Brazilian Government to Brazilian borrowers.
    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.
    The total foreign tax credit claimed by petitioner for 1980
    through 1986 that is still in dispute between the parties, and the
    amounts of the disputed credit attributable to the legal liability,
    Central Bank, and subsidy/pecuniary benefit issues, are as follows:
    Issues
    Total                                    Subsidy/Pecuniary
    Year      Credit    Legal Liability   Central Bk       Benefit
    1980      $53,358      $53,358           --            $21,343
    1981      545,462      545,462           --            218,185
    1982      814,969      814,969           --            325,988
    1983      489,341      489,341           --            195,736
    1984      312,353      312,353        $166,415         124,941
    1985      242,781      242,781         181,272          93,506
    1986      355,679      355,679         317,019            --
    OPINION
    Section 901 allows a domestic corporation to claim as a credit
    against its Federal income tax (subject to certain limitations not
    applicable herein) the amount of any income taxes paid on behalf of
    the taxpayer to a foreign country.         Sec. 4.901-2(a), Temporary
    Income Tax Regs., 45 Fed. Reg. 75648 (Nov. 17, 1980); sec. 1.901-
    - 54 -
    2(a), Income Tax Regs.22       The purpose of the credit is to reduce
    international double taxation.          American Chicle Co. v. United
    States, 
    316 U.S. 450
    , 452 (1942).       U.S. tax principles are applied
    in deciding whether a foreign levy is a creditable income tax.
    Goodyear   Tire   &   Rubber   Co.,   
    493 U.S. 132
      (1989);   Biddle   v.
    Commissioner, 
    302 U.S. 573
    (1938); United States v. Phillips
    Petroleum Co. v. Commissioner, 
    104 T.C. 256
    , 295 (1995).            However,
    the law of the foreign state is first looked at to determine the
    nature of the obligations and rights which form the basis of the
    claim of a foreign tax credit.          Cf. Phillips Petroleum Co. v.
    
    Commissioner, supra
    ; H.H. Robertson Co. v. Commissioner, 
    8 T.C. 1333
    (1947), affd. 
    176 F.2d 704
    (3d Cir. 1949).              Although prior
    cases involving other U.S. taxpayers' entitlement to foreign tax
    credits for Brazilian withholding tax paid on interest remittances
    to them have generally held the Brazilian withholding tax to be a
    creditable foreign income tax for purposes of section 901, e.g.,
    Continental Ill. Corp. v. 
    Commissioner, 998 F.2d at 518-519
    ; Nissho
    Iwai Am. Corp. v. Commissioner, 
    89 T.C. 773-774
    , none of those
    cases squarely dealt with the legal liability and Central Bank
    issues to be resolved by us infra.
    22
    In November 1980, the Internal Revenue Service issued
    temporary regulations which set forth requirements for, and
    limitations on, the amount of foreign tax credit. Secs. 4.901-2
    to 4.903-1, Temporary Income Tax Regs., 45 Fed. Reg. 75647-75658
    (Nov. 17, 1980). These temporary regulations generally were made
    applicable to taxable years ending after June 15, 1979. Final
    regulations under sec. 901 were made effective for taxable years
    beginning after Nov. 14, 1983.
    - 55 -
    I.    The Legal Liability Issue
    A foreign tax is generally creditable for purposes of section
    901 only if the domestic corporation is legally liable under
    foreign law for the tax.         Nissho Iwai Am. Corp. v. 
    Commissioner, supra
    at 773-774; sec. 4.901-2(g), Temporary Income Tax Regs., 45
    Fed. Reg. 75655 (Nov. 17, 1980); sec. 1.901-2(f), Income Tax Regs.
    However, it is recognized that legal liability for the tax and the
    obligation to pay are not necessarily the same. For example, under
    a    withholding   system,     legal   liability   for    the   tax    and   the
    obligation    to   pay   the   tax   are   different.     The   Federal      wage
    withholding system illustrates this difference--the employer is the
    person obligated to withhold the tax and to pay the withheld tax to
    the Government; the employee is the person legally liable for the
    tax.    Nissho Iwai Am. Corp. v. 
    Commissioner, supra
    at 773.
    To   resolve    the   legal   liability   issue,    we   must   examine
    Brazilian law.        In this regard, Rule 146 provides, in pertinent
    part:
    RULE 146. DETERMINATION OF FOREIGN LAW
    * * *    The Court, in determining foreign law, may
    consider any relevant material or source, including
    testimony, whether or not submitted by a party or
    otherwise admissible. The Court's determination shall be
    treated as a ruling on a question of law.
    - 56 -
    Rule 146 is taken almost verbatim from rule 44.1 of the Federal
    Rules of Civil Procedure.23   See Note to Rule 146, 
    60 T.C. 1137
    .
    23
    The 1966 Advisory Committee Notes to rule 44.1 of the
    Federal Rules of Civil Procedure, 28 U.S.C. app. at 759 (1994),
    state, in pertinent part:
    The * * * new rule describes the materials to
    which the court may resort in determining an issue of
    foreign law. Heretofore, the district courts, applying
    Rule 43(a), have looked in certain cases to State law
    to find the rules of evidence by which the content of
    foreign-country law is to be established. The State
    laws vary; some embody procedures which are
    inefficient, time consuming and expensive. * * * In
    all events the ordinary rules of evidence are often
    inapposite to the problems of determining foreign law
    and have in the past prevented examination of material
    which could have provided a proper basis for the
    determination. The new rule permits consideration by
    the court of any relevant material, including
    testimony, without regard to its admissibility under
    Rule 43. * * *
    *      *      *       *       *     *      *
    In further recognition of the peculiar nature of
    the issue of foreign law, the new rule provides that in
    determining this law the court is not limited by
    material presented by the parties; it may engage in its
    own research and consider any relevant material thus
    found. The court may have at its disposal better
    foreign law materials than counsel have presented, or
    may wish to reexamine and amplify material that has
    been presented by counsel in partisan fashion or in
    insufficient detail. On the other hand, the court is
    free to insist on a complete presentation by counsel.
    *      *      *       *       *     *      *
    The new rule refrains from imposing an obligation
    on the court to take "judicial notice" of foreign law
    because this would put an extreme burden on the court
    in many cases; and it avoids the use of the concept of
    "judicial notice" in any form because of the uncertain
    meaning of that concept as applied to foreign law.
    *   *   *   Rather the rule provides flexible
    (continued...)
    - 57 -
    A.   Non-Tax-Immune Borrowers/Liability Issue
    In prior cases involving Brazilian withholding tax paid by
    non-tax-immune Brazilian borrowers on their net loan interest
    remittances     to   domestic   corporations,   we   and   other   courts,
    including the U.S. Courts of Appeals for the Seventh and Eighth
    Circuits, have held those Brazilian withholding tax payments to be
    a potentially creditable tax to the domestic corporations for
    purposes of section 901.        As the Court of Appeals for the Eighth
    Circuit explained in Norwest Corp. v. 
    Commissioner, 69 F.3d at 1407
    :
    The Commissioner argues that Norwest is not legally
    liable for the local [Brazilian] tax, and thus is not
    entitled to * * * [foreign tax credit] for the local
    tax, because only the borrower was legally obligated to
    withhold it. * * *
    We reject this argument as did the tax court below
    and the other courts which have addressed this question.
    See Continental Ill. Corp. v. Commissioner, 
    998 F.2d 513
    ,
    518-19 (7th Cir. 1993) (Continental)       *   *    *   ;
    Continental Ill. Corp. v. Commissioner, * * * [T.C.
    Memo. 1988-318], affd. sub nom. Citizens & S. Corp. v.
    Commissioner, 
    919 F.2d 1492
    (11th Cir. 1990) (per
    curiam); Nissho Iwai Am. Corp. v. Commissioner, 
    89 T.C. 765
    , 773-74 * * * (1987) (Nissho). It is a well-settled
    principle under United States tax law that the person
    obligated to pay the tax is not necessarily the same
    person to whom legal liability attaches. 
    Nissho, 89 T.C. at 773
    * * * . Nissho, which the tax court here cites,
    compared the Brazilian system to the wage withholding
    system in the United States under which employees remain
    legally liable for income taxes, although the employer is
    the person obligated to withhold the tax and pay the tax
    to the government.      
    Id. Similarly, the
    Brazilian
    23
    (...continued)
    procedures for presenting and utilizing material on
    issues of foreign law by which a sound result can be
    achieved with fairness to the parties.
    - 58 -
    borrower is only charged with an administrative function.
    As explained, under Brazilian law, interest paid to
    foreign lenders like Norwest is subject to local tax.
    The Brazilian borrower is required to withhold the local
    tax from each interest payment.      
    Id. at 774
    * * * ,
    citing Gleason Works v. Commissioner, 
    58 T.C. 464
    , 478
    * * * (1972) (noting that liability for taxes "does not
    rest upon a search for the person from whom the tax is
    collectible but rather for the person upon whom the tax
    is imposed"). The Commissioner argues that in Brazil only
    borrowers have an enforceable legal obligation because
    withholding is the exclusive means of collection. The
    Commissioner's argument is unduly formalistic because
    Brazilian banking authorities will not allow the
    Brazilian borrower to buy foreign currency to pay
    interest to foreign lenders without proof it has withheld
    and paid the local tax. The lender thus could not escape
    liability and the absence of a law specifically applying
    to the lender is irrelevant. See 
    Continental, 998 F.2d at 518
    . "[T]he [local] tax is 'paid' by the [foreign]
    lender * * * even if the [Brazilian government's] tax
    enforcement guns are trained on the agent [that is, the
    Brazilian borrower,] rather than on the principal [that
    is, the foreign lender]." 
    Id. at 519.
    * * *
    Based on the record presented in the instant case, we see no
    reason    to    depart   from   the   above    precedents.      Brazilian    law
    indisputably      requires      non-tax-immune     Brazilian    borrowers     to
    withhold with respect to their interest remittances to foreign
    lenders.       Petitioner is "legally liable" under Brazilian law for
    the withholding tax paid by non-tax-immune Brazilian borrowers on
    their net loan interest remittances to petitioner.               We thus hold
    that the Brazilian withholding tax collected from and paid by these
    borrowers on their net loan interest payments to petitioner is
    potentially creditable to petitioner for 1980 through 1986.                   Of
    course,    the    actual   amount     of   this   withholding   tax   that   is
    creditable to petitioner will depend upon our resolution of the
    subsidy/pecuniary benefit issue infra.
    - 59 -
    B.    Central Bank/Liability Issue
    In the instant case, petitioner was not required to file a
    Brazilian tax return and had no obligation itself to pay Brazilian
    tax.    See Continental Ill. Corp. v. 
    Commissioner, 998 F.2d at 518
    -
    519.    Brazilian withholding tax was purportedly collected from and
    paid by the Central Bank on its Brazilian restructuring debt
    interest remittances to petitioner during the relending periods of
    the DFA's and CGA's, beginning in 1984.                For these purported
    withholding tax payments to be a potentially creditable tax to
    petitioner, the Central Bank must have a legal liability under
    Brazilian law to pay this "withholding tax".           Petitioner cannot be
    considered "legally liable" under Brazilian law for Brazilian tax
    if there was no legal liability on its and the Central Bank's part
    to     pay   this   "withholding   tax".      Nissho   Iwai    Am.       Corp.   v.
    Commissioner, 
    89 T.C. 773-774
    ; sec. 4.901-2(g), Temporary Income
    Tax Regs., 45 Fed. Reg. 75655 (Nov. 17, 1980); sec. 1.901-2(f),
    Income Tax Regs.; see also Amoco Corp. v. Commissioner, T.C. Memo.
    1996-159; Continental Ill. Corp. v. Commissioner, T.C. Memo. 1991-
    66 (hereinafter sometimes referred to as the PeMex case), affd. in
    part and revd. in part 
    998 F.2d 513
    (7th Cir. 1993).
    As we have determined in our findings, until 1984, the Central
    Bank paid Brazilian withholding tax on its gross loan interest
    remittances abroad, but not on its net loan interest remittances.
    This treatment       was   authorized   and   sanctioned      by   SRF    368,   an
    "officio" that the head of the Brazilian IRS issued to the Central
    - 60 -
    Bank in June 1980, and was consistent with certain prior decisions
    of the Brazilian Supreme Court that are discussed more fully
    hereafter.   Pursuant to SRF 368, the Central Bank (which in Brazil
    serves an instrumental role in ensuring that the withholding tax
    due on interest remittances abroad is collected), following its
    issuance of FIRCE 80 in May 1981, did not require withholding tax
    to be collected from and paid by public-sector entities, like
    itself, on their net loan interest remittances abroad.         Beginning
    in 1984, the Central Bank purportedly paid withholding tax on its
    restructuring   debt   interest   remittances   during   the   relending
    periods of the DFA's and the CGA's, pursuant to the borrowers-to-be
    theory applied in the March 1984 Brazilian IRS private ruling
    issued to the Central Bank.
    C.    Brazilian Supreme Court Decisions
    The following Brazilian Supreme Court decisions are apposite
    in understanding the respective arguments of the parties and their
    experts concerning the Central Bank's liability for the payment of
    withholding tax on its net loan interest remittances to foreign
    lenders.
    On September 24, 1974, a panel of the Brazilian Supreme Court
    issued its unanimous decision in Federal Govt. v. Highway Dept. of
    the State of Parana (hereinafter referred to for convenience as the
    Parana I--1st Panel decision), reversing the decision of the lower
    Brazilian Federal Court of Appeals and holding that the State of
    Parana was required to pay withholding tax on its remittance of
    - 61 -
    interest abroad with respect to a loan to finance the construction
    of State highways, because it was not immune from paying this
    withholding tax under Article 19 of the Brazilian Constitution.
    The loan involved in the Parana I--1st Panel decision was a gross
    loan. The Brazilian Supreme Court Justice reporting the case
    reasoned that if constitutional immunity from the withholding tax
    were held to apply, then the beneficiary of the immunity would be
    the foreign creditor, not the State of Parana. This Justice quoted
    with approval the following reasoning given in the dissent to the
    lower Brazilian Federal Court of Appeals' majority decision:
    If the State of Parana were the beneficiary of an
    increase in its assets, on which the Union were demanding
    the tax, it would be granted immunity, according to the
    Constitution.
    But since it appears in a different capacity in the
    litigation, namely, as remitter of interest on behalf of
    another, I hold that the argument alluding to immunity is
    inadmissible.
    On October 15, 1975, the full Brazilian Supreme Court issued
    its   unanimous    decision   in   State    of   Parana     v.   Central   Bank
    (hereinafter      for   convenience   referred    to   as    the    Parana   II
    decision), holding the State of Parana was not required to pay
    withholding tax on its remittance of interest abroad with respect
    to a loan to finance a railroad, because it was immune from such
    withholding tax under Article 19 of the Brazilian Constitution.
    The loan involved in the Parana II decision was a net loan.                  The
    Brazilian Supreme Court Justice reporting the case distinguished
    the Parana I--1st Panel decision, and reasoned as follows:
    - 62 -
    There is no further debate on whether [withholding of]
    income tax can be demanded in the remittance of interest
    to another country, by virtue of art. 11, sole paragraph
    of Law-Decree 401, of 30 December 68, coupled with art.
    1 of Law-Decree 1215, of 4 May 72, RE 76,792- Plenary
    Session (D.J. of 11 October 74, p. 7480), and I ruled
    this way in the RE 78,988-SP, on 18 March 75.
    What is at issue, however, is the application of the
    sole paragraph of art. 11 of the Law-Decree 401/68,
    notwithstanding the immunity guaranteed to the remitter
    by virtue of art. 19, III, a, by the Federal
    Constitution.
    The First Division, in RE 79,157 [the Parana I--1st
    Panel decision], held as follows:
    The   tax  is   payable,  even   though  the
    corporation * * * [by] constitutional law is
    immune, for otherwise the beneficiary of the
    immunity would not be the State, but the
    foreign creditor. * * *
    I believe that the precedent invoked [the Parana I--
    1st Panel decision] does not apply to the present case.
    In fact it has been expressly stipulated that, at any
    time and for any reason, any fiscal or parafiscal [(i.e.,
    tax)] burden shall be the responsibility of the State of
    Parana.
    It is argued that said contractual provision
    *   *    *   does not matter in the unraveling of the
    dispute, because the beneficiary of the interest would be
    the foreign creditor, which is not immune.
    But such is not so, in my opinion, * * * because,
    according to the sole paragraph of art. 11 of    * * *
    [Decree-law 401], the constitutionality of which also is
    not at issue, the creditor is not responsible for the
    payment of income tax.
    The aforementioned sole paragraph states explicitly:
    "For purposes of this article, it is
    considered that the fact generating taxation
    is the remittance to another country and the
    remitter is the contribuente."
    Now, in the present case, the generating fact is the
    remittance of interest on the loan owed by the State of
    - 63 -
    Parana, and the remittance being done, it is indisputable
    that it will be the contribuente.
    However, the State is immune by virtue of art. 19
    *     *    * of the Federal Constitution.
    In my view, the conclusion is incontrovertible that
    the burden of the payment falls on the remitter, and in
    the present case, this, a unit of the Federation, is
    immune that is, not obligated to pay the tax.
    There is no need to fear that the foreign creditor
    shall benefit from the immunity of the debtor.
    In view of the sole paragraph of art. 11 of Decree-
    law 401   *   *   *  , neither is the creditor of the
    interest abroad the contribuente, but rather the
    remitter, on occasion of the remittance.
    In its February 21, 1979, decision in State of Minas Gerais
    v. Federative Republic of Brazil (hereinafter for convenience
    referred to as the Minas Gerais decision), the full Brazilian
    Supreme Court held that the State of Minas Gerais and its State
    Highway Department were not required to pay withholding tax on
    interest remittances they made as repass borrowers with respect to
    their Resolution 63 repass loans, because they were immune from
    such        withholding   tax   under        Article   19   of   the   Brazilian
    Constitution.24         The reporting Brazilian Supreme Court Justice
    24
    In Minas Gerais, the reporting Brazilian Supreme Court
    Justice stated:
    Nowadays there is no further doubt on the subject,
    after * * * [Summula No. 586], establishing a
    position derived from art. 11 of Decree-law No. 401 of
    December 30, 1968 as follows: "[Withholding of] Income
    tax is due on interest remitted abroad, based on a loan
    agreement."
    We must thus now   *    *    *   [address the other
    (continued...)
    - 64 -
    reasoned that Resolution 63, which authorizes the repassing of the
    foreign loan, confers upon the repass borrower the status of a
    foreign currency borrower and concluded that the repass borrower
    could avail itself of its tax immunity.25        The Brazilian Supreme
    Court in Minas Gerais further held that certain mixed capital
    companies   were   required   to   pay   withholding   tax   on   interest
    remittances they made as repass borrowers with respect to their
    Resolution 63 repass loans, because these mixed capital companies
    did not enjoy immunity from taxation, as they have the same status
    under the Brazilian Constitution as private companies.26
    On August 30, 1979, the full Brazilian Supreme Court issued
    its decision unanimously rejecting the objections of the State of
    Parana Highway Department in its appeal from the Parana I--1st
    Panel decision (hereinafter for convenience referred to as the
    24
    (...continued)
    argument] invoked by the plaintiffs: the remittances
    are from the State of Minas Gerais and thus [enjoy] the
    benefit of reciprocal tax immunity granted under art.
    19 * * * of the Constitution.
    A "summula" is a statement of a legal proposition that the
    Brazilian Supreme Court feels is firmly established under
    Brazilian law.
    25
    In the case of a Resolution 63 repass net loan, the
    repass borrower generally must also provide the repass lender
    with the funds to pay the withholding tax on the repass lender's
    interest remittances to the foreign lender. However, as noted in
    our findings, if the repass lender is entitled to a pecuniary
    benefit, the repass lender must then pass on the benefit to the
    repass borrower.
    26
    The Minas Gerais decision does not specifically state
    whether the Resolution 63 repass loans involved were net loans or
    gross loans. However, see supra note 25.
    - 65 -
    Parana I--Full Bench decision).   The reporting Brazilian Supreme
    Court Justice agreed with the Parana I--1st Panel decision's
    reasoning that the remitter's immunity from taxation under Article
    19 of the Brazilian Constitution should not prevent the imposition
    of the withholding tax on gross loan interest remittances abroad,
    because a contrary holding would allow the foreign creditor, and
    not the State, to be the beneficiary of the immunity.   He concluded
    by stating that "As this was the foundation of the challenged
    ruling, and since this issue did not consider the ruling cited for
    comparison, the claimed divergence does not exist in the present
    case."27
    On June 17, 1988, a panel of the Brazilian Supreme Court
    issued its unanimous decision in Municipality of Santo Andre v.
    Federal Union (hereinafter for convenience referred to as the Santo
    27
    An expert witness for petitioner, Joao Guerra (Guerra),
    explained that the State Highway Department appealed the Parana
    I--1st Panel decision to the full Brazilian Supreme Court because
    the decision's holding appeared to conflict with the Parana II
    decision's holding. Although Guerra acknowledged that the
    reporting Justice in Parana I--Full Bench concluded that there
    was no actual conflict between the two decisions, Guerra
    maintained that this did not necessarily mean the reporting
    Justice accepted the Parana II decision's net-loan-versus-gross-
    loan rationale. Guerra claimed that (1) any points relating to
    whether the particular loan in Parana I--Full Bench was a gross
    loan or net loan may not have been brought to the Supreme Court's
    attention, and (2) the reporting Justice may not have understood
    the distinction between a net loan and a gross loan. While we
    agree that, in all likelihood, the Brazilian Supreme Court in
    Parana I--Full Bench was aware of the holding it reached in
    Parana II, we do not accept Guerra's other contentions. If the
    Highway Department's appeal were based on Parana II's holding, as
    Guerra propounded, then the Supreme Court in Parana I--Full
    Bench, in all substantial likelihood, would have had to have
    considered Parana II's net-loan-versus-gross-loan rationale.
    - 66 -
    Andre I decision), holding that the municipality did not have to
    pay withholding tax on its interest remittances as repass borrower
    with   respect      to   a   Resolution    63    repass   loan    to    construct    a
    municipal supply center.             The loan involved in the Santo Andre I
    decision was a net loan.             The reporting Brazilian Supreme Court
    Justice     noted    the     prior    Parana     I--1st   Panel   and    Parana     II
    decisions, but adopted and utilized the Parana II decision's
    rationale for distinguishing the Parana I--1st Panel decision.
    This Justice stated that the decision rendered in Santo Andre I was
    "oriented in the same line of jurisprudence" as the Parana II
    decision.
    On April 13, 1993, a panel of the Brazilian Supreme Court
    issued its ruling not to recognize the Brazilian Government's
    appeal in Federal Union v. Municipal Prefecture of Santo Andre
    (hereinafter for convenience referred to as the Santo Andre II
    decision).     The loan to the municipality in Santo Andre II was a
    Resolution 63 repass net loan.                  In its appeal, the Brazilian
    Government argued that the Parana II decision was distinguishable
    and did not support holding the municipality to be immune from
    payment of withholding tax, as the foreign loan in Parana II had
    been directly made to the State of Parana.
    D.   The Parties' Experts
    1. Petitioner's Experts.
    Petitioner offered testimony on the applicable Brazilian law
    concerning the Central Bank's liability for withholding tax on its
    - 67 -
    restructuring debt interest remittances from four expert witnesses:
    (1) Geraldo Ataliba (Ataliba), a Brazilian university professor who
    specializes in constitutional taxation, (2) Eivanny da Silva (da
    Silva),28 a Brazilian tax lawyer who served as a top-level Brazilian
    IRS official from 1982 through 1984 and was one of the principal
    authors of the March 1984 private Brazilian IRS ruling issued to
    the Central Bank, (3) Joao Guerra (Guerra), a Brazilian tax lawyer,
    and (4) Jose Pedreira (Pedreira), a Brazilian tax lawyer.
    Petitioner's experts were of the opinion that the applicable
    Brazilian   law   with     respect     to   the    Central    Bank's   payment   of
    withholding tax on its net loan interest remittances abroad was
    correctly presented in the Doniak-Kahan draft ruling that the
    Brazilian IRS never issued.            In other words, they maintained that
    the Central Bank was subject to the same withholding tax collection
    and payment rules as non-public-sector entities and was required to
    pay   withholding    tax    on   all    its   interest       remittances   abroad,
    including   those     with       respect      to    the   restructuring      debt,
    irrespective of the relending periods of the DFA's and CGA's.
    They were further of the opinion that SRF 368 did not reflect
    the applicable Brazilian law and was completely insupportable under
    Brazilian law.      Except for perhaps da Silva, all of petitioner's
    experts opined that, under Brazilian law, there was no such legal
    doctrine as the borrowers-to-be theory.
    28
    Petitioner offered da Silva as both a fact witness and
    an expert witness on Brazilian law.
    - 68 -
    Even da Silva, the principal author of the March 1984 private
    Brazilian IRS ruling issued to the Central Bank, acknowledged that
    the borrowers-to-be theory was a "new theory" that he devised to
    deal with an "atypical situation".           He asserted that he and Luiz
    Patury Accioly (Patury Accioly), the other top-level Brazilian IRS
    official assigned by Dornelles to revise the Doniak-Kahan draft
    ruling, were trying to save face for and avoid embarrassment to the
    Brazilian IRS, because its prior issuance of SRF 368 lacked "any
    legal basis" under Brazilian law.29          According to da Silva, Patury
    Accioly (who was serving as a Brazilian IRS official when SRF 368
    was issued) told him that SRF 368 had been issued by the Brazilian
    IRS because various States and municipalities did not want to be
    required   to   pay   withholding    tax     on   their   net   loan   interest
    remittances abroad.     Most significantly, da Silva further related
    that the Doniak-Kahan draft ruling, at the time it was being hotly
    debated within the Brazilian IRS and the Brazilian Government,
    though supported by certain Brazilian Supreme Court decisions,
    29
    Da Silva attributed the Brazilian IRS's "illegal"
    actions in issuing SRF 368 to the fact that Brazil was under the
    control of a military regime. As a result, he claimed, the
    executive branch of the Brazilian Government largely could do as
    it pleased. The record, however, reflects that Brazil operated
    under this military regime until about 1985. Thus, the March
    1984 Brazilian IRS private ruling was issued to the Central Bank
    during this period of military rule. Further, on cross-
    examination, da Silva acknowledged that Dornelles had no
    connection to the military regime. More importantly, da Silva
    did not address the fact that the position taken in SRF 368 was
    consistent with the Brazilian Supreme Court's Parana II and Santo
    Andre I decisions. The Santo Andre I decision was issued on June
    17, 1988, a date well after the military regime had ended. We
    find this aspect of da Silva's testimony not credible.
    - 69 -
    including   the   Parana    I--1st   Panel    and    Parana    I--Full   Bench
    decisions, was contrary to other Brazilian Supreme Court decisions,
    including the Parana II decision.
    Petitioner's    experts     were   of   the    opinion    that    certain
    Brazilian   Supreme   Court     decisions,    including       the    Parana   II
    decision, holding that public-sector entities were not required to
    pay withholding tax on their net loan interest remittances abroad,
    were incorrectly decided. They maintained that these Supreme Court
    decisions improperly extended and applied the taxation principles
    of Decree-law 401 to foreign currency loans.           Guerra claimed that
    the net-loan-versus-gross-loan rationale used in the Parana II
    decision to distinguish the Parana I--1st Panel decision was
    erroneous, but he acknowledged that this same rationale was applied
    and utilized in the Santo Andre I decision.            He claimed that this
    was a repetition of the error.
    Some of petitioner's experts were further of the opinion that
    Article 19 of the Brazilian Constitution would not prevent the
    Central Bank and other Federal-level autarquias from being subject
    to withholding tax on their net loan interest remittances, as
    Article 19 of the Constitution, they claim, prohibits taxation only
    between the different governmental levels.              According to them,
    Article 19 prevents the Federal Government of Brazil from taxing
    the   assets,   revenues,   and   operations    of    State    and   municipal
    governmental entities, but not the assets, revenues, and operations
    - 70 -
    of other Federal-level governmental entities, like the Central
    Bank.
    2. Respondent's Experts
    Respondent offered testimony on the applicable Brazilian law
    concerning the Central Bank's liability for withholding tax on its
    restructuring debt interest remittances abroad from two expert
    witnesses:      Paulo Bekin and Sergio Tostes.        Both Bekin and Tostes
    were Brazilian lawyers.
    Respondent's experts were of the opinion that the Central Bank
    was not required to pay withholding tax on its net loan interest
    remittances because of (1) its immunity from taxation under Article
    19 of the Brazilian Constitution, and (2) its exemption from
    withholding tax under various ordinary laws, including Decree-law
    1,215 and Decree-law 4,595 (under which the Central Bank is to
    enjoy the same privileges, immunities, and exemptions as the
    National Treasury).30
    Tostes was of the opinion that the Central Bank was not
    required     to    pay   withholding     tax   on   its   net    loan   interest
    remittances abroad, because of its immunity from taxation under
    Article    19     of   the   Brazilian   Constitution.      He    claimed   that
    Brazilian law distinguishes between net loans and gross loans, and
    that withholding tax would have to be paid by a public-sector
    30
    The parties' experts agree that, in a strict technical
    sense, immunity from taxation derives from the Brazilian
    Constitution, whereas an exemption from tax typically is provided
    by an ordinary law.
    - 71 -
    entity,   like   the   Central   Bank,   on   its   gross   loan   interest
    remittances abroad, but not on its net loan interest remittances.
    He cited as authority for this proposition the Brazilian Supreme
    Court's Parana II decision.
    Bekin maintained that the Central Bank would not be required
    to pay withholding tax on interest from net loans because it would
    be granted exemption from payment of withholding tax under Decree-
    law 1,215. He believed that Decree-law 1,215 was the authority for
    the Brazilian IRS's issuance of SRF 368.             However, on cross-
    examination, he acknowledged that, in 1983 and 1984, the National
    Monetary Council had set a minimum loan term of 10 years in order
    to qualify for exemption under Decree-law 1,215, whereas the phase
    I and phase II CGA's and DFA's had loan terms of less than 10
    years.     Both Bekin and Tostes were of the opinion that the
    Central Bank would be exempt under Decree-law 4,595 from payment of
    withholding tax with respect to its restructuring debt interest
    remittances, as the National Treasury, they maintained, would not
    have to pay withholding tax to itself if it, instead, had been the
    borrower under the DFA's and CGA's.       They pointed out that Decree-
    law 4,595 provides that the Central Bank is to enjoy the same
    privileges and exemptions as the National Treasury. Tostes further
    noted that the March 1984 Brazilian IRS ruling issued to the
    Central Bank acknowledged that the Central Bank was acting as an
    agent for the National Treasury.
    - 72 -
    E.   Determination of the Applicable Brazilian Law
    Petitioner contends that the applicable Brazilian law is
    correctly reflected in the Doniak-Kahan draft ruling which was
    never issued      by    the   Brazilian       IRS.     Petitioner    asserts   that
    Brazilian law does not distinguish between gross loans and net
    loans.    It further maintains that certain Brazilian Supreme Court
    decisions,      like    the   Parana     II   decision,    are   distinguishable,
    because they involved financing of imported goods subject to
    Decree-law 401, not foreign currency loans.
    Even    if    Article     19   of    the     Brazilian    Constitution    were
    applicable to public-sector entities' net loan interest remittances
    abroad, petitioner maintains that Article 19 prevents taxation only
    between   the     different    governmental          levels.     Thus,   petitioner
    contends, while Article 19 might prevent the Brazilian Federal
    Government from taxing certain State-level and municipal-level
    autarquias (e.g., the Minas Gerais decision), Article 19 would not
    prevent the Central Bank and other Federal-level autarquias from
    being subject      to    withholding       tax    on   their   net   loan   interest
    remittances abroad.
    Alternatively, petitioner maintains that this Court, pursuant
    to the act of state doctrine, must accord conclusive effect to the
    March 1984 Brazilian IRS private ruling issued to the Central Bank.
    As even petitioner's own experts generally acknowledged that the
    borrowers-to-be theory applied in the March 1984 Brazilian IRS
    - 73 -
    ruling did not reflect the applicable Brazilian law, we will deal
    with petitioner's act of state argument separately infra.
    Respondent, on the other hand, primarily contends that public-
    sector entities, like the Central Bank, were not required to pay
    withholding tax on their net loan interest remittances abroad
    because of their immunity from taxation under Article 19 of the
    Brazilian Constitution.    Respondent maintains that this was the
    applicable law in Brazil both before and after 1984, as reflected
    by the Brazilian IRS's issuance of SRF 368 in June 1980 and by
    certain Brazilian Supreme Court decisions, including the Parana II
    and Santo Andre I decisions. Respondent further asserts that these
    Supreme Court decisions involved foreign currency net loans, not
    net loans for the financing of imported goods.           We agree with
    respondent.
    The   record   reflects   that   to   help   meet   the   Brazilian
    Government's and the Central Bank's commitment to provide DARF's to
    the foreign lenders during the relending periods of the DFA's and
    CGA's, top Brazilian IRS officials concocted an elaborate legal
    fiction--the borrowers-to-be theory.        In light of the States,
    municipalities, and other public-sector entities with foreign net
    loans, it was not politically feasible for the Brazilian Government
    to change the applicable Brazilian law and require all public-
    sector entities to pay withholding tax on their net loan interest
    remittances abroad.    Moreover, as these public-sector entities,
    like the Central Bank, were immune from paying withholding tax on
    - 74 -
    their net loan interest remittances pursuant to Article 19 of the
    Brazilian Constitution, a constitutional amendment presumably would
    have been required to change the law.     As a result, the Doniak-
    Kahan draft ruling was never issued.
    Top Brazilian IRS officials, instead, devised the borrowers-
    to-be theory in an effort to (1) circumvent the Central Bank's tax
    immunity, and (2) limit narrowly the scope of the March 1984
    private ruling eventually issued as to the Central Bank's interest
    remittances during the relending periods under the DFA's and CGA's,
    beginning in 1984.    By doing so, their ruling would not directly
    conflict with existing Brazilian law and would have very little, if
    any, potential effect upon other net loan borrowings by public-
    sector entities.31   Indeed, in January 1985, during the subsequent
    phase III negotiations, the Brazilians, in resisting the efforts of
    a number of foreign lenders to have the Central Bank issue DARF's
    with respect to all of its net loan interest remittances to them,
    advised the BAC that there was "no room for any change     *   *   *
    [in the Central Bank's] tax immunity." The Brazilians noted, among
    other things, that about 75 percent of the total debt to be
    31
    On cross-examination, da Silva testified that
    Dornelles, upon assigning him and Patury Accioly to revise the
    Doniak-Kahan draft ruling, instructed them to adhere to the
    "spirit of" the Doniak-Kahan draft ruling but to keep their
    opinion within the provisions of SRF 368.
    - 75 -
    restructured was "exempt from withholding tax on the grounds of
    being considered governmental debt."32
    Petitioner's reliance upon Article 9 and Article 123 of the
    National Tax Code is misplaced.   Article 9 generally provides that
    an entity's immunity or exemption from tax will not relieve it of
    its obligation to collect withholding tax that is due upon its
    32
    We do not find credible da Silva's testimony that the
    entire technical staff of the Brazilian IRS believed that the
    Doniak-Kahan draft ruling accurately presented the applicable
    Brazilian law with respect to the Central Bank's net loan
    interest remittances abroad. Additionally, da Silva claimed that
    it was not necessary to publish the March 1984 ruling, because
    the Brazilian IRS's technical staff were well aware of the
    correctly applicable Brazilian law with respect to public-sector
    entities' net loan interest remittances abroad--presumably, as
    reflected in the Doniak-Kahan draft ruling that the Brazilian IRS
    never issued. We are not convinced by his explanation as to why
    the March 1984 Brazilian IRS ruling issued to the Central Bank
    was a private ruling. As an expert witness for respondent noted,
    although the decision to publish a Brazilian IRS ruling in the
    Brazilian Government's Official Gazette is discretionary, the
    March 1984 ruling's position represented such a drastic departure
    from existing law that, in his opinion, this ruling should have
    been published to provide public guidance--if the Brazilian IRS
    indeed was changing its interpretation and position with respect
    to the applicable law pertaining to public-sector entities' net
    loan interest remittances abroad. Da Silva was silent about
    what, if any, immediate efforts the Brazilian IRS took either to
    (1) revoke SRF 368, or (2) at minimum, publicize, prospectively
    apply, and enforce its alleged "new position" on the applicable
    Brazilian law concerning public-sector entities' net loan
    interest remittances abroad. We do not entirely understand
    petitioner's contention, on brief, that SRF 368 was revoked upon
    the Brazilian IRS's issuance of the March 1984 private ruling, as
    this private ruling applied only to the Central Bank, and not to
    other public-sector entities. See infra note 33. In fact,
    petitioner's failure to offer evidence concerning such Brazilian
    IRS actions to enforce the latter's alleged "new position",
    reasonably contemporaneous to its issuance of the March 1984
    private ruling to the Central Bank, leads us to conclude that
    this evidence would have been harmful to petitioner's case. See
    Wichita Terminal Elevator Co. v. Commissioner, 
    6 T.C. 1158
    , 1165
    (1946), affd. 
    162 F.2d 513
    (10th Cir. 1947).
    - 76 -
    income    remittances   to   third    parties.     Article   123   generally
    provides that private agreements concerning the liability to pay
    taxes are not binding upon the National Treasury.             However, the
    National Tax Code is a complementary law and cannot override a
    public-sector entity's immunity from taxation under Article 19 of
    the Brazilian Constitution.
    Similarly, petitioner's reliance upon certain "normative"
    rulings33 that were issued by the Brazilian IRS from 1971 through
    1974 is also misplaced.      These rulings generally hold that immune
    or exempt entities are required to withhold with respect to their
    remittances of income to third parties.          The rationale employed in
    these rulings is that although the remitter is immune or exempt
    from payment of Brazilian income taxes on its income, this immunity
    or exemption of the remitter does not extend to the beneficiary or
    recipient of the income.      Thus, withholding taxes must be paid by
    the remitter on behalf of the recipient, unless the recipient of
    the income is itself immune or exempt from Brazilian income tax.
    However, these rulings were issued prior to October 15, 1975, and
    June 10, 1980, the respective dates upon which the Brazilian
    Supreme Court's Parana II decision and SRF 368 were issued.34
    33
    Normative rulings are published in the Brazilian
    Government's Official Gazette and are intended to furnish
    guidance to and be applicable to the public at large. In
    contrast, the March 1984 Brazilian IRS ruling issued to the
    Central Bank was a private ruling that applied only to the
    Central Bank and not to other public-sector entities.
    34
    The earlier rulings do not distinguish between gross
    (continued...)
    - 77 -
    On brief, petitioner argues that the Brazilian Supreme Court
    decisions, like the Parana II decision, which hold that public-
    sector entities are not required to pay withholding tax on their
    net     loan   interest      remittances   abroad,    are   distinguishable.
    Petitioner maintains that these Brazilian Supreme Court decisions
    involved financing of imported goods covered under Decree-law 401,
    not foreign currency loans.         Thus, it contends that these Supreme
    Court      decisions   are    not   applicable   to   the   Central    Bank's
    restructuring debt interest remittances, because the DFA and CGA
    loans to the Central Bank were foreign currency loans.                However,
    some of petitioner's own experts agreed that the loans involved in
    these Brazilian Supreme Court cases were foreign currency loans.
    One of petitioner's experts further acknowledged that several of
    these cases involved repass loans under Resolution 63.            See infra
    note 36. Indeed, in the Minas Gerais decision, the reporting
    34
    (...continued)
    loan interest remittances and net loan interest remittances by
    the immune or exempt entities. However, the most recent of these
    rulings, CST Normative Opinion No. 193/74, which was issued on
    Oct. 25, 1974, dealt specifically with net loan interest
    remittances of tax-exempt foundations. This ruling noted that
    these foundations are generally subject to the same tax law rules
    as other private entities, except that certain legislation
    exempts them from income tax if prescribed requirements are met.
    It held that, notwithstanding their exemption from income tax,
    the foundations were still required to pay withholding taxes,
    even where they have contractually assumed the tax burden. This
    last ruling deals with foundations that are exempt pursuant to a
    provision of ordinary law and not with public-sector entities
    that are immune from taxation pursuant to Article 19 of the
    Brazilian Constitution. In the case of a foundation with an
    ordinary law exemption from income tax, Articles 9 and 123 of the
    National Tax Code may well apply to override the foundation's
    ordinary law exemption.
    - 78 -
    Justice reasoned that Resolution 63 conferred upon the public-
    sector entity/repass borrower the status of a foreign currency
    borrower.35
    Petitioner's experts were of the opinion that those Brazilian
    Supreme Court decisions, like the Parana II decision, which hold
    that    public-sector   entities    are     immune   from   having   to   pay
    withholding tax on their net loan interest remittances abroad, were
    incorrectly decided.      They maintain that the legal reasoning
    employed by the Brazilian Supreme Court Justices is technically
    wrong, because foreign currency loans, not import financing loans,
    were involved.   According to petitioner's experts, Decree-law 401,
    by its terms, applies only to import financing loans, and not to
    foreign currency loans.36    In our view, the crux of Parana II was
    35
    It is further to be noted that pursuant to its receipt
    of SRF 368, the Central Bank issued FIRCE 80 and did not require
    public-sector entities to pay withholding tax on their net loan
    interest remittances abroad, regardless of whether such interest
    remittances originated from a currency loan or from financing for
    the importation of goods.
    36
    Petitioner's expert Guerra testified, on cross-
    examination, as follows:
    Q. All right. However, your view is inconsistent
    with at least some of the [Brazilian] Supreme Court
    cases that we discussed yesterday, correct?
    A. No, I don't think it is because if you pay
    attention to the * * * [Parana I--1st Panel
    decision], it's--the quotation that I made says like--
    is exactly that.
    What you have there quoted from * * * [the
    dissent to the lower Brazilian Federal Court of
    Appeals' majority decision] is that if--were the state
    (continued...)
    - 79 -
    36
    (...continued)
    of--were the state of Parana the recipient of the
    interest on which the union would claim a tax, I would
    recognize the immunity. However, we are in a different
    situation in this case in which the recipient of the
    interest is a third party, and in this case the
    immunity does not apply.
    Q. I wasn't particularly talking about the
    * * * [Parana I--1st Panel and Parana I--Full
    Bench decisions]; I was talking about some of the other
    cases we discussed.
    A. Oh, the other, the two, I would say they
    should be approached with two qualifications. The
    first one is that they all concern, except for one,
    Resolution 63 loans, which is a different thing. And
    most important in that, none of these loans which were
    dealt with in these other cases were import financing;
    they were all, the three or the five of them, if you
    compute all of them, straightforward currency loans.
    And as we were discussing yesterday, the Decree Law
    401, which the court applied or argued in all these
    cases, only * * * [applies] to import financing and not
    to currency loans.
    That's the two main reservations or qualifications
    that apply to these precedents of the Supreme Court.
    Q. So you acknowledge that the Supreme Court
    cases we discussed yesterday did not involve import
    financing, correct?
    A. Yes. In the--my--the main criticism they may
    be subject to is that although they do not involve
    import financing, they apply one legal provision which
    applies only to import financing. That's the big
    contradiction of these decisions, and that's their weak
    point.
    Q. That's the reason you think the decisions are
    wrong or you [are in] disagreement with them, right?
    A.   Well, I disagree with them, yes.   Sure.
    Q.   Okay.
    (continued...)
    - 80 -
    the distinction it drew between a net loan and a gross loan in
    order to distinguish the previous holding reached in the Parana I--
    1st Panel decision.37        Although the Parana II decision cited and
    discussed     the    provision      in     Decree-law    401    that   deems    the
    borrower/remitter to be the contribuente where imported goods are
    purchased on an installment basis, that discussion was in rebuttal
    of the losing party's argument that the actual beneficiary of the
    interest    was     the   foreign    lender,      not   the    State   of   Parana.
    Moreover, if the 1975 Parana II decision was incorrectly decided,
    as petitioner's experts claim, we then find it puzzling that, over
    the years, no successful challenge to its holding has been made,
    and that the Brazilian Supreme Court has continued to utilize and
    36
    (...continued)
    A. Except for the * * * [Parana I--1st Panel
    and Parana I--Full Bench decisions], I do disagree.
    Q. You disagree with all the ones that held the
    borrower was immune?
    A.   These are the ones.         They are not different
    ones.
    37
    Da Silva indicated in his testimony that he believed
    the Parana I--1st Panel decision involved a gross loan, whereas
    the Parana II decision involved a net loan. Pedreira testified
    that the Parana II decision definitely involved a net loan.
    Guerra maintained that the Parana I--1st Panel decision possibly
    did not involve a gross loan. He claimed that if the case
    involved a gross loan, there then would be no reason for the
    State Highway Department to litigate and dispute payment of the
    withholding tax, as a victory would not benefit the Highway
    Department but only the foreign lender. However, Guerra did
    agree that the Parana II and Santo Andre I decisions involved net
    loans. We note that both the Parana II and Santo Andre I
    decisions utilized a net-loan-versus-gross-loan rationale to
    distinguish the Parana I--1st Panel holding.
    - 81 -
    apply the case's net-loan-versus-gross-loan rationale in similar
    cases involving foreign currency loans.
    The evidence reflects that this particular point petitioner's
    experts raise involves an area of Brazilian law in which there has
    been considerable controversy.   Although Article 11 of Decree-law
    401, by its terms, seems to be applicable only to import financing
    loans, even petitioner's experts acknowledge that Decree-law 401
    and the 1972 Brazilian Supreme Court decision that upheld the law's
    validity have caused a great deal of confusion and generated
    controversy in the area.   As petitioner's expert Gurerra related:
    some key legal principles in connection with the taxation
    of interest remitted by * * * [Brazilian borrowers]
    to    * * * [foreign lenders]--namely the         * * *
    [National Tax Code] definitions of taxable event,
    taxpayer, tax base and tax responsible and the scope of
    the * * * [constitutional] tax immunity--were neither
    adequately nor consistently applied by the      *   *   *
    [Brazilian Supreme Court].
    * * * The source of this problem was * * * [the
    1972 Brazilian Supreme Court decision that upheld the
    validity of Decree-law 401], while * * * [Article 11
    of Decree-law 401 in defining the borrower remitting the
    interest abroad to be the contribuente] clearly violates
    the * * * [National Tax Code] definitions of taxable
    event and taxpayer; the majority opinions varied largely
    and did not express a precise understanding of the * *
    * [National Tax Code] on the main issues of the case.
    Subsequently, in addressing other cases dealing with
    these topics, the * * * [Brazilian Supreme Court] was
    confronted with its conclusion in * * * [its 1972
    decision] and found no guidance in the varied opinions
    that had formed the majority in       *   *    *   [that
    precedent].
    It is neither necessary nor appropriate for us to decide
    whether certain Brazilian Supreme Court decisions, including the
    Parana II decision, were technically "wrong" in part of their legal
    - 82 -
    reasoning because, as petitioner's experts assert, the Brazilian
    Supreme Court Justices failed to appreciate that Decree Law 401
    applies only to import financing loans, not foreign currency
    loans.38        Of significance for our purposes in determining the
    applicable Brazilian law is that these Brazilian Supreme Court
    decisions, notwithstanding petitioner's experts' criticism of them,
    represent the Brazilian Supreme Court's legal position.                  Over the
    years, the Brazilian Supreme Court, in Parana II and other similar
    cases involving foreign currency loans, has consistently held that
    public-sector entities, like the Central Bank, are immune from
    paying withholding tax on their net loan interest remittances
    abroad under Article 19 of the Brazilian Constitution.
    We do not accept petitioner's contention that Brazilian law
    fails     to    distinguish     between     net   loans   and   gross   loans,   in
    situations in which the borrower/remitter is a public-sector entity
    having an immunity from taxation pursuant to Article 19 of the
    Brazilian Constitution.           In addition to the expert testimony the
    parties        have   offered   and   the    Brazilian    Supreme   Court   cases
    discussed above, other evidence in the record confirms that the
    38
    We are hesitant to substitute our judgment on a matter
    of Brazilian law for that of the Brazilian Supreme Court Justices
    who reported these decisions. In any event, this is a matter
    which we need not resolve, as in its subsequent decisions (which
    petitioners' experts agree involved foreign currency loans) the
    Brazilian Supreme Court has continued to utilize and apply Parana
    II's net-loan-versus-gross-loan rationale. We further note that
    even the Brazilian Government and the Brazilian IRS appear to
    have attached little, if any, practical significance to the fact
    that the loans made to the Central Bank under the DFA's and CGA's
    were currency loans and not import financing loans.
    - 83 -
    Central Bank, under Brazilian law, was constitutionally immune from
    having to pay withholding tax with respect to its net loan interest
    remittances abroad.      Pursuant to its receipt of SRF 368 from
    Dornelles (the head of the Brazilian IRS), the Central Bank, in May
    1981, issued FIRCE 80 and did not require public-sector entities,
    like itself, to pay withholding tax on their net loan interest
    remittances abroad, regardless of whether the interest remittances
    originated from a currency loan or from an import financing loan.
    Da Silva (a fact witness, as well as petitioner's expert witness,
    and the author of the March 1984 Brazilian IRS private ruling
    issued to the Central Bank) essentially confirmed that, during
    1983, when the Brazilian IRS's proposed issuance of the Doniak-
    Kahan draft ruling that conflicted with SRF 368 was being hotly
    debated within the Brazilian Government and the Brazilian IRS,
    certain existing Brazilian Supreme Court decisions, including the
    Parana II decision, supported the position taken in SRF 368.           As a
    result of this debate, Dornelles decided that he could not approve
    the issuance of the Doniak-Kahan draft ruling to the Central Bank.
    Instead, in the March 1984 Brazilian IRS ruling that eventually was
    issued to the Central Bank, top Brazilian IRS officials contrived
    to get around the constitutional tax immunity of the Central Bank
    and   other   public-sector    entities,   through   applying   the   novel
    borrowers-to-be theory.       As indicated by the Brazilians' comments
    to the BAC in January 1985, during the phase III negotiations,
    although the Brazilians were willing to continue applying the
    - 84 -
    borrowers-to-be theory and to negotiate a longer relending period
    for the phase III DFA, they were unwilling to make any change in
    the Central Bank's tax immunity. In their comments, the Brazilians
    also advised the BAC that about 75 percent of the phase III debt to
    be restructured was not subject to withholding tax because it was
    governmental debt.
    Lastly, we reject petitioner's contention that Article 19 of
    the Brazilian Constitution does not prohibit the Brazilian Federal
    Government from taxing the assets, revenues, and operations of
    Federal-level autarquias, like the Central Bank, as Article 19,
    petitioner maintains, precludes taxation only between the different
    governmental levels.    Although some of petitioner's experts did
    give opinions to that effect, we agree with respondent's expert
    Tostes that such an interpretation of the constitutional tax
    immunity of public-sector entities is contrary to the provisions of
    Article 19, and is an unreasonable and questionable construction of
    Article 19.39    If petitioner's interpretation of Article 19 were
    39
    Article 19 of the Brazilian Constitution provides, in
    pertinent part:
    Article 19. The Union, the states, the Federal
    District, and the Municipalities, are forbidden to:
    *         *       *       *      *      *        *
    III.    Establish a tax on:
    a. The assets, revenues, or services of one
    another.
    *         *       *       *      *      *         *
    (continued...)
    - 85 -
    correct, then a Brazilian State would be free to tax the assets,
    revenue, and operations of other Brazilian States.                   Similarly, a
    Brazilian municipality could tax other Brazilian municipalities.
    Petitioner has cited no persuasive Brazilian legal authority for
    this proposition.         We further note other convincing evidence of
    record.       The Central Bank, following its issuance of FIRCE 80 in
    May 1981, did not require withholding tax to be collected with
    respect to the net loan interest remittances abroad of all public-
    sector    entities,       including    "federal,       state,      and    municipal
    autonomous governmental agencies".               In January 1985, during the
    phase III negotiations, the Brazilians, in resisting the efforts of
    foreign lenders to have the Central Bank issue them DARF's and
    ostensibly      pay    withholding    tax   on   all   its   net   loan    interest
    remittances abroad, advised the BAC that there was "no room for any
    change    *    *   *   [in the Central Bank's] tax immunity."
    In our opinion, the applicable Brazilian law with respect to
    the Central Bank's restructuring debt interest remittances is as
    reflected in SRF 36840 and in certain Brazilian Supreme Court
    39
    (...continued)
    Paragraph 1. The provisions of letter a of item
    III above extends to the autonomous governmental
    entities, as regards the assets, revenues, and services
    connected with their essential purpose or resulting
    therefrom * * *
    40
    On brief, petitioner asserts that, to the best of its
    knowledge, "no banks lending to Brazil were aware of SRF 368
    until March 18, 1994, when Respondent produced a copy in its
    (continued...)
    - 86 -
    decisions, like the Parana II decision.      Consequently, we conclude
    that, under Brazilian law, public-sector entities, like the Central
    Bank, are not required to pay withholding tax on their net loan
    interest   remittances   abroad,   because   of   their   immunity   from
    taxation under Article 19 of the Brazilian Constitution.
    F.    The Act of State Doctrine
    As indicated previously, we have determined that SRF 368 and
    certain Brazilian Supreme Court decisions, including the Parana II
    decision, correctly reflect the applicable Brazilian law that
    public-sector entities are not required to collect and pay over
    withholding tax with respect to their net loan interest remittances
    40
    (...continued)
    Status Report filed on that date. Respondent has never explained
    how or where she obtained SRF 368." Petitioner also notes
    certain testimony of employees and representatives of various
    major international banks that the banks' Brazilian counsel had
    advised them that the Central Bank was required to pay
    withholding tax on its net loan interest remittances abroad. The
    record does not support petitioner's assertion that none of the
    banks were aware of SRF 368 until Mar. 18, 1994. Alexandre
    Leite, who headed Citibank-Brazil's tax division, testified that
    after the Central Bank's issuance of FIRCE 80 in May 1981, he
    concluded that Citibank would not be able to persuade the Central
    Bank to issue DARF's with respect to its 432 program net loan
    interest remittances. He stated that with FIRCE 80 "there was a
    ruling from the tax revenue service * * * that any immune
    entity would not be obliged to * * * [issue withholding
    receipts in remitting interest]." See supra note 12. We thus do
    not believe that the major international banks, like Citibank,
    that were seeking DARF's with respect to the Central Bank's net
    loan interest remittances to them, much less these banks'
    Brazilian counsel, were unaware of SRF 368 until Mar. 18, 1994.
    The record further fails to disclose what specifically the banks'
    Brazilian counsel told the banks or did not tell the banks with
    respect to SRF 368.
    - 87 -
    abroad.41       Petitioner, nevertheless, contends that the March 1984
    Brazilian IRS private ruling issued to the Central Bank must be
    accorded conclusive effect under the act of state doctrine.        On
    brief, petitioner asserts:
    Even if Respondent were correct and * * * [the
    March 1984 Brazilian IRS private ruling] represented a
    change in the    * * * [Brazilian IRS's] historical
    position, this would not affect * * * [the March 1984
    ruling's] validity.   *   *   *  [Respondent] regularly
    defends her ability to revise her rulings as necessary
    and appropriate in the circumstances.
    * * * Therefore, the * * * [Brazilian IRS would
    not have been required to follow an erroneous prior
    practice any more than * * * [respondent] would be
    required to follow such a practice.
    *        *      *      *       *    *      *
    Respondent's argument would require this Court to
    disregard * * * [the March 1984 Brazilian IRS ruling
    issued to the Central Bank] and the Minister of Finance's
    directive that taxes be withheld on the DFA and CGA
    interest payments. Respondent argues that the * * *
    [Brazilian IRS] "compromised" Brazilian tax law, and that
    this Court must rule against the * * *[Brazilian IRS] on
    a question of Brazilian tax law.        Thus, Respondent
    invites the Court to violate the Act of State doctrine by
    "declar[ing] invalid, and thus ineffective as 'a rule of
    decision for the courts of this country,' the official
    act of a foreign sovereign." W.S. Kirkpatrick & Co. v.
    Environmental Tectonics Corp. Int'l., 
    493 U.S. 400
    , 405
    (1990) * * *.
    41
    In Amoco Corp. v. Commissioner, T.C. Memo. 1996-159, we
    held that an Egyptian Tax Department determination reflected the
    applicable Egyptian law and rejected the Commissioner's argument
    that this Tax Department determination could have been
    successfully challenged. We stated that whether the Tax
    Department's determination could have been successfully
    challenged was unclear, because, at the time, there was no
    existing precedent that focused on the precise issue involved.
    We further stated that, on the facts presented, we perceived no
    reason to delve into the motives of a foreign government in
    connection with its tax determinations. The instant case is
    distinguishable from Amoco.
    - 88 -
    In the principal contemporary formulation of the act of state
    doctrine, the U.S. Supreme Court in Banco Nacional de Cuba v.
    Sabbatino, 
    376 U.S. 398
    , 428 (1964), stated:
    rather than laying down or reaffirming an inflexible and
    all-encompassing rule in this case, we decide only that
    the Judicial Branch will not examine the validity of a
    taking of property within its own territory by a foreign
    sovereign government, extant and recognized by this
    country at the time of suit, in the absence of a treaty
    or other unambiguous agreement regarding controlling
    legal principles, even if the complaint alleges that the
    taking violates customary international law.
    The   act   of   state   doctrine   thus   generally   precludes   judicial
    examination of the lawfulness of a taking by a foreign sovereign of
    property located in its territory, whether under the law of that
    foreign country, under international law, or under the law or
    policy of the forum. 1 Restatement, Foreign Relations Law 3d, sec.
    443, cmt. d (1986).42
    Although the act of state doctrine has predominantly been
    applied in cases involving a foreign sovereign's expropriation of
    private property, the doctrine has also been applied to other types
    of acts by foreign sovereigns.        
    Id. cmt. c
    & reporter's note 7.
    The burden of establishing the act and its character as an act
    of state is on the party invoking the doctrine.           Republic of the
    Philippines v. Marcos, 
    806 F.2d 344
    , 356-357, 359-360 (2d Cir.
    1986); 1 Restatement, supra sec. 443, cmt. i & reporter's note 3.
    42
    The act of state doctrine is to be contrasted with the
    U.S. courts' well-established refusal to enforce a foreign
    country's penal or revenue laws. Banco Nacional de Cuba v.
    Sabbatino, 
    376 U.S. 398
    , 413-415 (1964); 1 Restatement, Foreign
    Relations Law 3d, sec. 443, cmt. i & reporter's note 10 (1986).
    - 89 -
    The act of state doctrine applies to acts such as constitutional
    amendments, statutes, decrees, and proclamations, and in certain
    circumstances, to physical acts.          1 Restatement, supra sec. 443,
    cmt. i & reporter's note 3.
    In the instant case, the March 1984 Brazilian IRS ruling
    issued to the Central Bank was a private ruling.                 Petitioner's
    experts did not elaborate on whether the Central Bank, under
    Brazilian law, was legally compelled to accept and follow the
    ruling. Thus, it appears that the Central Bank possibly could have
    disputed    that    it    was   subject    to    withholding    tax    on   its
    restructuring      debt    interest    remittances   during    the    relending
    periods of the DFA's and CGA's, and sought review in the Brazilian
    courts.     In light of favorable existing Brazilian Supreme Court
    precedents, such as the Parana II decision, in all substantial
    likelihood, any effort by the Central Bank to dispute the ruling by
    resorting    to    the    Brazilian   judicial    system   would     have   been
    successful,    particularly      since    even   petitioner's    own    experts
    generally acknowledged that there was no such legal doctrine as the
    borrowers-to-be theory under Brazilian law.            The borrowers-to-be
    theory itself contravened a number of rules of Brazilian taxation.
    The record further reflects that although Brazil was under a
    military regime until about 1985, the Brazilian courts still
    functioned during this period of military rule.43               Moreover, the
    43
    Although petitioner's expert da Silva testified that
    SRF 368 was issued in June 1980, when Brazil was under a military
    (continued...)
    - 90 -
    March 1984 private ruling still conflicted with SRF 368, despite
    the efforts      of   top    Brazilian      IRS   officials,     in   devising   the
    borrowers-to-be theory, to distinguish from SRF 368 the Central
    Bank's restructuring debt interest remittances during the relending
    periods of the DFA's and CGA's.44
    We conclude that petitioner has failed to establish that the
    act of state doctrine is applicable. Petitioner has not shown that
    the March 1984 Brazilian IRS ruling was anything more than perhaps
    an administrative advisory opinion.45               We are thus not required to
    accord conclusive effect to the March 1984 Brazilian IRS ruling
    issued    to   the    Central     Bank.     Rule    142(a);      Republic   of   the
    Philippines v. 
    Marcos, supra
    .
    G.   Conclusion
    We   hold    that      the   Central    Bank    was   not    required,   under
    Brazilian law, to pay withholding tax on its restructuring debt
    43
    (...continued)
    regime, he also indicated that the Brazilian courts had more
    leeway than the Brazilian Congress. He related that Brazil had
    been under this military regime from 1964 through March 1985. We
    note that the Brazilian Supreme Court's Parana II and Minas
    Gerais decisions were issued, respectively, in 1975 and in 1979,
    during this period when Brazil was under military control.
    44
    As indicated above, the record does not reflect that
    the Brazilian IRS ever revoked SRF 368. See supra note 32.
    45
    Although the Finance Minister "directed" the Central
    Bank to begin "paying" this "withholding tax" by the last
    business day of the month following the month in which the
    Central Bank started "withholding", his action was merely in
    response to the Central Bank's request, in the consulta, that it
    be granted a waiver of any late payment "penalties", as only the
    Finance Minister had the authority to extend the time for
    "payment" and to waive such "penalties".
    - 91 -
    interest remittances to petitioner during the relending periods of
    the DFA's and CGA's.     Petitioner is thus not "legally liable" for
    these alleged Central Bank "withholding tax payments". Nissho Iwai
    Am. Corp. v. Commissioner, 
    89 T.C. 773-774
    ; sec. 1.901-2(f),
    Income Tax Regs.; see the PeMex case.
    II. Central Bank Issue
    Our holding on the Central Bank/liability issue requires us to
    decide the Central Bank issue against petitioner. As petitioner is
    not "legally liable" for the Brazilian tax, we hold that the
    "withholding tax" purportedly paid by the Central Bank on its
    restructuring   debt   interest    remittances   to   petitioner   is   a
    noncompulsory amount and not a tax to Brazil under section 1.901-
    2(e)(5), Income Tax Regs., and is not creditable to petitioner.
    Sec. 1.901-2(e)(1), Income Tax Regs.       Petitioner has not argued
    that, even if these alleged withholding tax payments were not
    required and exceed the amount of petitioner's actual Brazilian tax
    liability, they are still potentially creditable to petitioner
    pursuant to section 1.901-2(e)(5)(i), Income Tax Regs.46      We do not
    46
    The regulations provide relief, in certain limited
    circumstances, to taxpayers who reasonably interpret foreign law
    but overpay their actual foreign tax liability. Among other
    things, the amount of foreign tax paid must be determined by the
    taxpayer in a manner that is consistent with a reasonable
    interpretation and application of the substantive and procedural
    provisions of foreign law. Further, an interpretation of foreign
    law is not considered reasonable if there is actual or
    constructive notice (e.g., a published court decision) to the
    taxpayer that the interpretation is likely erroneous. Also,
    while a taxpayer generally may rely on advice obtained in good
    faith from competent foreign tax advisers, the taxpayer must have
    (continued...)
    - 92 -
    decide whether these alleged withholding tax payments, in fact,
    were made by the Central Bank.47
    46
    (...continued)
    disclosed to them the relevant facts. See sec. 1.901-2(e)(5)(i),
    Income Tax Regs. In any event, on the record presented in the
    instant case, petitioner has failed to establish it would be
    eligible for such relief. As previously discussed, petitioner's
    assertion that no banks lending to Brazil were aware of SRF 368
    until Mar. 18, 1994, is untrue. We do not believe that certain
    major international banks, like Citibank, much less these major
    international banks' Brazilian counsel, were unaware of SRF 368
    and the Brazilian Supreme Court's Parana II decision. See supra
    note 40. Moreover, notwithstanding the March 1984 Brazilian IRS
    private ruling issued to the Central Bank, even some of the
    employees and representatives of these major international banks
    who testified at trial indicated that they were skeptical of the
    ruling's borrowers-to-be theory.
    47
    The parties disagree over whether the Central Bank
    actually paid "withholding tax" on its restructuring debt
    interest remittances to foreign lenders during the relending
    periods of the CGA's and DFA's, beginning in 1984. At trial,
    petitioner offered the testimony of an employee of Banco do
    Brazil, the Brazilian National Treasury's agent for payment of
    taxes. The Banco do Brazil employee was offered by petitioner as
    an expert witness with respect to the manner in which Banco do
    Brazil accounted for its withholding tax payment collections. He
    examined one purported withholding tax payment of the Central
    Bank on its restructuring debt interest remittances, which he
    selected at random, and verified that certain entries had been
    made on Banco do Brazil's books reflecting Banco do Brazil's
    receipt of the Central Bank's purported withholding tax payment.
    However, as we noted in our findings, it is not known: (1)
    Whether the Central Bank was reimbursed by the National Treasury
    for its restructuring debt "withholding tax payments", or (2)
    whether the Central Bank received the pecuniary benefit based on
    such "withholding tax payments". Petitioner's expert
    acknowledged that he had not inquired into whether the Central
    Bank received the pecuniary benefit or whether any other
    transactions took place resulting in a "refund" being made of the
    Central Bank's "withholding tax payments". Although we do not
    decide the payment issue, the Central Bank's actual receipt of
    the pecuniary benefit would be highly probative evidence
    confirming its actual payment of this "withholding tax". If the
    Brazilian Government reimbursed the Central Bank for these
    "withholding tax payments", because the Central Bank was acting
    (continued...)
    - 93 -
    III. Subsidy/Pecuniary Benefit Issue
    Section 4.901-2(f)(3), Temporary Income Tax Regs., 45 Fed.
    Reg. 75653-75654 (Nov. 17, 1980), provides:
    (f) Amount of income tax paid or accrued-(1)
    In general. A credit is allowed under section 901 for
    the amount of income tax    *   *  *   that is paid or
    accrued to a foreign country, subject to the provisions
    of paragraph (f).    The amount of income tax paid or
    accrued is determined separately for each taxpayer.
    *       *       *      *       *       *       *
    (3) Subsidies-(i) General rule. An amount is not
    income tax paid or accrued to a foreign country to the
    extent that-
    (A) The amount is used, directly or indirectly, by
    the country to provide a subsidy by any means (such as
    through a refund or credit) to the taxpayer; and
    (B) The subsidy is determined directly or indirectly
    by reference to the amount of income tax, or the base
    used to compute the income tax, imposed by the country on
    the taxpayer.
    (ii) Indirect subsidies. A foreign country is
    considered to provide a subsidy to a person if the
    country provides a subsidy to another person that-
    (A) Is owned or controlled, directly or indirectly,
    by the same interests that own or control, directly or
    indirectly, the first person; or
    (B) Engages in a business transaction with the first
    person, but only if the subsidy received by such other
    person is determined directly or indirectly by reference
    to the amount of income tax, or the base used to compute
    the income tax, imposed by the country on the first
    person with respect to such transaction.
    47
    (...continued)
    as the Brazilian Government's agent, then the Central Bank, in
    all likelihood, would not receive the pecuniary benefit based on
    such "tax payments".
    - 94 -
    Substantially identical provisions are made in section 1.901-
    2(e)(3), Income Tax Regs.
    Pursuant to section 4.901-2(f)(3)(ii), Temporary Income Tax
    
    Regs., supra
    , and section 1.901-2(e)(3)(ii), Income Tax Regs., the
    existence of an indirect subsidy does not depend upon a finding
    that the U.S. taxpayer derived an actual economic benefit.   It is
    sufficient that another person who engages in a transaction with
    the U.S. taxpayer has received a subsidy that was based on the
    amount of tax paid.    Norwest Corp. v. 
    Commissioner, 69 F.3d at 1409-1410
    ; Continental Ill.   Corp. v. 
    Commissioner, 998 F.2d at 519-520
    ; Bankers Trust New York Corp. v. United States, 
    36 Fed. Cl. 30
    (1996). Thus, subsidies received by Resolution 63 repass lenders
    and repass borrowers also fall "within the letter as well as the
    spirit of" the indirect subsidy provision of the temporary and
    final regulations, as the repass lender is required by Brazilian
    law to pass along the pecuniary benefit to the repass borrowers.
    Norwest Corp. v. 
    Commissioner, 69 F.3d at 1410
    ; Continental Ill.
    Corp. v. 
    Commissioner, 998 F.2d at 520
    , affg. on this issue T.C.
    Memo. 1988-318; Bankers Trust New York Corp. v. United States,
    supra at 36.   Further, this Court and other courts, including the
    U.S. Courts of Appeals for the Seventh and Eighth Circuits, have
    upheld the validity of the indirect subsidy provision of the
    temporary   regulations, and have held that U.S. taxpayer-lenders
    are required to reduce the amount of their potentially creditable
    Brazilian withholding taxes by the pecuniary benefit the Brazilian
    - 95 -
    Government provided to their Brazilian borrowers. Norwest Corp. v.
    
    Commissioner, 69 F.3d at 1408-1410
    ; Continental Ill. Corp. v.
    
    Commissioner, 998 F.2d at 519-520
    ;     Nissho         Iwai   Am.    Corp.   v.
    Commissioner, 
    89 T.C. 775-777
    (1989); Bankers Trust New York
    Corp. v. United States, supra at 35.48
    Petitioner argues that the "subsidy               *    *   *   to the taxpayer"
    language   in   the    temporary    and    final    regulations         requires      an
    economic   benefit     analysis     and   asserts      that      petitioner     itself
    received   no   economic    benefit       from   the       pecuniary    benefit       the
    Brazilian Government provided to Brazilian borrowers.                        Petitioner
    points out that, in the case of Resolution 63 repass loans, it did
    not even know the identity of the repass borrowers who received the
    pecuniary benefit. It contends that if the regulations are applied
    to require reduction of the Brazilian withholding tax potentially
    creditable to petitioner by the pecuniary benefit the Brazilian
    borrowers received, then the regulations are invalid. We disagree.
    We hold that pursuant to section 4.901-2(f)(3)(ii), Temporary
    Income Tax 
    Regs., supra
    , and section 1.901-2(e)(3)(ii), Income Tax
    Regs., the Brazilian withholding tax potentially creditable to
    petitioner must be reduced by the pecuniary benefit the non-tax-
    immune borrowers received.           We further hold that the indirect
    48
    The position set forth in the temporary and final
    regulations has been codified in sec. 901(i), which is effective
    for foreign taxes paid or accrued in taxable years beginning
    after Dec. 31, 1986. Tax Reform Act of 1986, Pub. L. 99-514, sec.
    1204(a), 100 Stat. 2532; see Nissho Iwai Am. Corp. v.
    Commissioner, 
    89 T.C. 777
    n.17.
    - 96 -
    subsidy provisions of the temporary and final regulations are
    valid.   Norwest Corp. v. 
    Commissioner, 69 F.3d at 1408-1410
    ;
    Continental Ill. Corp. v. 
    Commissioner, 998 F.2d at 519-520
    ; Nissho
    Iwai Am. Corp. v. 
    Commissioner, supra
    at 775-777.      In light of our
    holdings on the legal liability and Central Bank issues (i.e., that
    the "withholding tax" purportedly paid by the Central Bank on its
    restructuring debt interest remittances to petitioner is not a
    potentially creditable tax to petitioner), we need not reach the
    issue of whether any pecuniary benefit the Central Bank received
    represents an indirect subsidy for purposes of section 1.901-
    2(e)(3)(ii), Income Tax Regs.    Compare the PeMex case with Amoco
    Corp. v. Commissioner, T.C. Memo. 1996-159.
    To reflect concessions by the parties,
    Decision will be entered
    under Rule 155.