WASHINGTON BB&T Corp lost on Friday a $772 million tax dispute with the U.S. Internal Revenue Service in federal court over a transaction the judge called "an economically meaningless tax shelter."
In a ruling that could affect other U.S. banks with similar disputes, BB&T unit Salem Financial was fighting for a tax refund related to a deal that it said was meant to advance its core business.
A U.S. Court of Federal Claims judge disagreed.
"The weight of the evidence shows that tax avoidance was singularly and precisely the goal pursued in execution of the STARS transaction," Judge Thomas Wheeler said in a 67-page decision.
"For the foregoing reasons, the Court finds that Plaintiff (BB&T) was engaged in an economically meaningless tax shelter," he said.
BB&T, in a statement late Friday, said it was reviewing the court decision and evaluating its legal options. The firm expects to book an after-tax, related charge of about $250 million in the current quarter, but remain profitable for the quarter.
"We are surprised and very disappointed with the court's ruling and continue to firmly believe that this was a legitimate financing transaction," BB&T Chairman and Chief Executive Officer Kelly King said.
STARS is short for "structured trust advantaged repackaged securities." The IRS has accused several banks of generating artificial foreign tax credits through STARS from roughly 1999 to 2006 with the assistance of UK bank Barclays Plc.
Barclays was not a party in any of the STARS cases.
Accounting firm KPMG LLP and law firm Sidley Austin LLP were also involved in facilitating the BB&T STARS deal, but were not parties in this case.
Foreign tax credits are awarded to U.S. companies by the IRS to ensure that they are not taxed twice on the same profits by the U.S. government and by a foreign government. BB&T had been fighting for a $772 million refund from the IRS.
Wheeler said the final dollar amount in the BB&T dispute will still need to be confirmed between the bank and the IRS.
In February, Bank of New York Mellon lost a STARS case in U.S. Tax Court. The bank has said it is appealing the decision.
Wells Fargo and Santander Holdings are challenging the IRS in separate STARS disputes.
"Today's ruling sends a strong message that no matter how sophisticated the scheme, these sham tax shelters will not stand," Justice Department Assistant Attorney General Kathryn Keneally said in a statement.
(Reporting by Patrick Temple-West; Additional reporting by Zeba Siddiqui; Editing by Leslie Adler, Tim Dobbyn and Eric Beech)