BB&T Corp.'s transaction with Barclays Plc to generate tax credits was "simply a money machine" with no economic purpose and can't be used to seek hundreds of millions of dollars in U.S. tax rebates, an appeals court ruled Thursday.
The decision involves a dispute between BB&T and the Internal Revenue Service, which objected to the bank's use of foreign tax credits and other deductions between 2002 and 2007 to lower its U.S. tax bill. BB&T was appealing a 2013 court decision it lost in which had sought recovery of more than $688 million in taxes and penalties.
At issue is an elaborate set of financial exchanges known as Structured Trust Advantaged Repackaged Securities, or STARS, transactions that London-based Barclays established with U.S. banks including BB&T and Bank of New York Mellon Corp.
In the BB&T transaction, the bank's Salem Financial unit established a trust containing about $6 billion in revenue- producing assets. Monthly revenue from the trust was cycled through a British trustee, which served as the basis for U.K. taxation. The assessment of taxes generated British tax credits which were split evenly between Barclays and BB&T.
"An elaborate scheme set up solely to take advantage of a foreign tax system and involving no 'economically-based business transactions' is not the type of transaction Congress intended to promote with the foreign tax credit system," a three-judge panel of the U.S. Court of Appeals for the Federal Circuit in Washington said.
The bulk of the refund sought by BB&T was for the foreign tax credits, for $498 million.
As of March 31, exposure to this transaction was "fully resolved," the bank said in a regulatory filing. Changes in tax benefits, penalties and interest associated with a final resolution could result in a benefit of up to about $700 million, according to the filing.
BB&T rose less than 1 percent to $39.14 at 11:02 a.m. in New York. The stock increased 0.5 percent this year through Wednesday.
One component of the agreement involved a $1.5 billion loan that Barclays issued to the trust, which was controlled by BB&T. It was then sold back to BB&T for the original $1.5 billion plus interest.
The court did say Winston-Salem, North Carolina-based BB&T can seek a deduction on the interest for that loan, as well as a reduction in some of the penalties that were imposed. The opinion was posted on the court's electronic docket.
The case will now go back to the U.S. Court of Federal Claims to determine how much BB&T can get in the interest deduction and the reassessment of the penalties.
Brian Davis, a spokesman for BB&T, didn't immediately respond to requests for comment. Mark Lane, a spokesman for Barclays, declined to comment.