BB&T is expected to have its case against the Internal Revenue Service heard today in the U.S. Court for Federal Claims as the bank fights to get back nearly $900 million from the IRS.
In the dispute, which is centered on an arcane type of foreign tax credit, Winston-Salem-based BB&T is challenging the IRS over the bank's 2002-07 use of the credits. In 2010, the bank paid the IRS $892 million in penalties and other related payments after the agency claimed the bank shouldn't have taken advantage of the credits. BB&T, apparently believing it didn't owe the IRS the payments after all, later sued the agency to recover the millions.
The type of foreign tax credit that BB&T used has also come under scrutiny in cases involving other financial services companies and banks, such as Wells Fargo and the Bank of New York Mellon Corp. The banks, in complex deals involving British banking giant Barclays, tried to reduce their U.S. tax liability through so-called Structured Trust Advantaged Repackaged Securities, or STARS.
So complicated that they have befuddled some courts before which cases over the credits have come, STARS transactions involved the creation of trusts and subsidiaries in the U.S. and overseas. The U.S. government has viewed STARS as shams to exploit tax laws. Banks, though, have argued that the deals were legitimate ways to get low-cost financing for the banks.
In what could be a setback for BB&T in the case, a U.S. Tax Court judge ruled Feb. 11 against BNY Mellon's use of the credits in 2001 and 2002. BNY had claimed about $200 million in credits. As a result of the ruling, BNY has said it will take a roughly $850 million after-tax charge in the first quarter of this year. BNY also said it plans to appeal the ruling.
After learning of the ruling against BNY, BB&T last week announced that it willrecord a charge of $281 million in the first quarter to increase its reserves as it prepares for a own worst-case scenario in the bank's legal feud with the IRS. The amount is more than half the bank's fourth-quarter profit of $506 million. For all of 2012, BB&T reported net income of $1.9 billion, which the bank said was a record amount.
"This could be $500 million to the upside still. It could be another 300 or so million dollars to the downside," Motley Fool financial analyst Matt Koppenheffer said in an online video. "But we're talking about percentage points on BB&T's $21 (billion), $22 billion in shareholders equity. Shareholders want to watch this. This is not pennies. But it's not life or death for BB&T here."
BB&T, in a press release Tuesday, said it was confident in the argument it was preparing to present to the court. BB&T has not provided details on that argument it will make. David White, BB&T spokesman, said the case is set to be heard in Washington, D.C.
BB&T did not include the press release on the $281 million charge on its webpage for "News Releases of Interest to Investors." White said that section of the site is primarily used for earnings-related press releases.
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