‘Reprehensible’ Tax Deal Carries Massive Penalty

WASHINGTON (CN) - A complicated off-shore tax shelter may require a BB&T subsidiary to pay the United States $772 million in penalties and disallowed tax credits, a federal judge ruled.

BB&T should face tax penalties for its participation in the complex financial scheme known as a Structured Trust Advantaged Repackaged Securities, or STARS, transaction, according to the 67-page ruling Friday.

"The conduct of those persons from BB&T, Barclays, KPMG, and the Sidley Austin law firm who were involved in this and other transactions was nothing short of reprehensible," Judge Thomas Wheeler wrote. "Perhaps the business environment at the time was 'everyone else is doing it, why don't we?' Perhaps some of those who participated simply were following direction from others. Nevertheless, the professionals involved should have known better than to follow the STARS path, rife with its conflicts of interest, questionable pro forma legal and accounting opinions, and a taxpayer with a seemingly insatiable appetite for tax avoidance."

Michael Cragg, an expert tapped by the United States for the trial, "aptly stated that 'enormous ingenuity was focused on reducing U.S. tax revenues,'" the ruling continues. "After wading through the intricacies of the STARS transaction, the court shares Dr. Cragg's view that '[t]he human effort, the amount of creativity and overall effort that was put into this transaction ... is a waste of human potential.'"

Potential taxpayer penalties of more than $112 million, plus about $498 million in disallowed foreign credits and other factors, bring the amount at issue in this case to $772,144,153.45, according to the ruling.

Salem Financial had sued the government in the U.S. Court of Federal Claims for a tax refund connected to the STARS transaction, and Judge Wheeler held a 21-day trial on the case earlier this year.

The ruling begins with Wheeler noting that the real parties in interest to the STARS transaction were Salem's parent BB&T Bank and the U.K.-based Barclays Bank.

He said BB&T had entered into the STARS transaction to generate large-scale foreign tax credits that it could use to enhance revenue and reduce taxes in the United States.

Beginning in 2002, BB&T created a trust containing approximately $6 billion in revenue-producing bank assets, according to the ruling.

It cycled the monthly revenue from the trust through a U.K. trustee to trigger U.K. taxation, Wheeler found. BB&T's trust always took back the revenue, and meanwhile BB&T and Barclays would equally split the U.K. tax credits generated from the U.K taxes, according to the ruling.

"While inarguably sophisticated and creative, the trust purely and simply is a sham transaction accomplishing nothing more than a redirection of cash flows that should have gone to the U.S. Treasury, but instead are shared among BB&T, Barclays, and the U.K. Treasury," Wheeler wrote. "The court finds that the trust component of STARS lacks economic substance."

As such "the entire arrangement must be disregarded," he added.

Every month Barclays paid BB&T its share of the tax credits in what was known as a Bx payment, according to the ruling.

"The court cannot find economic substance in a loan transaction that is so heavily driven by Bx payments from the sham trust," Wheeler wrote.

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