The Court of Federal Claims ruled that a subsidiary of BB&T Corporation was not entitled to $660 million in tax benefits that BB&T claimed based on its participation in a Structured Trust Advantaged Repackaged Securities ("STARS") foreign tax credit generator transaction.1 Furthermore, the Court imposed $112 million in penalties.

Background

The STARS transaction was jointly developed and marketed by Barclays Bank PLC and an accounting firm to generate foreign tax credits for a US taxpayer. Pursuant to BB&T's STARS transaction, in effect from August 2002 through April 2007, BB&T established a trust containing approximately $6 billion in revenue-producing bank assets, the revenues from which were cycled through a UK trustee before returning to the trust. The assessment of UK taxes generated UK tax credits that were shared evenly between Barclays and BB&T. There was also a $1.5 billion loan from Barclays to BB&T, with a higher interest rate than BB&T's normal cost of borrowing. Barclays made monthly "Bx" payments made to BB&T, representing BB&T's share of the foreign tax credits, that had the effect of reducing the interest cost of BB&T's loan.

Economic Substance Analysis

The Court bifurcated the trust and loan components of the STARS transaction and applied the economic substance doctrine separately to each component. In doing so, the Court found that the trust component of the STARS transaction "quite clearly is an abusive tax avoidance scheme" without a non-tax business purpose and should be disregarded as a sham structure. In its analysis of the loan component, the Court found that the loan lacked economic substance because it was not structured to make a profit, but instead to provide BB&T with a pretext for a purported business purpose for the trust component of the transaction. The Court found that for nearly the first three years of the transaction, Barclays made Bx payments to BB&T exceeding by millions the interest payments due from BB&T to Barclays. The Court determined that the loan had no non-tax business purpose and no possibility of pre-tax profit.

BB&T had argued that the Court should review the STARS transaction as a single integrated transaction, whereby the existence of the trust permitted Barclays to offer BB&T a $1.5 billion loan at a favorable rate. Looking at the economic realities of the integrated transaction, however, the Court still concluded that the transaction must be disregarded for lack of economic substance.

Penalties

The Court found BB&T liable for penalties for negligence and substantial underpayment of tax for its participation in the transaction. The Court found that the tax advice, which BB&T had received from the accounting firm and the law firm providing the tax opinion, was unreasonable; that BB&T's reliance on such advice was unreasonable; that substantial authority did not support the tax treatment claimed by BB&T; and that BB&T did not act with reasonable cause and good faith with regard to any portion of the underpayment determined.

Footnote

1 Salem Financial, Inc. v. United States, No. 10-192 (Fed. Cl. Sept. 20, 2013).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.