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BB&T Corporation’s (BBT - Analyst Report) tax claim of $688 million from the Internal Revenue System (IRS) was recently ruled out by the U.S. Court of Federal Claims. After losing the legal battle, BB&T will now incur $250 million as post tax charges in third-quarter 2013.

The claim was under the purview of the Structured Trust Advantaged Repackaged Securities (STARS) tax shelter program, which was criticized by the Federal judge Thomas Wheeler as "an economically meaningless tax shelter".

The outstanding tax for 2002–2007 was cleared by BB&T in 2010. The company thought that clearing the outstanding tax would give it a fair chance of making claims. However, earlier this year, after The Bank of New York Mellon Corporation (BK - Analyst Report) lost a similar case against the IRS, BB&T set aside $281 million as a charge to increase its reserves.

STARS was originally a deal between Barclays PLC (BCS - Analyst Report) and six U.S. banks. Though it had a legal approach based on the concept of tax shelter, the deeper motives were dubious.

The U.S. law forbids double taxation of companies that hold transactions worldwide. Therefore, once a transaction is completed, such a company can claim “foreign tax credits” from Internal Revenue System (IRS). However, the controversial deal between the U.K. banking giant and the U.S. banks was inked merely to exploit the aforementioned law and reap tax benefit.

IRS is still dealing with two pending STARS tax claim lawsuits with Wells Fargo & Company (WFC - Analyst Report) and Banco Santander, S.A. Tax shelter schemes are often complex and have loopholes. Large financial institutions often indulge in tax arbitraging, thereby misusing the same.

Currently, BB&T carries a Zacks Rank #3 (Hold).

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