BB&T Corporation (BBT - Free Report) will set aside $281 million as a charge in the first quarter of 2013 to increase its reserves. The need arises from the continuing tax liability dispute with the Internal Revenue Service (IRS).
The decision to set aside the amount stems from the ruling conferred to The Bank of New York Mellon Corporation (BK - Free Report) by a tax court judge in the high-profile case filed by IRS. Owing to this adverse ruling, BNY Mellon incurred a loss of $850 million.
IRS had filed the lawsuit against several banks including BB&T, BNY Mellon and Wells Fargo & Company (WFC - Free Report) , accusing these firms of creating bogus foreign tax credits through loans from London-based financial institution. The case against BNY Mellon was the first one to go for the trial.
At present, BB&T is engaged in a legal battle with IRS to recover tax assessment worth $892 million. The IRS had sent BB&T a legal notice of deficiency for 2002–2007 for a liability for taxes, penalties and interest connected to the disallowance of foreign tax credits and other deductions claimed in correlation with the financing transaction.
BB&T paid the assessment in 2010 and then filed a court case, seeking a refund in the U.S. Court of Federal Claims. This trial is expected to commence on Mar 4. BB&T recorded a receivable for the payment, excluding the reserves.
BB&T is confident of a favorable ruling as it is going to bring up arguments and issues that were not taken up by the Tax court. However, the creation of provision is a precautionary measure.
It is likely that BB&T will increase or decrease its reserves by nearly $496 million or $328 million, respectively, as the lawsuit proceeds further.
Currently, BB&T carries a Zacks Rank #3 (Hold). Other stock in the same sector that is performing well and is worth considering is BankUnited Inc (BKU - Free Report) . It carries Zacks Rank #1 (Strong Buy).