(Bloomberg) BB&T Corp. lost a bid to recover at least $688 million in taxes and penalties as a federal judge ruled a series of transactions with Barclays Plc, aimed at generating tax credits, lacked economic substance.

U.S. Court of Federal Claims Judge Thomas Wheeler in Washington slammed BB&T, Barclays and other participants in the transactions, including the KPMG consultancy and the Sidley Austin LLP law firm, for conduct he said was “nothing short of reprehensible.” BB&T “engaged in an economically meaningless tax shelter” Wheeler said Friday.

Those firms followed a 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,” Wheeler wrote, upholding the Internal Revenue Service’s rejection of transactions from August 2002 through April 5, 2007.

BB&T said it expects to book a $250 million charge this quarter because of the ruling, at least the second charge the bank has taken in connection with the case. In February, BB&T announced a $281 million charge after Bank of New York Mellon Corp., lost a similar lawsuit involving deals with Barclays designed to generate tax savings.

Bank’s Liability
This quarter’s charge and previous reserves fully address the bank’s liability for the disallowed transaction, and the company will remain profitable in the period, BB&T Chief Executive Officer Kelly S. King said in a statement.

“We are surprised and very disappointed with the court’s ruling and continue to firmly believe that this was a legitimate financing transaction,” King said. “We will continue to review the decision and evaluate our legal options.”

BB&T was seeking to recover payments made after the IRS objected to the bank’s use of foreign tax credits and other deductions. The lender has said it initially complied with a 2010 IRS demand for $892 million in taxes, penalties and interest.

The Winston-Salem, North Carolina-based bank then sought to recover money through its lawsuit, filed in March 2010. It booked some of the anticipated proceeds as a receivable, according to a November filing, meaning that it expected a recovery.

BB&T sought $688 million in its complaint while Wheeler said in his ruling that the amount at issue is $772 million.

Shares Climb
BB&T’s shares have climbed 20 percent to $35.05 this year, lagging behind the 25 percent gain in the 81-company Standard and Poor’s 500 Financials Index.

Manuel Goncalves, a KPMG spokesman, declined to comment on yesterday’s decision, citing a confidentiality obligation to the firm’s clients. Kellie Mullins, a spokeswoman for Chicago-based Sidley Austin, didn’t immediately reply yesterday to phone messages, and no one responded to a request for comment left on Barclays’ media relations line in New York.

The “ruling sends a strong message that no matter how sophisticated the scheme, these sham tax shelters will not stand,” Kathryn Keneally, assistant attorney general for the Justice Department’s tax division, said in a statement.

Wheeler’s decision rejected the validity of an elaborate set of financial exchanges known as a Structured Trust Advantaged Repackaged Securities, or STARS, transaction. The arrangements with BB&T and BNY Mellon were among six sets of STARS transactions Barclays entered into with U.S. banks, according to the ruling.

British Trustee
In the BB&T transactions, the bank established a trust containing $6 billion in revenue-producing assets. Monthly revenue from the trust was cycled through a British trustee, which served as the basis for British taxation, according to Wheeler’s decision.

The assessment of taxes generated British tax credits which were split evenly between Barclays and BB&T, according to the ruling.

There are at least two more lawsuits pending against the IRS over STARS transactions, one brought by Wells Fargo & Co., the other by Banco Santander SA.

“The weight of evidence shows that tax avoidance was singularly and precisely the goal pursued in execution of the STARS transactions” by BB&T, Wheeler wrote.

Wheeler said he agreed with a government expert who said that “the human effort, the amount of creativity and overall effort that was put into this transaction is a waste of human potential.”

The case is Salem Financial Inc. v. U.S., 10-192, U.S. Court of Federal Claims (Washington).

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