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November 20, 2013

Luke C. Martin, CPAMember of the Firm

Current Tax Developments

Current Tax Development Topics• Federal tax legislation for banks•Charge offs•OREO developments•Pennsylvania Shares Tax Developments

Federal Tax Legislative Updates•No significant legislation

•Notice 2013-35 on bad debt regulation

•Notice 2013-35

• Notice discussing and requesting public comments on Treasury Reg 1.166-2(d)(1) and (3)

• Asking for comments by October 8, 2013

Federal Tax Legislative Updates

Charge Offs• Continued movement by the Internal Revenue

Service Financial Institutions specialist to a position that GAAP and the Service’s definition of worthless do not agree, even to the point that Bank examiner ordered charge offs are not necessarily deductible.

• For service, the loan must be deemed worthless in order to be written off, unless it meets one of the two conclusive presumptions

• Two conclusive presumptions

• Historical Presumption Reg 1.166-2(d)(1)

• Conformity Election Reg 1.166-2(d)(3)

Charge Offs

• Historical presumption under Reg 1.166 – 2(d)(1)(i) is for banks without a conformity election and the presumption is that the loan was charged off in obedience with the Regulators during a safety and soundness examination.

• This does not however apply to voluntary charge-offs on the same loans.

Charge Offs

•Conformity Election• All banks should consider

• Has met some resistance from IRS do to current economic conditions (large charge offs questioned for worthlessness)

Charge Offs

“The bad debt conformity election” is found in code section 1.166-2 (d)(3), and was established by the Treasury as an effort to reduce disagreement between the IRS and banks.

Charge Offs

• Provides a conclusive presumption of worthlessness based on applying a single set of standards for regulatory (book) and tax purposes

• Presumption applies when election is made and satisfies an express determination requirement for the taxable year of election

Charge Offs

• Designed to provide banks with greater certainty of the tax treatment related to bad debt deductions by providing the conclusive presumption of worthlessness under single standard when it is classified by the bank as a “loss asset” under the applicable regulatory standards.

Charge Offs

• Banks should get express determination letter even if they are not sure they want to make the election, since it is necessary to have from the time of each exam. By have the letter it will give you the flexibility.

Charge Offs

OREO • Issue is holding period cost

• IRS has been very inflexible in this area

• The problem has been with nonoperation OREO

•Nonoperating OREO

• Banks usually deduct cost as incurred

• These cost must be capitalized into the basis of the property per the IRS audit manual (treated as being under Section 263A)

OREO

• This treatment changed in February 2013 with the issuance of a Generic Legal Advice Memorandum “GLAM” , which indicated that holding period cost for OREO are not subject to Section 263A.

• It concluded that OREO was not purchased by the Bank for resale, but was an extension of the Banks lending activity.

OREO

• While a generic legal memo can not be cited as precedent, it appears that the issue may have gone away.

• One problem remains for those banks that changed accounting methods to capitalization, is how to get back to the expensing method.• Obvious would be to file a 3115 and pay a user fee but if

the original election was not valid do to Banks not qualifying under automatic changes may be able to change by filing amended returns. (Discuss with your CPA)

OREO

PENNSYLVANIA BANK SHARES TAX CHANGES• Effective for tax years beginning on January

1, 2014. (current year filings)

• Changes were made via Act 52 passed on July 9, 2013, and are effective immediately

• Seven main changes

• Elimination of the use of a six-year moving average for equity capital• Will now be based on book value of equity capital at the

end of the immediately preceding calendar year

• Capital for non-controlling interest in consolidated subsidiaries will be excluded from the equity capital calculation.• Bank Shares Tax will be based solely on the

receipts. (one factor and not three)

PENNSYLVANIA BANK SHARES TAX CHANGES

• New rules for apportionment of receipts based more on market based sourcing in line with recommendations from the Multistate Tax Commission

• Defines receipts for purposes of apportionment

• Expand Nexus requirements.

• Lowers tax rate to .89 from 1.25

PENNSYLVANIA BANK SHARES TAX CHANGES

Questions

Luke C. Martin, CPAMember of the Firm

804 Wayne AvenueChambersburg, PA 17201

717-263-3910

lcmartin@sek.comwww.sek.com