This document summarizes recent tax developments from November 20, 2013. It discusses the federal tax legislative updates including Notice 2013-35 on bad debt regulations. It covers charge offs and issues the IRS has with agreeing that GAAP and tax definitions of worthlessness match. It outlines the two conclusive presumptions for charge offs. It also summarizes recent changes to the treatment of holding period costs for OREO according to a Generic Legal Advice Memorandum. Finally, it outlines seven major changes to the Pennsylvania Bank Shares Tax that take effect in 2014, including eliminating the moving average for equity capital and lowering the tax rate.

1. Current Tax
Developments
November 20, 2013
Luke C. Martin, CPA
Member of the Firm
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2. Current Tax Development
Topics
• Federal tax legislation for banks
• Charge offs
• OREO developments
• Pennsylvania Shares Tax Developments

3. Federal Tax Legislative
Updates
• No significant legislation
• Notice 2013-35 on bad debt regulation

4. Federal Tax Legislative
Updates
• 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

5. 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

6. Charge Offs
• Two conclusive presumptions
• Historical Presumption Reg 1.166-2(d)(1)
• Conformity Election Reg 1.166-2(d)(3)

7. 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.

8. 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)

9. 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.

10. 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

11. 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.

12. 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.

13. OREO
• Issue is holding period cost
• IRS has been very inflexible in this area
• The problem has been with
nonoperation OREO

14. 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)

15. 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.

16. 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)

17. 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

18. PENNSYLVANIA BANK
SHARES TAX 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)

19. 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

21. Luke C. Martin, CPA
Member of the Firm
804 Wayne Avenue
Chambersburg, PA 17201
717-263-3910
lcmartin@sek.com
www.sek.com