Your SlideShare is downloading. ×
1 30pm   community banking update
Upcoming SlideShare
Loading in...5
×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×

Saving this for later?

Get the SlideShare app to save on your phone or tablet. Read anywhere, anytime - even offline.

Text the download link to your phone

Standard text messaging rates apply

1 30pm community banking update

160
views

Published on

Published in: Technology, Business

0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
160
On Slideshare
0
From Embeds
0
Number of Embeds
2
Actions
Shares
0
Downloads
1
Comments
0
Likes
0
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
No notes for slide

Transcript

  • 1. COMMUNITY BANKING UPDATE SPEAKERS: COLLEEN DELGER RANDY CHURCHILL MARK REIS
  • 2. The material appearing in this presentation is for informational purposes only and should not be construed as advice of any kind, including, without limitation, legal, accounting, or investment advice. This information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant‐client relationship. Although this information may have been prepared by professionals, it should not be used as a substitute for professional services. If legal, accounting, investment, or other professional advice is required, the services of a professional should be sought.
  • 3.     CURRENT ISSUES BASEL III MERGER & ACQUISITION CONSIDERATIONS RECENT DEVELOPMENTS
  • 4.       Bad debts: claims for refunds Notice 2013-35 Conformity election Nonaccrual interest Oreo issues S elections and their value
  • 5.  Bad Debts: Claims for Refunds, Moving Ahead ◦ Where did we come from? Section 166  Wholly Worthless (Section 166(a)(1))  Partially Worthless (Section 166(a)(2)) ◦ The 6 Most Common Myths of Bank Tax Bad Debts  1 Tax bad debt charge offs must = F/S ALLL charge offs  2 Charge offs must be entered by year end  3 The IRS has veto power over your bad debts claimed  4 Selling Costs are not “deductible” for tax until sold  5 Bad Debt Changes = Change in Method of Accounting  6 The Conformity Election gives audit protection
  • 6.   Bad Debts: Claims for Refunds Notice 2013-35: 7 Conclusive Presumptions ◦ 1 Which entities should be covered? ◦ 2 Should changes in bank regulations change treasury regulations? ◦ 3 Are accounting rules sufficiently similar to IRC Sec. 166? ◦ 4 One conclusive presumption or more? ◦ 5 What process should be required? ◦ 6 Should limits be placed on timing of deduction? ◦ 7 Impediments to uniform loss standard?
  • 7.   Bad Debts/Claims for Refunds/Notice 201335 Conformity Election: Facts and Myths ◦ Fact: Some will use Election properly ◦ Fact: The election does NOT provide exam protection or exclusion from loan files review  See FSA 200129003, Rev. Rul. 2001-59, IRM Sec. 4 ◦ Fact: Revocation of Conformity Election by regulators may be advantageous ◦ Myth: Most banks would benefit from the election ◦ Myth: EDLs strengthen bad debt deduction taken
  • 8.  Nonaccrual Interest: The Top 6 Myths ◦ 1 The Rev. Rul. 2007-32 Election is a good deal ◦ 2 All interest accrued is includible in income ◦ ◦ ◦ ◦  Section 451 All Events Test/Rev. Rul. 80-361/Regs. 1.446-2 3 4 5 6 If taxable, no bad debt without payoff/REO/sale Rev. Rul. 80-361 is the primary legal determinant Non accrual interest: a bigger issue in good years The tax issue makes perfect sense to CFOs/CEOs
  • 9.  OREO ISSUES ◦ ◦ ◦ ◦ ◦ Maximize bad debt advantage over OREO losses IRS Notice “OREO AS INVENTORY” Method Change Requirements What costs are deductible vs capitalized? OREO held for rent
  • 10.  S ELECTIONS AND THEIR VALUE ◦ Review of past elections ◦ Current Challenge: New issues may make elections more problematic ◦ Regulators are limiting the ability of Shareholders to pay tax ◦ Complexities are looked at in a whole new light
  • 11.     What is it? Why is it important? How does it impact future income tax accrual issues? What do you do to prepare for it?
  • 12.  WHAT IS IT? ◦ The third BASEL accord ◦ A global, voluntary regulatory standard for banks for:  Capital Adequacy  Stress Testing  Market Liquidity Risk ◦ The purpose: Strengthen Capital Standards, Help force decrease in bank leverage
  • 13.  WHY IS IT IMPORTANT? ◦ Increased capital, leverage, and liquidity standards will put a premium on capital levels ◦ As ratios are increased, new standards will effectively limit substantially the current deferred tax assets and related tax attributes on the books of banks. ◦ Ratios are increased, new standards will effectively limit substantially the current deferred tax assets and related tax attributes of banks ◦ Timing of effectiveness is key (as well as future changes in response to criticisms)
  • 14.  How does it affect future income tax accrual issues? ◦ Capital required: 4.5% of common equity ◦ Leverage ratio: in excess of 3% ◦ 2 liquidity ratios:  Liquidity coverage ratio  Net stable funding ratio ◦ Carrybacks become premium for limits ◦ DTL netting and hypothetical carryback
  • 15.  What do you do to prepare for it? ◦ Rework deferred and current tax receivable models for new limits ◦ State by state BASEL III computations will be needed to determine limits applicable ◦ What do you do with associates and joint ventures’ results and balance sheet positions as included/(excluded) from capital computations ◦ Are DTA’s from unrealized gains/loss included?
  • 16.      Structure Skeletons/issues/exposures Optics Attributes optimization Partnership on deal and transition issues
  • 17.     Financial statement tax issues Asset purchase tax issues Stock purchase tax issues Tracking differences
  • 18.      Structure Skeletons/issues/exposures Optics Attributes optimization Partnership on deal and transition issues
  • 19.  Structure ◦ We know what structure is, ◦ Or do we? Tax impacts:     Owners Companies Stakeholders Regulators
  • 20.  Skeletons/issues/exposures S elections/inadvertent terminations Prior change of control date issues DTA/VA issues for loss companies What about 382/recent VA releases? Prior return issues (uncertain tax position items) ◦ Gains or losses triggered inadvertently ◦ Big tax on s corporations: 10 year? 7 year? ◦ Others (many more) ◦ ◦ ◦ ◦ ◦
  • 21.  Optics ◦ ◦ ◦ ◦ ◦ ◦ ◦ Financial statements: gain/loss Regulatory capital Financial reporting positions Tax-free/taxable status of transaction Compensation issues and votes Mix of consideration for shareholders Payments to executives: change of control
  • 22.  Attribute optimization ◦ ◦ ◦ ◦ ◦ ◦ ◦ NOL carryovers and limitations Credits and credit carryovers available Income capacity – accretive to earnings? Methods of accounting Section 381: what methods survive? Bad debts: section 585 or large bank? What have we not covered?
  • 23.  Partnership on Deal and Transition Issues ◦ ◦ ◦ ◦ Protective language Who issues the tax opinions? Who has final returns responsibilities? What tax decisions are made before close?  By whom? ◦ How are issues on tax elections and split of attributes to be made by seller/buyer? ◦ What items are we missing or not seeing?
  • 24.     Financial statement tax issues Asset purchase tax issues Stock purchase tax issues Tracking differences
  • 25.  Financial statement tax issues • • • • Understanding book-tax differences Stock vs. Asset or deemed asset sale Tax basis on day one Book values on day one
  • 26.  Asset purchase tax issues ◦ ◦ ◦ ◦ Day one – book and tax aligned Transaction costs – permanent differences Goodwill tax amortization – 15 years Goodwill tax amortization creates a deferred tax liability
  • 27.  Stock purchase tax issues ◦ Day one – book and tax differences for fair value adjustments ◦ Transaction costs – permanent differences ◦ INTANGIBLES TAX AMORTIZATION (i.e. CDI) – n/a ◦ Goodwill tax amortization – n/a
  • 28.  Tracking differences ◦ ◦ ◦ ◦ ◦ ◦ Loans Oreo Understanding section 382 limitations Valuation allowance thoughts Acquired tax credits Projection of taxes paid vs. Tax expense
  • 29.  Final tangible property regulations ◦ ◦ ◦ ◦ ◦ ◦ ◦ ◦ De Minimis Safe Harbor Materials and Supplies (M&S) Acquisition Costs UOP Improvements Improvement Rules Routine Maintenance Safe Harbor Safe Harbor for Small Taxpayers Dispositions
  • 30.   Final tangible property regulations Focus areas for Community Banks ◦ De Minimis Safe Harbor  May follow book capitalization policy if:  Either have AFS, written policy @beginning of year, and item/invoice cost is $5,000 or less (less than 12 months)  No AFS, have accounting procedures @ beginning of year and item is $500 or less and less than 12 months life  Attach an election statement to return each year  Use it for all materials and supplies (non-capitalized)
  • 31.    Final tangible property regulations Focus areas for Community Banks Materials and Supplies (M&S) ◦ UOP cost changed to $200 or less and added standy emergency spare parts to qualified list of expenses ◦ When deducted rules stayed the same (Incidental, when paid or incurred; Nonincidental, when used or consumed; rotable/temporary parts, when disposed (optional method)) ◦ Election to capitalize rotable, temporary, or standby emergency spare parts ONLY
  • 32.   Final tangible property regulations Focus areas for Community Banks ◦ Acquisition Costs  Same as proposed regulations (Facilitative costs capitalized (11 categories), whether or which test for real property, expense compensation and overhead)  Some clarifications added  Contingency fees defined ◦ UOP Improvements  Same with clarifications for leasehold improvements
  • 33.   Final tangible property regulations Focus areas for Community Banks ◦ Improvement Rules      Betterment, restoration, adaptation rules retained Clarified betterment and restoration tests Clarified rules for removal costs Modified casualty loss rules Added election to capitalize R&M expenses if capitalized for financial statements
  • 34.  Final tangible property regulations ◦ Routine Maintenance Safe Harbor  Same, with some clarifications  Building property – use 10-year period rather than class life ◦ Safe Harbor for Small Taxpayers  New in final regulations: small taxpayers (receipts of $10 million or less) MAY ELECT TO EXPENSE MINOR BUILDING REPAIRS ON ELIGIBLE BUILDINGS ◦ Dispositions  Elections to recognize gain/loss on partial dispositions
  • 35.  Final cost basis reporting rules, debt instruments/options/future contracts ◦ New rules  American taxpayer relief act of 2012: ◦ ◦ ◦ ◦ ◦ Income tax rates Net investment tax Medicare tax Expensing limits Other developments
  • 36.  Ambase Corp. v. U.S. 112 AFTR 2d 20136151 ◦ NOL – statute of limitations ◦ Bad debts: issue of time allowed to claim under Code Section 6511 ◦ Ruled for Plaintiffs   CCA 201341017: Allocation of interest expenses for subsidiary and affiliated group Downey Financial Corp., 112 AFTR 2d 20136047: Tax Sharing Agreement methodology
  • 37.     Salem Financial, Inc. v. U.S., 112 AFTR 2d 2013-6168 Bank’s tax avoidance transaction nullified WFC Holdings Corp., 112 AFTR 2d 20135815 (Discussed in earlier sessions) U.S. v. Stargell, 112 AFTR 2d 2013-Advance Anticipation loans Other cases, rulings and advance rulings
  • 38. QUESTIONS?