COMMUNITY BANKING UPDATE
SPEAKERS:
COLEEN DELGER
RANDY CHURCHILL
MARK REIS
The	material	appearing	in	this	presentation	is	for	informational	purposes	
only	and	should	not	be	construed	as	advice	of	a...
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
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CURRENT ISSUES
BASEL III
MERGER & ACQUISITION CONSIDERATIONS
RECENT DEVELOPMENTS
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


Bad debts: claims for refunds
Notice 2013-35
Conformity election
Nonaccrual interest
Oreo issues
S elections ...


Bad Debts: Claims for Refunds, Moving Ahead
◦ Where did we come from? Section 166
 Wholly Worthless (Section 166(a)(1)...



Bad Debts: Claims for Refunds
Notice 2013-35: 7 Conclusive Presumptions
◦ 1 Which entities should be covered?
◦ 2 Sho...
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

Bad Debts/Claims for Refunds/Notice 201335
Conformity Election: Facts and Myths
◦ Fact: Some will use Election prope...
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Nonaccrual Interest: The Top 6 Myths

◦ 1 The Rev. Rul. 2007-32 Election is a good deal
◦ 2 All interest accrued is inc...
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OREO ISSUES
◦
◦
◦
◦
◦

Maximize bad debt advantage over OREO losses
IRS Notice “OREO AS INVENTORY”
Method Change Requir...
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S ELECTIONS AND THEIR VALUE

◦ Review of past elections
◦ Current Challenge: New issues may make elections
more problem...
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
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What is it?
Why is it important?
How does it impact future income tax accrual
issues?
What do you do to prepare ...


WHAT IS IT?

◦ The third BASEL accord
◦ A global, voluntary regulatory standard for banks
for:
 Capital Adequacy
 Str...


WHY IS IT IMPORTANT?

◦ Increased capital, leverage, and liquidity standards
will put a premium on capital levels
◦ As ...


How does it affect future income tax accrual
issues?
◦ Capital required: 4.5% of common equity
◦ Leverage ratio: in exc...


What do you do to prepare for it?

◦ Rework deferred and current tax receivable models
for new limits
◦ State by state ...



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

Structure
Skeletons/issues/exposures
Optics
Attributes optimization
Partnership on deal and transition issues
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



Financial statement tax issues
Asset purchase tax issues
Stock purchase tax issues
Tracking differences






Structure
Skeletons/issues/exposures
Optics
Attributes optimization
Partnership on deal and transition issues


Structure

◦ We know what structure is,
◦ Or do we?
Tax impacts:





Owners
Companies
Stakeholders
Regulators
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Skeletons/issues/exposures

S elections/inadvertent terminations
Prior change of control date issues
DTA/VA issues for ...


Optics
◦
◦
◦
◦
◦
◦
◦

Financial statements: gain/loss
Regulatory capital
Financial reporting positions
Tax-free/taxable...
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Attribute optimization
◦
◦
◦
◦
◦
◦
◦

NOL carryovers and limitations
Credits and credit carryovers available
Income cap...


Partnership on Deal and Transition Issues
◦
◦
◦
◦

Protective language
Who issues the tax opinions?
Who has final retur...





Financial statement tax issues
Asset purchase tax issues
Stock purchase tax issues
Tracking differences


Financial statement tax issues
•
•
•
•

Understanding book-tax differences
Stock vs. Asset or deemed asset sale
Tax bas...


Asset purchase tax issues
◦
◦
◦
◦

Day one – book and tax aligned
Transaction costs – permanent differences
Goodwill ta...


Stock purchase tax issues

◦ Day one – book and tax differences for fair value
adjustments
◦ Transaction costs – perman...


Tracking differences
◦
◦
◦
◦
◦
◦

Loans
Oreo
Understanding section 382 limitations
Valuation allowance thoughts
Acquire...

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Notice 2013-35 (discussed earlier)
Final tangible property regulations
◦ Policy
◦ Retroactive Election
◦ Other issues...
QUESTIONS?
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7 4 10pm - community bank update

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Transcript of "7 4 10pm - community bank update"

  1. 1. COMMUNITY BANKING UPDATE SPEAKERS: COLEEN DELGER RANDY CHURCHILL MARK REIS
  2. 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. 3.     CURRENT ISSUES BASEL III MERGER & ACQUISITION CONSIDERATIONS RECENT DEVELOPMENTS
  4. 4.       Bad debts: claims for refunds Notice 2013-35 Conformity election Nonaccrual interest Oreo issues S elections and their value
  5. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 16.      Structure Skeletons/issues/exposures Optics Attributes optimization Partnership on deal and transition issues
  17. 17.     Financial statement tax issues Asset purchase tax issues Stock purchase tax issues Tracking differences
  18. 18.      Structure Skeletons/issues/exposures Optics Attributes optimization Partnership on deal and transition issues
  19. 19.  Structure ◦ We know what structure is, ◦ Or do we? Tax impacts:     Owners Companies Stakeholders Regulators
  20. 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. 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. 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. 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. 24.     Financial statement tax issues Asset purchase tax issues Stock purchase tax issues Tracking differences
  25. 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. 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. 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. 28.  Tracking differences ◦ ◦ ◦ ◦ ◦ ◦ Loans Oreo Understanding section 382 limitations Valuation allowance thoughts Acquired tax credits Projection of taxes paid vs. Tax expense
  29. 29.   Notice 2013-35 (discussed earlier) Final tangible property regulations ◦ Policy ◦ Retroactive Election ◦ Other issues to monitor in 2013-2014   Final cost basis reporting rules, debt instruments/options/future contracts American taxpayer relief act of 2012: ◦ Income tax rates, net investment tax, Medicare tax, expensing limits, other developments
  30. 30. QUESTIONS?
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