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  • 1. 47thBANK & CAPITAL MARKETS TAX INST IT U T Eannual D-1: MERGERS & ACQUISITIONS Nutcracker Ballroom November 9th, 1:45pm – 3:15pm 47th ANNUAL BANK & CAPITAL MARKETS TAX INSTITUTE DISNEY CONTEMPORARY HOTEL Speakers: JOHN KINSELLA KEVIN POWERS, CPA MELISSA REINBOLD 47 BANK I N S T I T U MARKET th annual TA X & CAPITAL TE NOVEMBER 7-9, 2012 E.COM WWW.BANKTAX I N ST I T U T D I S N E Y C O N T E M P O R A RY H OT E L | ORLANDO
  • 2. The Unique Alternative to the Big Four®Bank & Capital Markets Tax Institute 2012Mergers & AcquisitionsKevin Powers, Partner – Crowe Horwath LLPMelissa Reinbold, Senior Manager – Crowe Horwath LLPJohn Kinsella, Director of Tax – U.S. BancorpNovember 9, 2012 The Unique Alternative to the Big Four®Disclaimers These slides are for educational purposes only and are not intended, and should not be relied upon, as legal, tax or accounting advice. Pursuant to Circular 230 promulgated by the Internal Revenue Service, please be advised that these slides were not intended or written to be used, and that they cannot be used, for the purpose of avoiding federal tax penalties unless otherwise expressly indicated.Audit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 2 The Unique Alternative to the Big Four®Agenda 2012 Year in Review Due Diligence Process S Corporation Acquisitions Recapitalizations & Sec. 382 Ownership Change Rules Other Current IssuesAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 3 1
  • 3. The Unique Alternative to the Big Four® 2012 Year in ReviewAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 4 The Unique Alternative to the Big Four®2012 Year in Review See separate hand-outAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 5 The Unique Alternative to the Big Four® Due Diligence ProcessAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 6 2
  • 4. The Unique Alternative to the Big Four®Due Diligence Process Acquisition structure Target review Post-acquisition integrationAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 7 The Unique Alternative to the Big Four® Acquisition StructureAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 8 The Unique Alternative to the Big Four®Due Diligence – StructureWhat questions should you be asking? Stock or asset acquisition? Tax-free or taxable? C Corp or S Corp? Holding Company or Bank? Type and amount of consideration? What are the post-closing plans for target corporation?Audit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 9 3
  • 5. The Unique Alternative to the Big Four®Due Diligence – StructureStock or asset acquisition? This is not always a simple question You could have a stock acquisition for legal purposes which may be treated as an asset acquisition for tax purposes  If asset acquisition for legal purposes, then it should always be treated as an asset acquisition for tax purposes The legal form of the acquisition will also dictate which pre- and post- acquisition liabilities (including income taxes) are the responsibility of the acquirer  Stock sale avoids title transfers/re-titlements, transfer taxes, consents and other legal entity issues (dissolution, etc.)  Joint and several liability for subsidiaries of an affiliated/consolidated groupAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 10 The Unique Alternative to the Big Four®Due Diligence – StructureTax-free or taxable? We are asking this question with respect to the target corporation and acquirer The acquisition can be taxable to the shareholders, but tax-free to the corporations During pre-acquisition planning, this is an important question to ask, as legal documents will have to be drafted specific to the expected results During post-acquisition implementation, the structure will impact the purchase accounting entries, tax return preparation, etc.Audit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 11 The Unique Alternative to the Big Four®Due Diligence – StructureC Corp or S Corp? C Corp acquisitions are typically structured as tax-free deals Many S Corp acquisitions are structured to be treated as asset purchases, but can also qualify as tax-free Question: What is the reason for this? Answer: No double taxation for S Corp target shareholders (however, BIG Tax can still apply to the target corporation)Audit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 12 4
  • 6. The Unique Alternative to the Big Four®Due Diligence – StructureHolding Company or Bank? In many cases, the target holding company stock will be acquired However, the target Bank stock could be purchased from a holding company Question: Why purchase the Bank stock instead of the holding company stock? Answer:  Non-tax reasons – Unwanted H/C assets or liabilities  Tax reasons – To facilitate an asset purchaseAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 13 The Unique Alternative to the Big Four®Due Diligence – StructureType and amount of consideration? Target shareholders may receive some combination of cash and acquirer’s stock Even if target shareholders receive all cash, the transaction can still be tax-free to the corporations In some cases, even if the acquisition is structured such that it could qualify as tax-free, an election can be made to treat the acquisition as a purchase of assets Any contingent consideration?Audit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 14 The Unique Alternative to the Big Four®Due Diligence – StructureWhat are the post-closing plans for target corporation? In many cases, the target corporation will be merged with the acquirer  Target corporation could be the holding company, in which case the target Bank subsidiary might be merged with the acquirer’s Bank subsidiary Assets of target corporation and its subsidiaries may be contributed to other entities within acquirer’s affiliated group  Is acquirer filing a consolidated tax return? Consideration should be given to how these plans impact the structure of the deal (e.g., state taxes)Audit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 15 5
  • 7. The Unique Alternative to the Big Four®Due Diligence – Structure Acquirer Target Merge New Sub C Corp Tax-free or taxable? Forward triangular merger - Target shareholders exchange stock of Target for stock of Acquirer and Cash (at least 40/60 split) Treated as asset purchase if all cash considerationAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 16 The Unique Alternative to the Big Four®Due Diligence – Structure Acquirer Target Merge New Sub C Corp Tax-free or taxable? Reverse triangular merger - Target shareholders exchange stock of Target for stock of Acquirer and Cash (at least 80/20 split) Treated as a “qualified stock purchase” if all cash considerationAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 17 The Unique Alternative to the Big Four®Due Diligence – Structure Parent Target Stock Acquirer Target C Corp Tax-free or taxable? Qualified stock purchase – Can make §338(h)(10) election to treat as asset purchase for tax purposesAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 18 6
  • 8. The Unique Alternative to the Big Four® Target ReviewAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 19 The Unique Alternative to the Big Four®Due Diligence – TargetWhat questions should you be asking? What is the target corporation’s structure? What tax returns are being filed? Have there been any IRS or state audits? What are the target corporation’s accounting methods? Has the target corporation engaged in any prior acquisitions or other significant transactions?Audit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 20 The Unique Alternative to the Big Four®Due Diligence – TargetWhat questions should you be asking? (cont.) Does the target corporation have any NOLs or other carryforward attributes? Has the target corporation engaged in any tax planning strategies? Are there any change-in-control agreements? Have all non-income taxes been considered?Audit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 21 7
  • 9. The Unique Alternative to the Big Four®Due Diligence – TargetWhat is the target corporation’s structure? Obtain a copy of the organizational chart, including states (or countries) in which the corporation does business Obtain a schedule of partnerships in which the corporation has invested, including a description of the nature of the investments Obtain a copy of any intercompany agreements, including tax allocation S Corps – Obtain a copy of the following:  Shareholder list  Executed shareholder agreementsAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 22 The Unique Alternative to the Big Four®Due Diligence – TargetWhat tax returns are being filed? Obtain a copy of all federal and state tax returns filed for the past 3 years Obtain a copy of related tax workpapers for these same returns, including:  Deferred inventory schedules  Rollforward of all balance sheet tax accounts  Calculation of book taxable income and expense  State apportionment schedules  “FIN 48” analysis / Sch. UTP details S Corps – Obtain a copy of the following:  IRS approval letter for S election and QSub elections (if any)  Any required state approval letters/applications  Schedule of net unrealized built-in gainsAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 23 The Unique Alternative to the Big Four®Due Diligence – TargetHave there been any IRS or state audits? Obtain a summary of IRS and/or state examinations for the 5 most recent tax years Obtain a copy of any revenue agent reports, settlements or closing agreements for the 5 most recent tax years Obtain a copy of any tax notices received within the last 5 years, including any correspondence sent and a description of the resolution/current status Obtain a copy of any notices and correspondence related to information reporting infractions, including penalties paid within the past 5 yearsAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 24 8
  • 10. The Unique Alternative to the Big Four®Due Diligence – TargetWhat are the target corporation’s accounting methods? Review tax return and workpapers for applicable accounting methods Obtain a copy of any Form 3115’s filed within the past 5 years, including a copy of the executed IRS consent letters (if applicable) Obtain a copy of the following documents:  Sec. 475 mark-to-market identification policy  Hedge identification policy/statements  Express determination letter (if bad debt conformity election in place)Audit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 25 The Unique Alternative to the Big Four®Due Diligence – TargetHas the target corporation engaged in any prior acquisitions or othersignificant transactions? Obtain a description of the transactions, including a copy of any tax opinions issued Obtain a copy of any IRS private letter rulings, or state rulings, issued in conjunction with the transactions Obtain a copy of any purchase accounting schedules or any other book- tax reconciliation schedules Obtain a copy of the “FIN 48” assessments and Sch. UTP details completed with respect to the transactions (if available) BOLI policies – Consider impact based on structure of transactionAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 26 The Unique Alternative to the Big Four®Due Diligence – TargetDoes the target corporation have any NOLs or other carryforwardattributes? Obtain a copy of any carryforward schedules  The tax returns can also be reviewed to identify any carryforward attributes Remember – The form of the transaction will dictate the availability of these tax attributes  For example, if the acquisition is to be treated as an asset purchase for tax purposes, any carryforward items remain with the “old” target  Acquisition of target subsidiary – Consolidated regulations will dictate availability of carryforward items S Corps – Any carryforward items from pre-S Corp years?Audit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 27 9
  • 11. The Unique Alternative to the Big Four®Due Diligence – TargetHas the target corporation engaged in any tax planning strategies? Obtain a description of the strategies Obtain a copy of any pending IRS private letter ruling requests, or state ruling requests, with respect to proposed transactions Obtain a copy of any executed IRS consent letters with respect to strategies implemented in prior years Obtain a copy of the “FIN 48” assessments and Sch. UTP details completed with respect to the strategies (if available)Audit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 28 The Unique Alternative to the Big Four®Due Diligence – TargetAre there any change-in-control agreements? Obtain a copy of executive employment agreements or any supplemental change-in-control agreements Obtain a copy of any Code §280G calculations that may have been completed For public companies – Review the executive compensation summary table from the most recent proxy filing Note – Certain exceptions apply for non-public companies; in particular, S Corps (or companies otherwise qualifying as S Corps, even if an election has not been made) are exempt from the provisions of Code §280GAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 29 The Unique Alternative to the Big Four®Due Diligence – TargetHave all non-income taxes been considered? Non-income taxes can include:  Payroll taxes  Back-up withholding  Personal property taxes There can often be hidden liabilities in these taxes Confirm as to who will be responsible for reviewing these areasAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 30 10
  • 12. The Unique Alternative to the Big Four® Post-Acquisition IntegrationAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 31 The Unique Alternative to the Big Four®Due Diligence – IntegrationWhat should you do now? Address tax treatment of acquisition costs Address tax treatment of severance payments Review purchase accounting entries Consider impact on book accounting for taxes Consider impact on federal tax return Consider impact on state tax returns Consider need to prepare final short-period tax returns for target corporation Consider impact on information reportingAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 32 The Unique Alternative to the Big Four®Due Diligence – IntegrationAcquisition costs Prepare/obtain an analysis of the following:  Investment banker fees (Note: 70/30 election now available)  Legal & accounting fees  Other integration costs Analysis should be prepared for costs incurred by both target and acquirer Determine impact on book purchase accounting and target/acquirer tax returnsAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 33 11
  • 13. The Unique Alternative to the Big Four®Due Diligence – IntegrationSeverance payments Update Code §280G calculations for final pay-outs  Determine amount of payments treated as “excess parachute payments” – no tax deduction for this amount Review timing/deductibility of other compensation related payments, such as:  Deferred compensation  Stock option “cash out” Determine impact on book purchase accounting and target/acquirer tax returnsAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 34 The Unique Alternative to the Big Four®Due Diligence – IntegrationPurchase accounting entries Review purchase accounting entries Tax-free acquisitions – Deferred tax assets/liabilities will have to be established  What tax rate should be used (including states)?  Any “FIN 48” reserves required? Taxable acquisitions – Generally no net deferred tax implications  Book ALLL does not carry over  What about PAA entries related to liabilities?Audit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 35 The Unique Alternative to the Big Four®Due Diligence – IntegrationBook accounting for taxes Update ASC 740 schedules  Target book-tax basis differences  Carryforward attributes  Purchase accounting entries Determine impact on book expense for income taxes  Higher tax bracket?  Changes in state apportionment?  New state filing requirements? Discuss need for valuation allowancesAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 36 12
  • 14. The Unique Alternative to the Big Four®Due Diligence – IntegrationFederal tax return Determine where inconsistencies may exist between target and acquirer accounting methods  Consider filing of Form 3115, where necessary  Consider need for bad debt reserve recapture Prepare any necessary statements related to tax-free acquisitions (e.g., Sec. 368 statements) Coordinate preparation of Form 8594 or Form 8883 (if applicable) Update Form 851 for new subsidiaries  Also report post-acquisition liquidations of subsidiariesAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 37 The Unique Alternative to the Big Four®Due Diligence – IntegrationFederal tax return (cont.) Coordinate revisions to Sec. 475 and hedge identification policies Update carryforward schedules (e.g., NOLs) Determine applicability of Code §382 to carryforward items, such as:  Net operating losses  General business credits  AMT credits  Capital losses Consider impact of Sec. 56(g)(4)(G) “ACE” basis adjustments Determine impact to estimated tax calculationsAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 38 The Unique Alternative to the Big Four®Due Diligence – IntegrationState tax returns Determine impact to state apportionment factors Determine if any new state or local tax returns will have to be filed  Consider timing of estimated tax payments  Consider need to file tax registration documents Update carryforward schedules (e.g., NOLs) Determine impact of any federal accounting method changes to specific states  Do all states conform to Internal Revenue Code?Audit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 39 13
  • 15. The Unique Alternative to the Big Four®Due Diligence – IntegrationFinal short-period tax returns Coordinate preparation of tax returns  When are the tax returns due? Coordinate payment of final estimated tax and extension payments Determine if NOLs should be carried back  If taxpayer chooses to carry forward, election must be made on tax return  Remember – Credits and capital losses must be carried back if they can be used in a prior tax year (no election to C/F)Audit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 40 The Unique Alternative to the Big Four®Due Diligence – IntegrationInformation reporting Consider the various requirements related to information reporting for the target’s pre-acquisition activities For example, consider the reporting requirements for the following:  Form W-2  Form 1099 series, including 1099-INT & 1099-MISC  Form 1098Audit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 41 The Unique Alternative to the Big Four® S Corporation AcquisitionsAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 42 14
  • 16. The Unique Alternative to the Big Four®S Corp Acquisitions – Considerations Is the purchase price more or less than the seller’s income tax basis in its assets? Is the purchase price more or less than the selling shareholders’ income tax basis in their shares? Should the transaction be a sale of stock or a sale of assets?Audit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 43 The Unique Alternative to the Big Four®S Corp Acquisitions – Options1. Purchase of holding company stock2. Purchase of holding company stock with a Sec. 338(h)(10) election3. Purchase of bank stock from a holding company4. Purchase of assets and assumption of liabilities from a bankAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 44 The Unique Alternative to the Big Four®Purchase of Holding Company Stock Target Parent Stock Acquirer S/H’s Parent Bank QSub Can be structured as a Sec. 368 reorganization Consideration can be a combination of cash and stock of AcquirerAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 45 15
  • 17. The Unique Alternative to the Big Four®Purchase of Holding Company StockImpact on Selling Corporation No corporate-level tax implications All holding company and bank assets transfer All holding company and bank liabilities are assumedAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 46 The Unique Alternative to the Big Four®Purchase of Holding Company StockImpact on Selling Shareholders For tax-free reorganizations, gain recognized up to amount of “boot” (e.g., cash) received  No loss recognition, unless all cash consideration received by shareholder  Any gain/loss deferral reflected in basis of acquiring stock received Full gain or loss recognition for taxable acquisitionsAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 47 The Unique Alternative to the Big Four®Purchase of Holding Company StockImpact on Acquiring Corporation No corporate-level tax imposed Carryover basis in assets and liabilities Section 382 could limit use of recognized built-in losses or prior years’ C Corp carryover attributes  Built-in loss recognition period for bad debt deductions is generally 1 year For acquiring S corporations, built-in gains attributable to selling corporation’s assets tracked for remainder of recognition periodAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 48 16
  • 18. The Unique Alternative to the Big Four®Purchase of Holding Company StockReporting Requirements For tax-free reorganizations, information statements included with returns of all parties to the reorganization  See Reg. Sec. 1.368-3 Consider Sec. 6045B reporting of “organizational actions”  See IRS Form 8937, Report of Organizational Actions Affecting Basis of SecuritiesAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 49 The Unique Alternative to the Big Four®Purchase of Holding Company StockPlanning Considerations If acquiring corporation is also an S corporation, acquisition unlikely to be structured as a Sec. 368 reorganization  Limitations on number of shareholders  Ownership by closely-held family groups S Corp acquirer should consider filing QSub election for target holding company and/or bankAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 50 The Unique Alternative to the Big Four®Purchase of Holding Company Stock w/ Sec. 338(h)(10) Election Target Parent Stock Acquirer S/H’s Parent Bank QSub Consideration can be a combination of cash and stock of Acquirer Target shareholders and Acquirer must all agree to the electionAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 51 17
  • 19. The Unique Alternative to the Big Four®Tax Transaction – Step 1:“Old Target” Sells Assets to “New Target” Consideration Old New Target Target Assets/Liabilities Old target is treated as selling assets to new target New target is treated as assuming liabilities of old targetAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 52 The Unique Alternative to the Big Four®Tax Transaction – Step 2:Old Target Liquidates Target S/H’s Consideration (cash, acquiring stock, Old other properties) Target Target shareholders receive liquidating distribution from old targetAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 53 The Unique Alternative to the Big Four®Tax Transaction – Step 3:New Target Gets Fair Market Value Basis in Assets Acquirer New Asset Tax Basis = Fair Market Value Target New target may remain in existence or merge with acquirer (or a subsidiary of acquirer)Audit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 54 18
  • 20. The Unique Alternative to the Big Four®Purchase of Holding Company Stock w/ Sec. 338(h)(10) ElectionImpact on Selling Corporation Taxable sale of all holding company and bank assets All holding company and bank liabilities are assumed Consider impact of cash-basis adjustments  Ordinary income “recapture” for net accrued income Built-in gains tax could applyAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 55 The Unique Alternative to the Big Four®Purchase of Holding Company Stock w/ Sec. 338(h)(10) ElectionImpact on Selling Shareholders Gains and losses from deemed sale of assets pass through to shareholders  Shareholders adjust stock basis for these gains/losses  Certain assets will generate ordinary (versus capital) gains/losses  Acquirer may indemnify shareholders for additional tax resulting from ordinary gains Shareholders recognize gain or loss upon deemed liquidation of holding company shares (or bank shares, if no holding company) See separate hand-out for sample analysis of tax implications to shareholdersAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 56 The Unique Alternative to the Big Four®Purchase of Holding Company Stock w/ Sec. 338(h)(10) ElectionImpact on Acquiring Corporation Step up (or step down) in tax basis Deductible Sec. 197 intangible asset No Section 382 limitations No carryover of built-in losses or prior years’ C Corp attributes S Corp acquirer should consider filing QSub election for target holding company and/or bankAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 57 19
  • 21. The Unique Alternative to the Big Four®Purchase of Holding Company Stock w/ Sec. 338(h)(10) ElectionReporting Requirements Joint election required  See IRS Form 8023, Elections Under Section 338 for Corporations Making Qualified Stock Purchases IRS Form 8883, Asset Allocation Statement Under Section 338, included with return of both selling and acquiring corporationsAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 58 The Unique Alternative to the Big Four®Purchase of Holding Company Stock w/ Sec. 338(h)(10) ElectionPlanning Considerations A single dissenting shareholder can disrupt the process  Various transactions can be used to “squeeze out” the dissenting shareholder Forward cash merger can be used in lieu of a Section 338(h)(10) election Invalid holding company S election or bank QSub election could pose potential tax risks to the acquirer Acquiring corporation assumes certain tax liabilitiesAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 59 The Unique Alternative to the Big Four®Purchase of Bank Stock from Holding Company Parent Bank Stock Acquirer Bank QSub Automatically treated as an asset purchase Unwanted assets and liabilities can be transferred from bank to holding company (or vice versa) immediately before the saleAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 60 20
  • 22. The Unique Alternative to the Big Four®Purchase of Bank Stock from Holding CompanyImpact on Selling Corporation Taxable sale of all bank assets (not holding company assets)  Remember, the Bank is a QSub, and thus was treated as having been completely liquidated in a prior tax year Bank, but not holding company, liabilities are assumed Consider impact of cash-basis adjustments  Ordinary income “recapture” for net accrued income Built-in gains tax could applyAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 61 The Unique Alternative to the Big Four®Purchase of Bank Stock from Holding CompanyImpact on Selling Shareholders Gains and losses from deemed sale of bank assets pass through to shareholders  Shareholders adjust stock basis for these gains/losses  Certain assets will generate ordinary (versus capital) gains/losses  Acquirer may indemnify shareholders for additional tax resulting from ordinary gains No deemed liquidation of shares  Gain or loss recognized if holding company subsequently liquidatesAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 62 The Unique Alternative to the Big Four®Purchase of Bank Stock from Holding CompanyImpact on Acquiring Corporation Step up (or step down) in tax basis Deductible Sec. 197 intangible No Section 382 limitations No carryover of built-in losses or prior years’ C Corp attributes S Corp acquirer should consider filing QSub election for target bankAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 63 21
  • 23. The Unique Alternative to the Big Four®Purchase of Bank Stock from Holding CompanyReporting Requirements No special elections required  Mitigates objections of dissenting shareholders IRS Form 8594, Asset Acquisition Statement Under Section 1060, included with return of both selling and acquiring corporationsAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 64 The Unique Alternative to the Big Four®Purchase of Bank Stock from Holding CompanyPlanning Considerations Invalid holding company S election or bank QSub election could pose potential tax risks to the acquirer Built-in gains tax or potential state-level corporate income taxes from the deemed sale of the bank’s assets remains a liability of the selling corporationAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 65 The Unique Alternative to the Big Four®Purchase of Assets and Assumption of Liabilities from a Bank Parent Bank Bank Assets/ Liabilities Acquirer QSub Tax consequences essentially mirror those of a purchase of bank stock from a holding company Advantageous if target Bank is under regulatory enforcement or other significant legal exposures existAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 66 22
  • 24. The Unique Alternative to the Big Four®Purchase of Assets and Assumption of Liabilities from a BankImpact on Selling Corporation Taxable sale of specifically identified bank assets Specifically identified bank liabilities are assumed Built-in gains tax could applyAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 67 The Unique Alternative to the Big Four®Purchase of Assets and Assumption of Liabilities from a BankImpact on Selling Shareholders Gains and losses from sale of assets pass through to shareholders  Shareholders adjust stock basis for these gains/losses  Certain assets will generate ordinary (versus capital) gains/losses  Acquirer may indemnify shareholders for additional tax resulting from ordinary gains (although perhaps not as common w/ this structure) No deemed liquidation of shares  Gain or loss recognized if holding company (or bank, if no holding company) subsequently liquidatesAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 68 The Unique Alternative to the Big Four®Purchase of Assets and Assumption of Liabilities from a BankImpact on Acquiring Corporation Step up (or step down) in tax basis Deductible Sec. 197 intangible No Section 382 limitations No carryover of built-in losses or prior years’ C Corp attributesAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 69 23
  • 25. The Unique Alternative to the Big Four®Purchase of Assets and Assumption of Liabilities from a BankReporting Requirements No special elections required IRS Form 8594, Asset Acquisition Statement Under Section 1060, included with return of both selling and acquiring corporationsAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 70 The Unique Alternative to the Big Four®Purchase of Assets and Assumption of Liabilities from a BankPlanning Considerations Invalid holding company S election or bank QSub election would not pose any risks to acquirer Built-in gains tax or potential state-level corporate income taxes from the deemed sale of the bank’s assets remains a liability of the selling corporationAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 71 The Unique Alternative to the Big Four® Recapitalizations & Sec. 382 Ownership Change RulesAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 72 24
  • 26. The Unique Alternative to the Big Four®Recapitalizations & Sec. 382 Ownership Change Rules Banks seeking capital Private equity/other investors seeking investment opportunities Recent economic downturn resulted in large deferred tax assets (DTA) DTA indicative of pre-change tax attributes  Net operating losses (NOLs), tax credit carry forwards, built-in losses (BILs)  Banks and potential investors want to preserve DTA Challenge is how to structure recapitalization to preserve DTA by avoiding Section 382 ownership change (OC)Audit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 73 The Unique Alternative to the Big Four®Recapitalizations & Section 382 – Agenda Background on Section 382  Exceptions to Segregation Rules  Aggregation into single “entity”  TARP Proposed Regulations on Segregation Rules for Small Shareholders Tax benefit preservation plans OC implications and BILsAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 74 The Unique Alternative to the Big Four®Background on Section 382 Purpose to prevent abuses  trafficking in NOLs  infusion of income-producing assets or opportunities If loss corporation has OC, Sec. 382 limits amount of pre-change losses available to offset post-change income Sec. 382 limit = FMV of loss corporation’s stock immediately before OC x applicable long term tax-exempt rate Accounting implications – may result in write off of DTA under U.S. GAAP to extent losses limited by Sec. 382 cannot be utilized Complex rules to determine if OC triggeredAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 75 25
  • 27. The Unique Alternative to the Big Four®Background on Section 382 Generally, OC occurs with respect to a loss corporation on any testing date where there is a greater than 50 percentage point increase in percentage by value of equity ownership by one or more 5-percent shareholders over each such shareholder’s lowest ownership percentage during the testing period Sub-elements:  Loss corporation  Testing date  Transaction  Testing period  5-percent shareholderAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 76 The Unique Alternative to the Big Four®Sub-elements Defined, Generally Loss corporation – corporation with tax loss, credit carry-forwards, or BILs Testing date – any date on which the loss corporation must determine whether an OC has occurred due to a transaction Transaction – an owner shift (e.g., percentage ownership of a 5-percent shareholder changes) or equity structure shift (e.g., merger) Testing period – generally, the 3-year rolling period looking backwards from a testing date 5-percent shareholder – person holding 5 percent or more of the loss corporation’s stock at any time during the testing period (directly, indirectly or constructively), or a group of less than 5-percent shareholders treated as a public group by virtue of the aggregation or segregation rulesAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 77 The Unique Alternative to the Big Four®Transactions Causing Testing Dates Owner shift  Stock issuance (to new or existing shareholder, public offering, private placement)  Stock redemptions  Exercise of stock options or lapse of restrictions on stock awards  5-percent shareholder/higher-tier entity buys or sells stock from/to other shareholders Equity structure shift  Most reorganizations under Code Section 368(a)(1)  A “failed” reorganization may also qualify  An equity structure shift cannot occur unless the former shareholders of the loss corporation receive or retain less than 50 percentage points in the reorganization survivorAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 78 26
  • 28. The Unique Alternative to the Big Four®Public Group Public Group – group of individuals, entities or other persons each of whom owns, directly or constructively, less than five percent of the loss corporation 5-percent shareholder definition includes  Public group of first tier entity or higher tier entity under aggregation rules (§1.382-2T(j)(1)(iv)(A) or (B))  Public group of loss corp. under aggregation rules (§1.382-2T(j)(1)(iv)(C))  Public group of loss corp., first tier entity or higher tier entity under segregation rules (§1.382-2T(j)(2) or (3))Audit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 79 The Unique Alternative to the Big Four®Tiered Entities First Tier Entity – owns 5% or more direct ownership interest in the loss corp. during the testing period Higher Tier Entity – owns 5% or more direct ownership interest in a first tier entity or higher tier entity during the testing period Highest Tier Entity – a first or higher tier entity NOT owned by a higher tier entity during the testing period Next Lower Tier Entity – with respect to a first tier entity = Loss corp.Audit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 80 The Unique Alternative to the Big Four®Example of Aggregation Rule Analysis of Tiered Entities F G 5% 95% E 4 B C D E 90% 10% 90% 5% 5% E E A E1 2 3 4% 36% 56% 4% LCAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 81 27
  • 29. The Unique Alternative to the Big Four® 2.52% 47.88% F G 5% 95% E 4 3.6% 32.4% 2.8% 2.8% B C D E 10% 90% 5% 5% 90% E E A E1 2 3 4% 36% 56% 4% LCAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 82 The Unique Alternative to the Big Four® 5% S/H PUBLIC GROUP OF FIRST TIER ENTITY 5% S/H 2.52% 47.88% F G 5% 95% 5% S/H DIRECT PUBLIC E GROUP OF LOSS CO 5% S/H 4 3.6% 32.4% 2.8% 2.8% B C D E 10% 90% 5% 5% 90% E E A E1 2 3 5% S/H 4% 36% 56% 4% LCAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 83 The Unique Alternative to the Big Four®Direct Public Group Defined in §1.382-2T(j)(2)(ii) Any Public Group of the loss corp.  under aggregation rule §1.382-2T(j)(1)(iv)(C)  under segregation rule §1.382-2T(j)(2)(iii), including  Certain equity structure shifts  Redemption-type transactions  under segregation rule §1.382-2T(j)(3)(i) on dispositions Significance of direct public group vs. public groupAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 84 28
  • 30. The Unique Alternative to the Big Four®Aggregation/Segregation Rules Result in Distinct Public Groups Equity structure shifts – new less-than-5-percent shareholders segregated as a result of the reorganization Stock issuances (e.g., public offering) – segregate new less-than-5-percent shareholders Redemption of shares from public – redeemed shares treated as owned by a different public group Sale to public by 5-percent shareholder or tiered entity – Segregate purchasing public group Stock option exercises by public – Segregate exercising into new public groupAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 85 The Unique Alternative to the Big Four®Exceptions to Segregation Rules Small issuance exception – issuance itself does not exceed small issue limitation as of the beginning of the year of either 1. 10% of the value of the stock outstanding on a corporation-wide basis, OR 2. 10% of the number of shares on class-by-class basis… …Up to the small issue limitation when the shares issues are considered with all other small issuances previously made in the same taxable year Cash issuance exception – stock issued solely for cash up to an amount equal to one-half of the stock held (before the issuance) by the small shareholders  Limit: amount of stock excepted cannot exceed the total amount of stock issued in the issuance less the amount of that stock owned by a 5-percent shareholder (other than a direct public group) immediately after the issuance  Treated as issued on a pro-rata basis to the aggregated public groups existing immediately prior to the issuanceAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 86 The Unique Alternative to the Big Four®Maximize Recapitalization Cash Issuance Exception Absent exceptions, new investors may only own up to 50% of total post-issuance shares If less than 5-percent shareholders comprise a majority of the new investors, the cash issuance exception would generally allow for a larger capital raise Beware of the coordinated acquisition rule under §1.382-3(a) that can treat a coordinated effort to acquire stock as a deemed entity to which the cash issuance exception does not apply  Entity defined  Corporation, estate, trust, association, company, partnership or similar organization  Includes group of persons who have formal understanding among themselves to make a coordinated acquisition of stock  Is investment decision of each member of group based on the investment decision of one or more members?Audit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 87 29
  • 31. The Unique Alternative to the Big Four®2010 Notices Notice 2010-2 provides for a favorable exception for certain sales by the U.S. government to the public (less than 5-percent shareholders) Notice 2010-49 explores the purposive approach vs. the ownership approach; contemplated some taxpayer favorable exceptions for small shareholders that are not currently in effect; sought comments; and was the precursor to Prop. Regs. §1.382-3Audit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 88 The Unique Alternative to the Big Four®Proposed Regulations §1.382-3 “Taxpayer-friendly” exceptions to segregation rules for Small Shareholders Reduces percentage owner shift in measuring an OC Reduces administrative burden Builds on purposive approach in Notice 2010-49, utilizing objective criteria Purposive approach – identify circumstances where abuse would likely occur; acquisitions by Small Shareholders generally not determined to be abusive Small Shareholders – shareholders who are not 5-percent shareholdersAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 89 The Unique Alternative to the Big Four®Exceptions under the Proposed Regulations Secondary transfer exception Small redemption exception Exception for first tier and higher tier entitiesAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 90 30
  • 32. The Unique Alternative to the Big Four®Secondary Transfer Exception – Prop. Reg. §1.382-3(j)(13) Segregation rules of §1.382-2T(j)(3)(i) would not apply to:  The transfer of a direct ownership interest in the loss corporation to public shareholders by  A first tier entity or  An individual that owns 5 percent or more of the loss corporation  The transfer of an interest in a tiered entity that owns 5% or more in the loss corporation to either:  a public owner, or  a 5-percent owner who is not a 5-percent shareholder BY:  A 5-percent owner that is a 5-percent shareholder, or  A higher tier entity owning 5 percent or more of the loss corporation Exempted stock will be treated as acquired proportionately by each public group existing at the time of the transferAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 91 The Unique Alternative to the Big Four®Small Redemption Exception – Prop. Reg. §1.382-3(j)(14) Segregation rules do not apply to “small redemptions” Rule applies similar to the small issuance exception Small redemption – redemption of public shareholders by the loss corporation up to the small redemption limitation (each redemption and on an aggregate year- to-date basis) Small redemption limitation for each taxable year of either: 1. 10% of the value of the stock outstanding as of the beginning of the year on a corporation-wide basis, OR 2. 10% of the number of shares of the class redeemed that were outstanding at the beginning of the taxable year Exempted stock will be treated as being redeemed proportionately by each public group existing at the time of the redemptionAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 92 The Unique Alternative to the Big Four®Exception for Tiered Entities – Prop. Reg. §1.382-3(j)(15) Segregation rules do not apply if: 1. First tier or higher tier entity owns 10% or less (by value) of all the outstanding stock of the loss corporation, AND 2. Entity’s direct or indirect investment in the loss corporation does not exceed 25% of the entity’s gross assets (excluding cash or cash items) Entity’s ownership in the loss corporation will be determined without regard to §1.382-2T(h)(2), but considers attribution under Code Sec. 318(a) with an exception for options not treated as exercised If the exception applies to combine one or more public groups, the continuing public group must combine its increase in the percentage of stock ownership, as well as its lowest percentage ownership, with the respective proportionate share of each of the former public groupsAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 93 31
  • 33. The Unique Alternative to the Big Four®Proposed Regulations Seeking Comments Small issuance and cash issuance exception Coordinated acquisitionAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 94 The Unique Alternative to the Big Four®Tax Attribute Preservation Plans Tax preservation plans seek to protect taxpayers from an inadvertent ownership change by letting existing shareholders purchase at highly discounted rates May discourage, but do not actually prevent, an OC  Discourage from becoming 5-percent shareholder  Discourage existing 5-percent shareholder from acquiring more shares Mechanisms used may include:  Rights to existing shareholders that may be exercised at a below-market price  Voiding shares that would have otherwise contributed to an OCAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 95 The Unique Alternative to the Big Four®Built-in Losses BILs recognized within five years of OC subject to 382 limitation up to NUBIL Notice 2003-65 provides 2 safe harbor approaches: 1. The 1374 approach  Depreciation/amortization is not RBIL up to the amount of such deduction that would have been allowed had the loss corporation purchased the asset for its FMV on the change date  Bad debt deductions taken during the first 12 months of the recognition period for debts owed at the beginning of that recognition period are RBILs 2. The 338 approach  Under the 338 approach, built-in gain assets may be treated as generating RBIG even if they are not disposed of at a gain during the recognition period, and deductions for liabilities, particularly contingent liabilities, that exist on the change date may be treated as RBILs  Hypothetical depreciation/amortization of an asset with change-date built-in gain over the actual depreciation/amortization deduction claimed during the recognition period is treated as RBIG – the so-called “wasting asset”  May use either approach, but may not mixAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 96 32
  • 34. The Unique Alternative to the Big Four®ACE Basis See Code Sec. 56(g)(4)(G) Adjusted asset basis deemed equal to proportionate share of the FMV of the assets of the corporation immediately before OC Permanent reduction in bases of assets for ACE, including depreciation and any gain or loss on disposition For the life of the asset, not just the 5-year BIL recognition period, and will require separate record keeping Result – no deduction for losses that occurred pre-change in computing ACE adjustments; could result in unexpected AMT liabilityAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 97 The Unique Alternative to the Big Four® Other Current IssuesAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 98 The Unique Alternative to the Big Four®Other Current Issues Agenda Reporting of organizational actions Revenue Procedure 2012-39 Deductibility of success-based fee – Background and recent CCAs Section 597 observationsAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 99 33
  • 35. The Unique Alternative to the Big Four®Section 6045 Reporting Requirements Form 1099-B has historically required those acting in the capacity of a broker to report the gross proceeds from sales of stock or securities to the seller New laws now require the broker to report the tax basis of certain covered securities and indicate whether the resulting gain/loss is short-term or long-term Covered securities  Shares of stock (other than mutual fund and dividend reinvestment plan shares) acquired for cash on or after 1/1/2011  Mutual fund and dividend reinvestment plan shares acquired for cash on or after 1/1/2012  Debt securities acquired for cash on or after 1/1/2013, or such later date determined by the Treasury  Other securities as the Treasury may designate in future years Unless the bank acts as a broker/custodian of its own stock, it is not likely required to file Form 1099-BAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 100 The Unique Alternative to the Big Four®Transfer Statement Requirements Generally requires that brokers and professional custodians who effect transfers of stock to other brokers/custodians issue a “transfer statement” to the receiving broker/custodian within 15 days of the transfer Contains various identification and other information about the transferred securities, including a designation regarding whether the transferred securities are covered securities If the transferred securities are covered securities, the transfer statement must contain the original acquisition date and tax basis of those securities If the bank acts as its own transfer agent, it will likely be required to comply with the transfer statement provisions of §6045A Those banks who employ professional transfer agents to handle transfers of their stock will not likely be impacted by the transfer statement or basis reporting requirementsAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 101 The Unique Alternative to the Big Four®Organizational Actions Enacted in tandem with the new Form 1099-B basis reporting and transfer statement requirements All banks are potentially subject to the organizational action reporting requirements of §6045B if they undertake an action that affects their shareholders’ stock basis Requires issuers of stock and securities to report actions undertaken by the issuer that affect a holder’s per-share basis in such securities Reporting is made to the owners of the applicable securities and to the IRS The ultimate goal is to provide owners of such securities with information needed to calculate the impact of the action on the basis of their securities Any organizational action that impacts the basis of the securities must be reported, including (but not necessarily limited to):  Mergers and tax-free reorganizations  Stock dividends  Stock splits  Non-dividend distributionsAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 102 34
  • 36. The Unique Alternative to the Big Four®Organizational Actions Reporting required on two fronts:  1) Reporting to each holder of record by January 15th of the year following the calendar year in which the organizational action was executed; and  2) Reporting to the IRS within 45 days following the organizational action or, if earlier, January 15th of the year following the calendar year in which the organizational action was executed Both reporting requirements can be satisfied by timely posting the required information on the taxpayer’s public website within 45 days of the organizational action and keeping it available there for 10 years Reporting must include identification of the affected securities and a detailed description of the impact the organizational action has on the basis of the securities Reporting requirement first applicable to organizational actions on or after 1/1/2011 See Notice 2012-11 for transitional relief for 2011 actionsAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 103 The Unique Alternative to the Big Four®Form 8937, Report of Organizational Actions Affecting Basis of Securities Describe the OA and the date of the action, or the date against which shareholders’ ownership is measured for the action Describe the quantitative effect of the OA on the basis of the security in the hands of a U.S. taxpayer as an adjustment per share, or as a percentage of old basis Describe the calculation of the change in basis and the data that supports the calculation, such as the market values of securities and the valuation dates List the applicable IRC section(s) and subsection(s) upon which the tax treatment is based Discuss if any resulting loss be recognized Provide any other information necessary to implement the adjustment, such as the reportable tax year See separate hand-outs for sampling of completed formsAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 104 The Unique Alternative to the Big Four®Revenue Procedure 2012-39 Change in Method of Accounting Provides for automatic accounting method change for taxpayers engaging in corporate reorganizations or tax-free liquidations under Section 381(a) for the taxable year of transaction Previously, automatic consent procedures were not available Policy changes related to August 2011 final rules (T.D. 9534) on accounting method changes in corporate acquisitions – See §§1.381(c)(4)-1 and 1.381(c)(5)-1Audit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 105 35
  • 37. The Unique Alternative to the Big Four®Deducting Success-Based Fees in M&A Transactions Deductions for success-based investment banking and other fees have been the source of significant disagreement between taxpayers and the IRS The issue centers largely on the documentation requirements required by regulation and the fact that conforming documentation is often not available  The IRS wants timesheet documentation (or something similar) and many investment bankers do not keep or provide  Documentation is often subjective and relies on service provider To eliminate much of the disagreement in this area going forward, the IRS issued Revenue Procedure 2011-29 in April 2011 Applies to transactions described in §1.263(a)-5(e)(3) – most merger and acquisition transactions Provides an elective safe harbor to treat 70% of the success-based fee as non- facilitative (deductible) and 30% as facilitative (capitalized) without the need to gather any supporting documentation Available (separately) to both the buyer and the sellerAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 106 The Unique Alternative to the Big Four®2012 Chief Counsel Advice on Success-Based Fees CCA 201234027 provides that non-refundable amounts paid to an investment banker upon reaching specified deal milestones, even when those payments are credited toward the success-based fees, are not eligible for the 70/30 safe harbor split CCA 201234026 provides that the “bright-line” date is not impacted or extended by the time period allowed in the deal for the target to shop itself to other buyersAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 107 The Unique Alternative to the Big Four®Section 597 Observations Typical acquisition of a failed bank from the FDIC Structured as a direct purchase and assumption of failed bank’s assets and liabilities (including deposit liabilities) Failed bank charter not acquired Subsidiaries of failed bank often acquired in the transaction Transaction may or may not contain loss share coverage (i.e., negotiated amount of guarantees) on acquired loans and OREO to be provided by FDIC for a set period of timeAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 108 36
  • 38. The Unique Alternative to the Big Four®Tax Treatment of the Transaction Considered to be a taxable asset purchase Purchase price paid (failed bank liabilities assumed plus any cash paid by the purchaser) is allocated to classes of assets acquired under general rules of §338 / §1060, with some modification  Covered assets are Class II Any resulting allocation of purchase price to intangible assets (Classes VI and VII) constitutes a §197 intangible to be amortized over 15 years No carry-forward tax attributes (e.g., NOLs, tax credits) of failed bank are available to purchaser If the purchaser receives financial assistance from the FDIC in the form of a cash payment or loss share coverage, then the transaction is governed by §597Audit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 109 The Unique Alternative to the Big Four®Application of §597 §597 contains special rules:  Forces particular approach to determining purchaser’s basis in certain categories of acquired assets  May result in a bargain purchase gain for tax purposes (excess of assigned tax basis over the actual purchase price paid) required to be recognized evenly over 6 tax years, beginning with year of acquisition  Requires taxable asset purchase treatment within acquired subsidiaries, similar to a §338(h)(10) election If §597 applies to transaction due to presence of a loss sharing agreement, may be significant differences between purchase price assigned to loans and OREO for book and tax purposesAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 110 The Unique Alternative to the Big Four®Discrepancies in Book vs. Tax Purchase Price Allocations Under §597, tax basis of loans and OREO covered by loss share agreement are recorded at FMV, but not in an amount less than the guaranteed balance For book purposes, loans are recorded at GAAP FMV, which is generally the discounted amount of the anticipated cash flows from the loans May result in a significant difference between recorded book value of acquired loans and OREO and tax basis of these assets (i.e., tax basis is likely to be much greater than book basis) GAAP requires recording of a “FDIC indemnification asset” which represents the value of anticipated indemnification payments to be received from FDIC under loss sharing agreement No tax basis assigned to FDIC indemnification asset, resulting in a potentially significant book vs. tax differenceAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 111 37
  • 39. The Unique Alternative to the Big Four®Discrepancies in Book vs. Tax Purchase Price Allocations Forced allocation of purchase price to loans and OREO under §597 can lead to little or no tax basis assigned to other types of miscellaneous assets (e.g., fixed assets, certain securities, prepaid expenses, loans and accounts receivable not covered under the loss sharing agreement) Can cause significant book v. tax differences in the allocation of purchase price All of these differences require recording and tracking of deferred tax assets and liabilities for GAAP purposesAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 112 The Unique Alternative to the Big Four®Tracking Issues Going Forward – the “Day-2 Dilemma” Once significant book-tax basis differences in loans are established at acquisition, proper tracking of correct taxable income from these loans going forward becomes challenging Book accounting systems and reports used for financial reporting purposes will no longer provide correct taxable income for loans For book, interest accrued is likely being calculated on loan’s recorded balance, not on contractual loan terms as required for tax purposes Rate used to accrue interest on the discounted loan for GAAP purposes may not comport with loan’s stated interest rate Differences in the amount and methodology employed to calculate the accretion of the loan purchase discount may exist as this amount is calculated on a different loan basis for book and tax purposes and may not be accreted on some loans for book purposesAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 113 The Unique Alternative to the Big Four®How Are the Tracking Issues Being Addressed? A variety of approaches are being used in the marketplace Specialized software  Benefits:  Precision  Automatic calculations  Detailed support for the “M” adjustments  Drawbacks:  Price  Output is only as good / reliable as data input Manual calculations (i.e., spreadsheets)  Benefits:  No additional software to purchase  Complete control over the calculations / assumptions  Drawbacks:  Time consuming  Calculations are complex  May not be possible if there are too many loans to trackAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 114 38
  • 40. The Unique Alternative to the Big Four®How Are the Tracking Issues Being Addressed? Deferred Tax Asset / Liability Approach  Benefits:  No additional software to purchase  Often tied to movements in the associated GAAP purchase accounting adjustments or MTM calculations of loans remaining at year end, so calculations are simpler (macro)  Drawbacks:  Precision is lower than with other methods  Often lacks detailed support for “M” calculations (i.e., relies more on a conceptual process than upon raw data)Audit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 115 The Unique Alternative to the Big Four® Questions??Audit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 116 The Unique Alternative to the Big Four®For more information, contact:Kevin Powers, Partner – Crowe Horwath LLPDirect 630.586.5140kevin.powers@crowehorwath.comMelissa Reinbold, Senior Manager – Crowe Horwath LLPDirect 630.586.5244melissa.reinbold@crowehorwath.comJohn Kinsella, Director of Tax – U.S. BancorpDirect 612.303.0990john.kinsella@usbank.comCrowe Horwath LLP is an independent member of Crowe Horwath International, a Swiss verein. Each member firm of Crowe Horwath International is a separateand independent legal entity. Crowe Horwath LLP and its affiliates are not responsible or liable for any acts or omissions of Crowe Horwath International or anyother member of Crowe Horwath International and specifically disclaim any and all responsibility or liability for acts or omissions of Crowe Horwath International orany other Crowe Horwath International member. Accountancy services in Kansas and North Carolina are rendered by Crowe Chizek LLP, which is not a memberof Crowe Horwath International. © 2012 Crowe Horwath LLPAudit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 117 39

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