Your SlideShare is downloading. ×
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
554
On Slideshare
0
From Embeds
0
Number of Embeds
2
Actions
Shares
0
Downloads
22
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. 47thBANK & CAPITAL MARKETS TAX INST IT U T Eannual LOAN WORKOUTS Nutcracker Ballroom November 9th, 9:15am – 10:30am 47th ANNUAL BANK & CAPITAL MARKETS TAX INSTITUTE DISNEY CONTEMPORARY HOTEL Speakers: JOHN KINSELLA DENISE SCHWIEGER TONY WELBURN 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. 10/26/2012 Bank & Capital Markets Tax Institute Loan Workouts John Kinsella – US Bancorp Denise Schwieger – KPMG LLP Tony Welburn – KPMG LLP Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY KPMG TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING, OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. Notwithstanding anything to the contrary set forth herein, you (and your employees, representatives, or agents) may disclose to any and all persons, without limitation of any kind, the tax treatment or tax structure of any transaction, and all materials of any kind (including opinions or other tax analyses) that are provided to you by KPMG LLP related to such tax treatment and tax structure, effective immediately upon commencement of discussions with KPMG LLP. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. © 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent 1 member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.Agenda  Removing Loans from the Balance Sheet  Loan Sales  Structured Sales  Loan Modifications  Significant Modifications under Treas. Reg. Section 1.1001-3  A/B Note Structure  Foreclosures  Types of Foreclosure and Related Tax Issues  Tax Controversy Issues Surrounding Foreclosures and Foreclosure Property© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative(“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. 1
  • 3. 10/26/2012 Removing Loans From The Balance Sheet Loan SalesCharacter  Is debt instrument an ordinary or capital asset in the hands of the seller?  Section 1221(a)(1) – stock in trade/inventory  Section 1221(a)(4) – for sale of property or services rendered  Exception to capital asset treatment for debt instruments for certain types of taxpayers:  Securities dealers section 475(a)  Electing securities traders under section 475(f)  Banks and certain other financial institutions under section 582(c)© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative(“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.Character  Section 582(c) provides ordinary treatment for gains and losses on the sale or exchange of debt instruments by a bank (bank defined to include banks, foreign banks to the extent the gains and losses are ECI, thrifts, small business investment companies and business development entities (as defined in section 582(c)(2)(B)).  If the single owner of a business entity is a bank… then the special rules applicable to banks under the Internal Revenue Code will continue to apply to the single owner as if the wholly owned entity were a separate entity. Treas. Reg. § 301.7701-2(c)(2)(ii).  For non-bank affiliates (e.g., REITs, investment companies, partnerships, etc.) to whom the bank might sell or transfer loans, general tax law principles apply.© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative(“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. 2
  • 4. 10/26/2012Potential Loss Limitations (Section 382)  Sale of Existing Non-Performing Loans  Has the company had an “ownership change” within the three year testing period that could subject any losses to the section 382 limitation?  Sale of Acquired Non-Performing Loans  Were the non-performing loans previously acquired as part of a transaction subject to section 382?© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative(“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.Potential Loss Limitations (Section 382)  In the event of an “ownership change,” Section 382 generally places a limit on the amount of NOLs, certain recognized built-in losses, and other tax attributes arising before the change that may be used to offset taxable income after the ownership change. Section 382 does not restrict the recognition of NOLs or other tax attributes arising after the ownership change date.  The Section 382 annual limitation is generally computed by taking the pre-change equity value of the entity multiplied by the IRS published long term tax-exempt interest rate. That is, pre-change losses can only be used to offset post-change income to the extent of the Section 382 limitation.  An ownership change occurs when there is a more than 50% shift in the equity ownership of a loss corporation, measured through 5 percent shareholders, during any rolling three year period.  Section 382 subjects built-in losses on the date of the ownership change to limitation if they are recognized (an “RBIL”) during a five year recognition period.© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative(“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. Removing Loans From The Balance Sheet Structured Sales 3
  • 5. 10/26/2012 LLC / Partnership Structure Cash / Note Rec./LLC interest Cash Buyer Selling Bank Investor (LLC Entity) NPAs / Equity LLC Interest Loan Servicing Servicing Fees 3rd Party Servicer© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative(“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.LLC / Partnership Structure  The “Selling Bank” may enter into an LLC / partnership structure with a third party whereby the Bank transfers its non-performing asset (NPA) portfolio to a partnership in exchange for cash, a note receivable, or equity, or any combination thereof.  Depending on the form of the transaction, generally for tax purposes, the initial transaction may be treated as either:  A non-taxable capital contribution (Section 721);  A taxable sale (Section 1001); or  Partially both.  If the Selling Bank receives cash and/or a note receivable in partial or full exchange for its NPAs, the Selling Bank generally recognizes sales treatment.  If the Selling Bank receives a capital interest in the LLC/partnership, the transaction could be considered a non-taxable capital contribution.  In the event that the Selling Bank receives both cash/note receivable and a capital interest in the LLC, the Selling Bank may have a partial sale and partial capital contribution. The related adjusted tax basis of the transferred assets, partnership interest and any resulting tax gain or loss will have to be allocated.© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative(“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.LLC / Partnership Structure  The character of the non-performing loans will not automatically be afforded ordinary treatment under Section 582(c) applicable to Banks.  If the Selling Bank is related to the partnership (i.e. if the Selling Bank owns more than 50% of the capital interest, or the profits interest, in the partnership), any loss realized on the sale of the NPAs may be deferred until such time that the property is sold to an unrelated third party (Section 267, Section 707(b)).  Following the sales treatment, the partnership will need to consider the various “buyer side” issues associated with distressed debt portfolios:  Market discount  Nonaccrual interest  Charge-offs  REO expense capitalization  Loan modifications© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative(“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. 4
  • 6. 10/26/2012Loan ModificationsSection 1.1001-3Section 1.1001-3  A bank may modify the terms of a loan agreement to increase the borrowers chances of paying or for other reasons - Home Affordable Modification Program (“HAMP”)  If the modification of debt is a significant modification, it will be treated as a taxable exchange  The modified debt instrument must materially differ from the original debt instrument either in kind or extent© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative(“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.Significant Modifications  Bank debt modifications that may result in a “significant modification” include:  Change in rate  Principal forbearance  Principal reduction© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative(“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. 5
  • 7. 10/26/2012What is a “Modification?”  Any change of a legal right or obligation of the issuer or the holder  Can occur from the parties’ direct agreement or from their conduct© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative(“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.What is not a Modification?  Generally, a modification does not include a change under the terms of the instrument  Exceptions  A change in obligor (addition or deletion)  A change in recourse nature of obligation  A change that results in instrument no longer being debt (unless holder converts debt into equity)  A change as a result of an option (possessed by either party) unless it is unilateral  For holder options, it is not reasonably expected to result in delay or reduction of a scheduled payment  Failure of the issuer to perform  Holder agrees to stay collection or waive an acceleration clause if it lasts not more than two years  Period of good faith negotiations during a bankruptcy proceeding© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative(“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.When is a modification “Significant?”  General Rule – When the legal rights or obligations are altered in an economically significant manner  The regulations provide specific rules for five types of modifications that apply instead of the general rule - Change in yield - Change in timing of payments - Change in obligor or security - Change in the nature of a debt instrument - Change in accounting or financial covenants© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative(“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. 6
  • 8. 10/26/2012Cumulating Factors  Changes that occur over time may be evaluated together to see if they would be significant had they occurred at the same time  For modifications that fall outside of the 5 specific rules, modifications are considered collectively  Modifications tested under the 5 specific rules are not considered collectively, but assume all such changes have been made before testing© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative(“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.Consequences of a Debt-for-Debt Exchange Holder  Amount realized generally equals the issue price of the new debt. (section 1.1001-1(g))  Gain or loss not recognized in a recapitalization.  Holder may have OID going forward. Issuer:  Potential COD if the adjusted issue price of the old debt is greater than the issue price of the new debt. (See section108(e)(10))  Bond repurchase premium if issue price of new debt is greater than adjusted issue price of old debt. Bond repurchase premium may need to be spread over term of new debt. (See section 1.163-7(c))  Possible OID deductions going forward.  Need to retest for AHYDO and under other interest disallowance provisions© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative(“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.Consequences of a Debt-for-Debt Exchange  Section1.166-3(a)(3) provides a special “deemed charge-off” rule for significantly modified loans that have been subject to a partial charge-off prior to the modification.  The deemed charge-off is equal to the lesser of: - The gain recognized on the modification; or - The amount by which the tax basis of the modified debt exceeds the greater of: - The fair market value of the modified debt, or - The amount of the modified debt recorded on the taxpayers books and records© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative(“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. 7
  • 9. 10/26/2012Loan ModificationsA&B NotesA&B Note Structure  The lender modifies a single debt into two tiers of debt  A Note – A performing loan that has a lower principal amount than the original debt  B Note – A new loan for part or all of the principal reduction agreed to on the A note.  The B Note generally ensures that the lender can recover some of the forgiven principal in the event the property value improves over time© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative(“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.A&B Note Structure A NOTE  Lender: ABC Bank  Borrower : ORIGINAL LOAN Home LLC  Maturity Date: Performing  Lender: ABC Bank 10/1/2020  Borrower :  Principal: $8,000,000 Home LLC  Interest : 5.3%  Maturity Date: 10/1/2014  Principal: $14,000,000 B NOTE  Interest : 4%  Lender: ABC Bank  Borrower : Non-PerformingAt the time of the note Home LLCsplit the total principal  Maturity Date: 10/1/2020and accrued but unpaid  Principal: $6,550,555interest equaled$14,550,555  Interest : 1.7%© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative(“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. 8
  • 10. 10/26/2012Deterioration in Issuer’s Financial Condition Regulations under section 1.1001-3 were finalized on January 6, 2011 Clarify that any deterioration in the financial condition of the issuer is generally not taken into account to determine if the modified instrument is debt This exception does not apply to debt modifications where a new obligor has been substituted or a co-obligor has been added or deleted Taxpayers may rely on the final regulations for alterations occurring on or before January 6, 2011© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative(“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.ForeclosuresTypes of Foreclosures andRelated Tax IssuesForeclosures A holder of debt may decide to exercise its right to take control or ownership of the collateral securing the loan through foreclosure action Types of Foreclosure  Judicial Foreclosure Sale  Non-Judicial Foreclosure sale  Deed in Lieu of Foreclosure© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative(“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. 9
  • 11. 10/26/2012Foreclosures Foreclosure or Deed in Lieu of Foreclosure are the standard forms of collection on defaulted loans  Depending on state, may result in discharge of debt instrument  May still be recourse obligation against the borrower, in which case the loan is not discharged. Some states allow the use of trust deeds (or deeds of trust) instead of mortgages. In trust deeds a third party (the trustee) holds the legal title to the property securing the loan between the lender/(bank) and the borrower. Foreclosure with a deed of trust is generally non-judicial while a foreclosure with a mortgage is generally judicial (i.e., involves a court action).© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative(“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.Foreclosures Foreclosures (judicial or non-judicial) result in sale of the mortgaged property to the bank lender or to another bidder If purchased by another bidder, the bank is entitled to a bad debt deduction to the extent of the excess of the bank’s basis in the debt (including accrued but unpaid interest) over the amount for which the property is sold (assuming the remaining debt is worthless) (section1.166-6(a)) If purchased by the bank, there is a two-step calculation(section 1.166-6(b)): - Bad debt deduction (computed as the difference between the bid price and the basis in loan) - Gain or loss on acquisition of the property (computed as the difference between FMV of property and the amount of the loan applied to the bid price)© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative(“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.Deed In Lieu Of Foreclosure In the context of a deed in lieu of foreclosure, the exact form of the transaction depends on the state law treatment, but the tax consequences will generally be the same as a foreclosure sale where the lender acquires the property. A primary difference is that there will be no bid in a deed in lieu of foreclosure. Thus, the FMV of the property will have to be determined through a valuation or similar exercise.© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative(“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. 10
  • 12. 10/26/2012Section 1.166-6 versus 1271  Section 1.166-6 Sale of mortgaged or pledged property. a) Deficiency deductible as bad debt— 1) Principal amount. If mortgaged or pledged property is lawfully sold (whether to the creditor or another purchaser) for less than the amount of the debt, and the portion of the indebtedness remaining unsatisfied after the sale is wholly or partially uncollectible, the mortgagee or pledgee may deduct such amount under section 166(a)(to the extent that it constitutes capital or represents an item the income from which has been returned by him) as a bad debt for the taxable year in which it becomes wholly worthless or is charged off as partially worthless. See § 1.166–3.  Section 1271 Treatment of amounts received on retirement or sale or exchange of debt instruments a) General rule. For purposes of this title— 1) Retirement. Amounts received by the holder on retirement of any debt instrument shall be considered as amounts received in exchange therefor.© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative(“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.Sale of Foreclosure Property When property is later sold by bank, need to consider character of gain or loss Banks generally treat gain or loss as ordinary. Need to determine if: – Property is being used in a trade or business (e.g., rental property); or – The entity holding the property is in the trade or business of selling foreclosure property, or the property is held for sale to customers in the ordinary course of the holder’s trade or business. – See Revenue Ruling 74-159; Kanawha Valley Bank; Girard Trust; Corn Exchange Bank.© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative(“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.ForeclosuresTax Controversy IssuesSurrounding ForeclosureProperty 11
  • 13. 10/26/2012Expenses Related to Foreclosure Property  Whether Borrowers costs paid after the foreclosure should be added to the basis in the foreclosure property.  Treatment of expenses related to foreclosure property  Section 263A applies to real or personal property described in section 1221(a)(1) which is acquired by the taxpayer for resale.  If section 263A applies, then direct costs of such property and the property’s allocable share of indirect costs are capitalized.  Query whether property “acquired” for resale© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative(“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.Tax Controversy Issues Surrounding Foreclosure Property  Whether foreclosure costs should be added to the basis in the foreclosure property or whether they are currently deductible.  Fair market value of foreclosure property for purposes of measuring the bad debt deduction.  Costs to sell the property© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative(“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. Questions? 12

×