The current versions of the economic stimulus tax bills under consideration by the Senate Finance and the House Ways and Means Committees contain two (2) provisions that are likely to be of particular interest to and will directly impact most, if not all, of our bank and other financial institution clients. The provisions are (i) changes in the rules allowing for the carryback of a net operating loss (“NOL”) of up to five (5) years instead of the current carryback period of only two (2) years, and (ii) a repeal (with limited transitional protection) of the relief provided in Notice 2008-83 issued by the Internal Revenue Service (“IRS”) in the fall of 2008 that exempted certain losses on loans and foreclosure property incurred by banks from the NOL limitation rules applicable to built-in losses.
Increase in the Net Operating Carryback Period
The provisions of the Senate Finance and the House Ways and Means Committees’ bills increasing the NOL carryback period to two (2) to five (5) years are essentially identical. The increased carryback period only applies to NOLs arising in 2008 and 2009. In addition, the 90% limitation (or the 10% haircut required) on the use of NOL carrybacks when computing a corporation’s alternative minimum tax is suspended. For those banks or other financial institutions with NOLs in 2008 and 2009, the bill will provide three (3) additional years (i.e., 2003, 2004, and 2005) from which they can obtain a refund of federal income taxes paid.
The bills contain a number of limitations, including that the expanded carryback period does not apply (i) if the bank or other financial institution received any money under the Troubled Assets Relief Program (TARP) (ii) to Fannie Mae or Freddie Mac, or (iii) any corporation that is a member of the same affiliated group for income tax purposes as a bank or other financial institution that received TARP funds.
IRS Notice 2008-83
The tax law currently limits the use of NOL carryovers if the corporation possessing the NOLs experiences an ownership change with respect to its stock (i.e., a more than 50% shift in the ownership of its stock) measured over a three(3) year period. The limitations also can apply to built-in losses (i.e., losses that economically accrue with respect to a corporation’s assets prior to an ownership change) that exceed a threshold amount and that are recognized for tax purposes after the ownership change occurs. The IRS issued Notice 2008-83 on October 1, 2008, in which it provided that losses recognized by a bank on loans or bad debts that accrued economically prior to an ownership change with respect to a bank’s stock were excepted from the NOL limitations applicable to built-in losses. A number of questions were raised subsequent to the issuance of Notice 2008-83 as to whether (i) Treasury had the authority to issue regulations applicable to particular industries or classes of taxpayers, (ii) such notice was consistent with the provisions of the tax law, and (iii) Treasury complied with appropriate internal procedures in connection with the issuance of the notice.
The House Ways and Means Committee economic stimulus tax bill contains provisions effectively repealing Notice 2008-83 for all ownership changes occurring after January 16, 2009, but the notice will be deemed to have the force and effect of law for (1) all ownership changes occurring on or before such date, and (2) all ownership changes occurring after such date if such change occurs with respect to a transaction that (i) is pursuant to a written binding contract entered into on or before such date, or (ii) was described in a public announcement or in a filing with the Securities and Exchange Commission on or before such date. The Senate Finance Committee economic stimulus tax bill does not contain any provisions limiting the impact of IRS Notice 2008-83.
January 27, 2009 Update: On January 27, 2009, the Senate Finance Committee approved its version of the bill on January 27, 2009, which included an amendment virtually identical to the House bill that closes down the built-in loss benefit that the Treasury granted in IRS Notice 2008-83. Thus, now both versions (House and Senate) of the bill are in sync on these two issues.