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Bank Regulation Increases Under the HIRE Act

Posted by Wendell Brock on Thu, Aug 19, 2010

Many Bank’s don’t realize that the HIRE Act, signed into law in March, which was sold to promote jobs, also has implications for the banking industry. Namely, the offset provisions impose withholding and reporting requirements to expand offshore tax compliance by non US banks, thereby funding the cost of the act.


Tax penalty for failure to report


Under the new legislation, foreign financial institutions must enter into a reporting arrangement with the IRS to provide account information on U.S.-owned accounts. Institutions that refuse such an arrangement are subject to a 30% tax on any payment of interest, dividends, rents, salaries, gains, profits and other forms of income from U.S. sources. Excluded from this definition of “withholdable payments” are payments owned by publicly traded companies or businesses wholly owned by U.S. residents.   


An institution may obtain a waiver of withholding by certifying to the withholding agent that it has no substantial U.S. account owners. However, withholding agents are liable for the tax and are still required to collect it if they have any reason to believe such certification is false.


Terms of reporting arrangement


The accepted reporting arrangement defined in the act requires foreign financial institutions to provide the IRS with the following information for each U.S.-owned account:


  1. Name, address and TIN of each account holder
  2. If the account holder is a U.S.-owned foreign entity, the name, address and TIN of each substantial U.S. owner of that entity
  3. Account number
  4. Account balance
  5. Gross receipts and gross withdrawals from the account


With respect to Number 2 above, a substantial U.S. owner is: any U.S. individual who owns 10 percent or more of the stock of a foreign corporation; any U.S. individual who owns more than 10 percent of the profit or capital interests in a foreign partnership; or any U.S. individual who owns more than 10 percent of the beneficial interests of a foreign trust.


The institution does have the option to exclude reporting on individually owned accounts where the account holder has less than $50,000 in aggregate balances at that institution.


Individual reporting requirements


The legislation also requires individuals to comply with the new reporting regime. Individuals who own certain foreign financial assets worth more than $50,000 in aggregate must include the information listed above in their personal tax returns. Foreign financial assets are defined as financial accounts, as well as stocks or securities issued by a non-U.S. person, financial instruments or contracts issued by or counterparty to a non-U.S. person, or any interest in a foreign entity.  The IRS wants to know where US citizens are keeping their money and how much.


Basically, banks will chose to not to bear the risk being liable for the tax and withhold the 30 percent on all wire transfers/payments to offshore bank accounts and businesses that have not made the disclosure agreement with the IRS. If the bank makes the wire transfer and should have withheld the 30 percent but did not – they are liable to pay the 30 percent tax to the IRS.  If the bank makes the wire transfer, and should NOT have withheld the 30 percent, then it is the individual’s responsibility to collect the tax from the IRS, there is no liability on the bank for the mistake.


The HIRE Act’s reporting and withholding requirements apply to payments made after December 31, 2012. 

Topics: Bank, Banking, Bank Risks, regulators, tax laws, Banking industry

New Guidance Allows Greater Use of Built-In Lossesin Bank M & A Deals

Posted by Wendell Brock on Wed, Dec 17, 2008

From Hunton and Williams, LLP

The Treasury Department and the IRS have issued favorable guidance under Internal Revenue Code Section 382 for banks engaging in merger and acquisition activities, as well as certain capital raising efforts. Given the current state of the economy, banks engaging in such transactions are likely to hold financial assets that have decreased in value. Traditionally, bank investors’ and acquirers’ use of these unrealized losses after an acquisition would be significantly limited. Under the new guidance, no such limitation would be imposed. This shift is no doubt part of a larger policy initiative to encourage the capitalization and acquisition of troubled banks in the wake of the current financial crisis.

Code Section 382 generally imposes limitations on the use of existing unrealized losses and net operating loss carryforwards against income earned after a corporation has had a change in ownership of 50 percent or more. The policy behind this rule is to prevent the development of a market where taxpayers could buy and sell tax losses. This loss limitation rule effectively prevents one corporation from buying another corporation with significant losses for the primary purpose of using those losses to offset the acquiring corporation’s future taxable income.

Generally, unrealized losses and net operating loss carryforwards can be used after an ownership change only up to the amount of the “Section 382 limitation.” The Section 382 limitation is equal to the fair market value of the corporation on the date of the ownership change multiplied by the long-term tax-exempt rate, which is published each month by the IRS. (4.65 percent in October 2008.) Notice 2008-83, however, provides that for a bank, losses on loans or bad debts that are recognized after an ownership change will not be treated as built-in losses or deductions that are attributable to periods before the change date. Practically speaking, the impact of this new rule is that acquiring banks may be able to fully utilize any unrealized losses held by target banks if the acquisitions are otherwise properly structured.

In addition, the Treasury Department and the IRS have relaxed the presumption of a tax avoidance motive for contributions made within two years of an ownership change. These “anti-stuffing” provisions attempt to disallow the arbitrary inflation of a corporation’s value when capital contributions are made in anticipation of a change in ownership, as increases in value would result in a higher limitation amount under Section 382. Currently, any contribution made within two years of a change in ownership is presumed to be part of a plan for the avoidance of tax
and is subtracted from the value of the corporation for purposes of calculating the Section 382 limitation, thus reducing the amount of losses that can be utilized after the change date. Notice 2008-78 removes this presumption altogether and provides four safe harbors under which contributions will not be deemed to be part of a plan for the avoidance of tax. This notice also makes it clear that failure to fall within one of the safe harbors is not evidence of a plan for tax avoidance. This change in the antistuffing rules is not limited to banks.

© 2008

Topics: IRS, banks, mergers and Aquisistions, tax laws, bank losses, treasury department

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