• Notice 2008-83: What It Means to Banks Acquiring Other Banks
  • October 19, 2008 | Author: Annette M. Ahlers
  • Law Firm: Pepper Hamilton LLP - Washington Office
  • IRS Notice 2008-83, issued on September 30, 2008 and effective immediately, provides significant relief from the impact of corporate federal income tax rules that arise in a change in ownership of a bank. Under normal circumstances, a purchase of a bank by another bank will cause an ownership change under Section 382 of the Internal Revenue Code (Code). Once an ownership change has occurred, the acquired corporation is required to calculate the “Section 382 limitation” resulting from that ownership change. Each time a corporation undergoes an ownership change, a separate Section 382 limitation is calculated.1

    As part of the consequences of taking an ownership change into account, and determining what losses of the acquired corporation will be limited, an acquired corporation must determine whether it is in a “built in gain” or “built in loss” position at the time of the ownership change. Section 382(h) of the Code provides rules for determining whether or not a corporation undergoing an ownership change has a net unrealized built in gain or net unrealized built in loss. To make this determination, the acquired corporation generally must determine if the tax basis of its assets exceeds the value of the overall corporation. If the tax basis is higher than its overall corporate value, and certain thresholds are met, the acquired corporation is considered to be in a net unrealized built in loss position (NUBIL). The main consequence of being considered in a NUBIL position is that if some of the unrecognized built in losses are recognized by the corporation during the 5 year period after the ownership change, all or a portion of those losses may be considered “pre-change” losses and thus, will be subject to the Section 382 limitation.

    Thus, as applied to the banking industry, the normal application of the rules would limit the ability of an acquiring bank to use certain losses of an acquired bank. The case most likely contemplated by Treasury and the IRS is where Bank A (a profitable bank) acquires Bank B (a bank with significant bad loans on its books), and then shortly after the acquisition, Bank A negotiates a disposition of many of the bad loans previously held by Bank B in a transaction where the purchase price for such loans is less than the tax basis of the loans. This disposition creates a loss for federal income tax purposes. Under the normal application of Section 382(h), assuming Bank B is in a NUBIL position, some or all of that recognized loss will be limited by the Section 382 limitation that resulted from the ownership change (i.e., Bank B’s sale). Under Notice 2008-83, however, Treasury and IRS will not impose the typical rule of Section 382(h), but will instead treat the recognized loss from the disposition of the bad loans as an event that created a post-change loss that is not subject to the Section 382 limitation, thereby allowing Bank A freedom to offset its income against this loss and thereby reduce its tax obligations overall.

    While this Notice will provide significant relief from the impact of Section 382 with respect to the losses generated from the disposition of bad loans and other debts (or reserve amounts), it does not eliminate the Section 382 rules with respect to tax losses already recognized by acquired banks prior to an ownership change. Thus, the impact of Section 382 still needs to be considered in connection with being acquired or when considering an acquisition of another bank.


    1 Section 382 was originally enacted to prevent the trafficking of net operating losses by corporations. The Section 382 limitation is a formulaic calculation that is basically equal to the product of the value of the losses at the acquired corporation and the long-term tax-exempt rate. The long-term tax-exempt rate is published on a monthly basis by the Internal Revenue Service and can be found in IRS publications, including the Internal Revenue Bulletin. Taxpayers are required to use the long-term tax-exempt rate for the month in which the ownership change occurs when calculating their Section 382 limitation for any ownership change.