New Tax Treatment of Acquired NOLs
When the market gives you lemons, the IRS sometimes hands you sugar.
Bad debts and loan losses held by a bank never looked so good. The Internal Revenue Service issued Notice 2008-83, dated today, which permits an acquiring company to deduct losses on loans or bad debts when purchasing a “bank”, as defined in section 581. After an ownership change (defined in section 382(g)), a proper deduction relating to losses on loans or bad debts is not treated as a built-in loss or attributed to the period before the change. The result is a tax deduction that is not subject to the limitation rules of Section 382 when purchasing a bank.
With many banks sour with loan losses and bad debts, this Notice apparently hopes to increase the acquisitions of banks by providing tax benefits to sweeten the deal. Not knowing the future of the debts and loans, the deal keeps getting sweeter as those items become deductible losses in the future. And with limited restrictions, a potential 3 year retroactive applicability, and no end date in sight, this Notice may help stir up acquisitions.
Before you can sit on your porch and enjoy your IRS lemonade, you should know that there are serious questions being raised as to whether this change is within the authority of the Internal Revenue Service. Others are still calculating the financial impact of this change and some estimate the loss of tax revenue to be in the billions. The impact of this Notice has yet to be fully recognized, but the IRS may have found the secret ingredient to stimulate the banking acquisition market.
Contact Christine Halbrook at chalbrook@dickinsonlaw.com or at 515.246.4544 with further questions.
IRS Circular 230 Disclosure: Although this written communication may address certain tax issues, it is not intended to constitute a reliance opinion as described in IRS Circular 230 and, therefore, it cannot be relied upon by itself to avoid any tax penalties.
