IRS Provides New Tax Incentives for Banks in Change of Control Transactions
Expanded M&A Activity Is Expected
On October 1, 2008 the IRS issued Notice 2008-83, which changes the way banks can recognize losses on loans or bad debts in a change of control transaction.
Up until Notice 2008-83, Section 382 of the Internal Revenue Code provided limits on the utilization of net operating loss carry forwards against future taxable income of any new loss corporation following the ownership change. Section 382 provides that, after an ownership change, the amount of a loss corporation's taxable income for any post-change year available for offset by pre-change NOLs shall not exceed the Section 382 limitation for that year. The Section 382 limitation equals the fair market value of the corporation's stock as of the change date, multiplied by the long term tax exempt rate (currently about 4.65%). The section 382 limitation represents the hypothetical return on a loss corporation's value had it not undergone an ownership change. By limiting the absorption of NOLs to the hypothetical return of a loss corporation, Congress attempted to eliminate tax bias for or against the sale of loss corporations based on their NOLs.' Accordingly, the key here is relating post-change taxable income to losses that are recognized post-change, but may have been implicitly unrecognized pre-change. In other words, if the target bank has significant bad loans on its books, loans that were generated pre-change, the prior system of applying Section 382 would have limited the losses available to be recognized for deductions by the acquiring bank based on the application of the formula in Section 382.
APPLICATION OF SECTION 382(h) TO BANKS
Notice 2008-83
Section 1. Overview
The Internal Revenue Service and Treasury Department are studying the proper treatment under section 382(h) of the Internal Revenue Code (Code) of certain items of deduction or loss allowed after an ownership change to a corporation that is a bank (as defined in section 581) both immediately before and after the change date (as defined in section 382(j)). As described below under the heading Reliance on Notice, such banks may rely upon this guidance unless and until there is additional guidance.