9 00am general banking update

44

Transcript of 9 00am general banking update

Page 1: 9 00am   general banking update
Page 2: 9 00am   general banking update

General Banking Update

Presenters:Adrian Fenton, Bank of New York Mellon, Pittsburgh, PAEmail: [email protected]

Peter DiVincenzo, Ernst & Young LLP, Boston, MAEmail: [email protected]

Steven Balzer, Ernst & Young LLP, Charlotte, NCEmail: [email protected]

Page 3: 9 00am   general banking update

• Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions

• These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice

Circular 230 disclaimer

Page 4: 9 00am   general banking update

Agenda

• Final Tangible Property Regulations

• Deferred Tax Implications of Final Basel III Rules

• Other Matters

Page 5: 9 00am   general banking update

Final Tangible Property Regulations

Page 6: 9 00am   general banking update

Final Tangible Property Regulations (TPR)► Final TPR released 9/13/13: the “repair” regulations (deduction and capitalization of expenditures)► Procedural guidance expected mid/end October or early November► Regulations affect ALL taxpayers with tangible property► Effective for tax years beginning on or after January 1, 2014 (optional early adoption for 2012 and/or 2013 

years)► Overall viewed more of a burden from compliance perspective by many clients 

► Will require changes to accounting methods, computation of section 481(a) adjustments, process changes and tax compliance efforts: clients will need to perform more assessments, calculations and complete more filings.

► Scope of regulations:

► The time to act is now► In near term, clients need to assess their policies and processes and consideration of financial statement implications so 

many may select their vendor now

General assets accounts (GAA) and disposition of tangible property: structural components, partial dispositions, qualifying dispositions

Materials and supplies Acquisition costs Improvements General Assets Accounts (GAA) and dispositions

► Definition► Types and timing► Interaction with de minimis

► De minimis rule ► Capitalized acquisition costs

► Unit of property► Repair vs. improvement► routine maintenance

► Structural components ► Partial dispositions ► Qualifying dispositions

Page 7: 9 00am   general banking update

Final and Proposed Tangible Property RegulationsMaterials and supplies (M&S) Acquisitions Improvements General Asset Accounts (GAA) and

dispositions

§ 1.162-3 (Final) §§ 1.263(a)-1 and -2 (Final) § 1.263(a)-3 (Final) §§ 1.168(i)-1, -8 (Prop.)

► Definition of M&S► A unit of property ≤ $200► Used or consumed in 12 months 

or less► Replacement parts► Fuel, lubricants, etc. or► Identified as M&S in other IRS 

guidance► M&S Types and Timing

► Incidentals (no record of consumption or physical inventory) when acquired

► Non‐incidentals (including emergency spare parts) when consumed

► Rotable and temporary spare part when disposed

► Limited annual election to capitalize M&S

► Interaction with de minimis safe harbor

► De minimis safe harbor ‐ annual election to follow book expense policy► If have applicable financial 

statement (AFS), no more than $5,000 per invoice or item 

► If no AFS, no more than $500 per invoice or item

► If written book policy in place at beginning of year

► Capitalize costs that facilitate acquisitions► 11 inherently facilitative costs

► Safe harbor annual election to expense► Employee compensation and 

overhead► Investigatory costs for real 

property

► Unit of Property (“UOP”) definition ‐functional interdependence propertyexcept for► Buildings► Plant property► Leased property

► Improvement defined► Betterment► Restoration► New or different use

► Safe harbor to expense routine maintenance► Buildings: if more than once over 

10‐year period► Non‐Buildings: if more than once 

over class life► Annual election to follow book by 

capitalizing repairs

► General Asset Accounts► Establish GAAs with assets of 

similar depreciation methods► Qualifying dispositions do not 

include partial dispositions (e.g., structural components of a building)

► Dispositions (not in GAA)► Optional annual election to 

recognize partial dispositions (e.g., building structural components)

► Reasonable valuation method to determine disposition gain or loss

► Coordination of dispositions with IRS examination of repairs

► The regulations affect all taxpayers with tangible property and require compliance via Form 3115 or annual elections► Effective for tax years beginning on or after January 1, 2014 (optional early adoption for 2012 and/or 2013 years)

Page 8: 9 00am   general banking update

Key modifications to temporary regulations

Page 9: 9 00am   general banking update

Appendix A – pull through opportunities 

Page 10: 9 00am   general banking update

Section 263A interplay ► Many costs deductible under the TPR may still be required to be capitalized to 

inventory or self‐constructed assets under Section 263A► Materials and supplies► Repairs► Costs deducted under the de minimis rule

► Significant differences in taxable income based on which Section 263A methodologies are used► Historic method not always favorable or permissible► Goal generally to increase current expense and reduce costs capitalized to ending inventory and self‐

constructed assets

► Produced assets, including many improvements and betterments capitalizable under the TPR, are self‐constructed assets to which Section 263A applies

► TPR has significantly heightened IRS focus on Section 263A► Opportunity now to change to favorable methods and obtain back year audit protection

Page 11: 9 00am   general banking update

Section 174 interplay

► Section 174 costs are excluded from the starting point in the application of: ► The de minimis rule► Materials and supplies► Improvement/betterment rules as it relates to certain R&D test equipment and 

prototypes► Thus, supplies and expenditures recorded to research designated departments and 

labs determined to meet Section 174 criteria do not have to be included in the analysis 

► This may be a significant exclusion for taxpayer’s with opportunities under the proposed Section 174 regulations (released 9/5/2013, REG‐124148‐05, Doc 2013‐21136)

Page 12: 9 00am   general banking update

Transaction costs► Which rules apply to transaction costs?  

► If acquisition is assets constituting a trade or business then Treas. Reg. 1.263(a)‐5 applies

► If assets do not constitute a trade or business, TPR  applies to the tangible property, or Treas. Reg. 1.263(a)‐4 for intangibles

► Analysis of the existence of a trade or business under factors set forth in Reg. 1.1060‐1(b) and other relevant authorities

► Potential to allocate contingent fees► Transactions could involve the application of 

both TPR and Treas. Reg. 1.263(a)‐4 

► Non‐capital transaction costs:► For real property, costs appropriately 

allocated pre‐ “whether and which” date► Determination of “whether and which” date 

under authorities existing prior to the issuance of Reg. 1.263(a)‐5 (e.g., Rev. Rul. 99‐23)

► Costs attributable to abandoned acquisitions► Ordinary and necessary expenses incidental 

to the acquisition are not required to be capitalized even if they would not have been incurred “but for” the acquisition.

Page 13: 9 00am   general banking update

Appendix B

Page 14: 9 00am   general banking update

De minimis safe harborDe minimis safe harborTreas. Reg. §1.263(a)-1(f)

► Can follow book de minimis expense policy: ► If policy is in writing at beginning of tax year and ► If amount is expensed for books pursuant to

policy and either► If have Applicable Financial Statement

(AFS), invoice or item is ≤ $5,000 or ► If don’t have AFS, invoice or item is ≤ $500

and► If file annual election statement with return

► Change in book policy is not a method change

Major changes from temporary regulations

► Deleted aggregate ceiling► Safe harbor for taxpayers with no AFS► Provides clarification on treatment of transaction

costs► No election to capitalize and depreciate► Materials and supplies that meet safe harbor must

be deducted as de minimis

Key considerations► Know at the beginning of the year whether the safe

harbor is met► Fewer book/tax differences► Safe harbor for taxpayers without AFS ► Intended that taxpayers may continue to follow

existing agreements with IRS rather than elect safe harbor

Page 15: 9 00am   general banking update

Materials and supplies definition

Materials and supplies definitionTreas. Reg. §1.162-3

Supplies are defined as tangible property that is not inventory and that is:► A component acquired to maintain, repair or

improve a unit of tangible property; or► Consists of fuel, lubricants, water and

similar items that are reasonably expected to be consumed in 12 months or less; or

► A unit of property with an economic useful life of 12 months or less; or

► A unit of property costing $200 or less; or► Identified as such in published guidance

Major changes from temporary regulations

► Increased threshold definition to include items that cost $200 or less

► Adds definition for standby emergency parts

Key considerations► Reduces issue caused by temporary

regulations in which common office supplies would not be materials and supplies because cost more than threshold

► If use de minimis rule then must utilize the de minimis rule for all materials and supplies that meet its requirements

Page 16: 9 00am   general banking update

Materials and supplies timing

Materials and supplies rulesTreas. Reg. §1.162-3

Supplies are deducted at different times depending on how the items are categorized:► Incidental

Deduct when paid► Non-incidental

Deduct when used► Rotable spare parts

Deduct when disposed or Use optional method of accounting

► Elect to capitalize and depreciateOnly for rotable, temporary, or standby emergency spare parts

Major changes from temporary regulations

► Restricted election to capitalize and depreciate to only rotable, temporary, or standby emergency spare parts

► Clarified interaction with de minimis rule► Clarified optional method for rotables

Key considerations► Election to capitalize rotable, temporary, and

emergency spares► Removes flexibility in temporary regulations to

resolve uncertainty regarding treatment of specific items by capitalizing and depreciating them

► Relative importance of materials and supplies to the business

Page 17: 9 00am   general banking update

Acquisitions

Acquisitions rulesTreas. Reg. §1.263(a)-2

► Costs that facilitate acquisition must be capitalized► 11 inherently facilitative costs

► Safe harbor to expense ► Employee compensation and overhead, ► Investigatory costs for real property

Major changes from temporary regulations

► Clarified reasonable allocation methods ► Clarified treatment of contingency fees

Key considerations► Book costs capitalized may not match the

list of inherently facilitative costs► Opportunity to expense costs such as

employee compensation that may currently be capitalized for book purposes

Page 18: 9 00am   general banking update

Unit of property rules

Unit of property rulesTreas. Reg. §1.263(a)-3

► Unit of property generally all functionally interdependent property except for:► Buildings – Building is unit of property,

but improvement rules applied separately to each building system

► Plant property – unit of property is major and discrete functions within the plant

► Leased property – leasehold interest► Network assets – facts and

circumstances or as provided in published industry guidance

Major changes from temporary regulations

► Clarified application of improvement rules to leasehold improvements

Key considerations► Book units of property may be very different

than tax► What is a major and discrete function within

plant property?► Certain building systems may be a

challenge to analyze

Page 19: 9 00am   general banking update

Repair versus improvement

Improvement rulesTreas. Reg. §1.263(a)-3

► Capitalize► Betterments► Restorations► New or different use

► Safe harbor for routine maintenance for:► Property other than buildings if taxpayer

reasonably expects to perform maintenance on the property more than once over the class life of the property

► Buildings if taxpayer reasonably expects to perform activities more than once in a 10-year period

► Election to capitalize repairs that are capitalized for book purposes

► Treatment of removal costs

Major changes from temporary regulations

► Clarified application of rules in examples► Casualty loss rule allows deduction of repair costs

above casualty loss► Election to capitalize repairs► Building maintenance safe harbor► Clarification of removal costs

Key considerations► Book analysis often different than tax► Election to capitalize repairs may prevent change in

future year with §481(a)► Are repairs written off under a de minimis

capitalization threshold for book?► Building safe harbor may include only limited

reactive maintenance

Page 20: 9 00am   general banking update

Dispositions and general asset accounts

Disposition rulesProposed Treas. Reg. §1.168(i)-1,-8Proposed rules► Optional annual election to recognize partial

dispositions (e.g., building structural components)

► Reasonable valuation method to determine disposition gain or loss

► Coordination of dispositions with IRS examination of repairs

General Asset Accounts (GAA)► Establish GAA with assets of similar depreciation

methods

► Qualifying dispositions do not include partial dispositions (e.g., structural components of a building)

Major changes from temporary regulations

► Qualifying dispositions from GAA no longer include structural components of buildings

► Dispositions (non-GAA)► Partial dispositions of buildings no longer

mandatory► Election for partial dispositions generally

available beginning 2014 (special procedures to elect as early as 2012)

► Interaction with IRS repair examination adjustments

Key considerations► No annual GAA election needed for buildings► Election to take partial dispositions ► Improvements are separate assets

Page 21: 9 00am   general banking update

Deferred Tax Implications of Final Basel III Rules

Page 22: 9 00am   general banking update

Basel III ‐ Significant Rule Updates: definition of capital and regulatory adjustments and deductions

► US Federal Reserve published a final Basel III regulatory capital rules on July 2, 2013 (subsequently approved by OCC and FDIC on July 9, 2013) ► The final rule follows a notice of proposed rulemaking (NPR) that was first released in June 

2012 and received more than 2,600 comment letters

► Advanced approaches  ‐ Applies to largest internationally active US banks greater than $250 billion in consolidated assets that are not SLHCs: Effective January 1, 2014

► Standardized approach ‐ applies to all banking organizations except small bank holding companies under $500 million in assets: Effective January 1, 2015 

Page 23: 9 00am   general banking update

Significant Rule Updates: definition of capital and regulatory adjustments and deductions

► Reg capital begins with GAAP/IFRS‐based equity► CET1 ‐ computed by subtracting preference shares and a variety of so‐called 

“regulatory adjustments”► Tier 1 capital ‐ generally CET1 plus preference shares and other types of 

instruments that meet a list of certain criteria► Tier 2 capital ‐ includes elements of ALLL and subordinated debt (with 

certain features) and is added to Tier 1 capital in order to measure Total Capital

Page 24: 9 00am   general banking update

Significant Rule Updates: definition of capital and regulatory adjustments and deductions

► Among other matters, Basel III requires banks to satisfy several “risk‐based capital ratios” and a “leverage ratio.”► Risk‐based Capital Ratio = Capital/RWA

► Numerator = ► Common Equity Tier 1 (“CET1”) capital (CET1/RWA)► Tier 1 Capital:  CET1 + Additional Tier 1 (“AT1”) capital (TT1/RWA)► Total Capital:  Tier 1 + Tier 2 capital (TCap/RWA)

► Denominator = Total Risk‐Weighted Assets► Multiply the dollar amount of every asset by the risk weight assigned to that asset.

► RWA are reduced by assets disallowed from the numerator (e.g., goodwill, intangibles, disallowed DTAs)

► RWA include off‐balance sheet items, subject to conversion to on‐balance sheet equivalent► The leverage ratio is similar but the numerator typically uses only Tier 1 capital and the denominator takes assets 

into account without risk weighting and without other credit‐related adjustments.► Consequently banks pay close attention to the composition of their assets – notably, in this context, their DTAs – and 

whether a security issued by the bank qualifies as capital, particularly whether the security qualifies as a Tier 1 instrument.

Page 25: 9 00am   general banking update

Significant Rule Updates: definition of capital and regulatory adjustments and deductions – DTAs

DTA limitations and DTA/DTL netting► In measuring CET1, DTAs are subject to three limitations:

► Attribute DTA (i.e., NOLs/credits), net of allocated DTLs, are automatically subtracted► Timing DTAs (that cannot be realized through hypothetical carryback), net of related 

Valuation Allowances and allocated DTLs, are limited to 10% of Tier 1► Timing DTAs, MSRs, and nonconsolidated investments in other financial entities are added 

together and subjected to a combined limitation equal to 15% (or 17.65%) of CET1

► DTAs are also subject to different risk weighting:► Timing DTAs offset by hypothetical carryback subject to 100% risk weighting► Remaining DTAs not eliminated are subject to 250% risk weighting – cliff phase in during 

2018

Page 26: 9 00am   general banking update

Normal balance sheet Regulatory balance sheetRisk-based capital ratio

CapitalRisk-weighted assets

--------------------------------------------

Leverage ratio

CapitalAssets (with some adjustments)

Assets 100 Liabilities 80 Risk-weighted assets 75 [or 150]

Liabilities

Equity 20 Capital 25

Significant Rule Updates: definition of capital and regulatory adjustments and deductions

Risk‐weighted assets may have a weighting that is more than 100% (bad) or less than 100% (good).

DTAs and certain other assets are subject to special rules, pursuant to which they may be subtracted from both the numerator and the denominator.  This has the effect of increasing the amount of capital required to support other assets.  

► Compare 15/100  ratio (15%)  to  same ratio less of  5 of assets:  10/95 (11% ratio).

Page 27: 9 00am   general banking update

Significant Rule Updates: definition of capital and regulatory adjustments and deductions – DTAs

DTA limitations and DTA/DTL netting► Prior to measuring these “buckets” of DTAs, DTLs may be optionally netted against 

other regulatory adjustments while in other cases netting of tax effects is mandatory► Section 22(a):  Goodwill, intangibles, overfunded pension, gain on sale are all optionally

nettable w/ related DTLs► Section 22(b):  Cash flow hedge, DVA and AOCI opt‐out items aremandatorily netted, with 

election to reduce DTAs subject to threshold limits by the netted amount of DTA► Section 22(c): Investments in financials are optionally netted► Section 22(d): Significant investments and MSRs are optionally netted

► Sections 22(d)(3) and 22(e)(2) provide rules that should prevent any netted items from being double counted

Page 28: 9 00am   general banking update

Significant Rule Updates: definition of capital and regulatory adjustments and deductions – DTAs

DTA limitations and DTA/DTL netting► Hypothetical carryback potential

► Final regulations permit banks to exempt temporary difference DTAs from subtraction to the extent supported by hypothetical carryback capacity

► Preamble suggests that the immediate reversal presumption can be applied to determine capacity (three years instead of two years)

► Not totally clear whether the hypothetical carryback is taken into account before or after apportioning DTLs

Page 29: 9 00am   general banking update

Significant Rule Updates: definition of capital and regulatory adjustments and deductions – DTAs 

DTA limitations and DTA/DTL netting► The Final Rule distinguishes between temporary difference DTAs and other 

DTAs (i.e., attributes)

► Some US DTAs do not fit neatly into either category:► Disallowed interest expense under IRC § 163(j)► Losses on straddles and wash sales► IRC § 59(e) or § 174(b) amortization► IRC § 481 adjustments► IRC § 597 gain deferral► IRC § 267 loss deferral

Page 30: 9 00am   general banking update

Significant Rule Updates: definition of capital and regulatory adjustments and deductions – DTAs 

DTA limitations and DTA/DTL netting► Netting of DTAs and DTLs within the same taxing jurisdiction

► Within a taxing jurisdiction DTAs are grouped into two categories:  (1) NOLs & Credits and (2) Timing Differences

► DTLs are allocated to each category – but only DTLs from the same jurisdiction► Under US capital adequacy rules there is some thought that DTAs and DTLs can 

be netted “across jurisdictional lines;” these rules resolve any lingering doubts

Page 31: 9 00am   general banking update

Significant Rule Updates: definition of capital and regulatory adjustments and deductions – DTAs 

DTA limitations and DTA/DTL netting► Numerous revisions clarify the limitations on how and when deferred tax assets 

(DTAs) are required to be subtracted from GAAP equity Some of the changes between the final rule and the NPR provide further clarity:► In measuring the amount of a banking organization’s tax loss carryback capacity for 

purposes of determining the amount of exempt temporary difference DTAs, the final rules explain that current practice will continue to apply (the so‐called hypothetical carryback rule).

► DTAs netted against regulatory adjustments such as cash flow hedges will be subtracted from the GAAP basis DTAs prior to imposing the threshold limitations.

► DTL netting must be evaluated state by state and not on a multistate basis.

Page 32: 9 00am   general banking update

Significant Rule Updates: definition of capital and regulatory adjustments and deductions – DTAs DTA limitations and DTA/DTL netting► Two changes that have prompted further questions are:

► An addition to section 22(d)(1) suggests DTL apportionment might occur before considering the banking organization’s tax loss carryback capacity, whereas section 22(e)(3) continues to state that DTL apportionment is made after reducing temporary difference DTAs by the banking organization’s tax loss carryback capacity

► A new rule that permits the DTLs embedded in leveraged lease accounts seems to apply only for purposes of determining the amount of net temporary difference DTAs subject to threshold limitations but does not explicitly allow leveraged lease DTLs to offset attribute DTAs

Page 33: 9 00am   general banking update

Significant Rule Updates: definition of capital and regulatory adjustments and deductions – DTAs 

DTA Profile Gross Allocation NetBook Assets 10,000$ Attribute DTAs 180$ (60)$ 120$ Book Liabilities 9,000$ Timing DTAs 120$ (40)$ 80$ Book equity 1,000$ DTLs (100)$ 100$ -$

Net DTAs per Annual Report 200$ -$ 200$

Book equity 1,000$ Timing DTAs 80$ Less: Attribute DTAs (120)$ Less: 10% * CET1 (88)$

CET1 before threshold items 880$ Threshold Limited DTAs -$ Less: Threshold Limited DTAs -$ Admitted DTAs 80$

CET1 880$

Book Assets 10,000$ Plus: DTA adjustments -$ RWA 10,000$

CET1 Ratio 8.80%G-SIB CET1 Target 8.00%

Balance Sheet

Regulatory Filing Threshold Limit on Timing DTAs

EXAMPLE 1

Results

Base Example

Page 34: 9 00am   general banking update

Significant Rule Updates: definition of capital and regulatory adjustments and deductions – DTAs 

FactsTemp DTA 800 Credit DTA 400 DTL (300) Net 900 Carryback 700

Given Amounts

Carryback Capacity Net of C/B

DTL allocated

under 22(e)

Net attribute

DTA deducted from CET1

Net temporary

DTA subject to 22(d)

TempDTA 800 (700) 100 (60) 40 CreditDTA 400 400 (240) 160 DTL (300) (300) 300 - Net Amounts 900 (700) 200 - 160 40

Alt. #2 Beginning C/B Net of C/B

DTL allocated

under 22(e)

Net attribute

DTA deducted from CET1

Net temporary

DTA subject to 22(d)

TempDTA 800 (500) 300 (129) 171 CreditDTA 400 400 (171) 229 DTL (300) (300) 300 - Net 900 (500) 400 - 229 171

Page 35: 9 00am   general banking update

Significant Rule Updates: definition of capital and regulatory adjustments and deductions – DTAs 

Alt. #3 Given

Amounts

DTL allocated

under 22(d)

Net attribute

DTA deducted from CET1

Gross temporary DTA, less

DTL

Reduce DTA by c/b

via 22(d)(1)(i)

Net temporary

DTA subject to 22(d)

TempDTA 800 (200) 600 (600) - CreditDTA 400 (100) 300 DTL (300) 300 Net Amounts 900 - 300 -

Alt. #4 Given

Amounts

DTL allocated

under 22(d)

Net attribute

DTA deducted from CET1

Gross temporary DTA, less

DTL

Reduce DTA by c/b

via 22(d)(1)(i)

Net temporary

DTA subject to 22(d)

TempDTA 800 (300) 500 (500) - CreditDTA 400 - 400 DTL (300) 300 Net Amounts 900 - 400 -

Page 36: 9 00am   general banking update

Significant Rule Updates: definition of capital and regulatory adjustments and deductions – Other Items 

Investments in unconsolidated financial institutions► The final rule provides more detailed guidance and a framework for identifying indirect 

investments, clarifying that these are limited to indirect holdings via investment funds and not through commercial or other companies. There is also clarification regarding the definition of a financial institution: the “predominantly engaged” test would now be applied only to exposures of more than $10 million or ownership of more than 10% o f common shares (or similar equity interest).

► Additionally, the revised definition excludes investment funds registered under the Investment Company Act of 1940, as well as employee benefit plans. The final rule also further clarifies the treatment for hedging long and short positions in equity investments, an important issue for firms with sizable trading books.

Page 37: 9 00am   general banking update

Significant Rule Updates: definition of capital and regulatory adjustments and deductions – Other Items 

Unrealized gains and losses in AOCI► final rule permits non‐advanced firms to make a one‐time election to retain the 

existing Basel I filter that removes the impact of unrealized gains and losses from regulatory capital. The election must be made for the initial Basel III reporting date (March 31, 2015) and cannot subsequently be changed except in “limited circumstances.”

Removal of 90% fair value limitation on MSAs ► The final rule removes the existing Basel I limitation (maintained in the NPR) that 

MSAs can be included in regulatory capital only up to 90% of fair value.

Page 38: 9 00am   general banking update

Other Matters

Page 39: 9 00am   general banking update

Wells Fargo vs. US re Tax Accrual Workpaper (TAW) Requests 

• The Court found that the IRS had a proper purpose in requesting Wells Fargo’s TAWs. 

• The Court determined that Wells Fargo’s identification of UTPs is not entitled to work product protection but that Wells Fargo’s recognition and measurement steps are protected. 

• the Court found that eight of Wells Fargo’s documents are protected by the attorney‐client privilege. 

• The Court found that the United States has not shown the potential relevance of Wells Fargo’s state and local TAWs or Wachovia’s TAWs 

Page 40: 9 00am   general banking update

Notice 2013‐35

• Requests comments on the current bank bad debt conformity regulations:

• “Directed charge‐off” rule of Reg. §1.166‐2(d)(1)• “Conformity method” of Reg. §1.166‐2(d)(3)

• Motivated possibly by substantial changes in GAAP charge‐off and valuation methodology since 1991—toward “fair value” and away from “collectability.”

• Watch this space.

Page 41: 9 00am   general banking update

New requirements for IDRs issued after June 30, 2013

• All IDRs issued after June 30, 2013 must meet the following new requirements:• Must be issue focused, i.e., must identify and state the issue that has 

led the examiner to request the information in the IDR• IRS examiner must discuss the IDR with the taxpayer prior to its 

issuance• Taxpayer and the IRS agent must discuss and determine a reasonable 

timeframe for response

Note: All existing Memoranda of Understanding (MOUs) relating to IDR management that do not comply with the principles set forth in the new Directive are deemed no longer effective

Page 42: 9 00am   general banking update

IRS Business Plan Items • Regulations regarding the scope and application of §597• Guidance under §4261(e)(3)(C) re the application of the domestic air 

transportation excise tax to the purchase of mileage awards• Guidance under §166 on the conclusive presumption of worthlessness for 

bad debts• Final regulations providing guidance under §171• Regulations under §446 on NPCs• Regulations on prepaid forward contracts• Regulations on distressed debt• Guidance under §954(c), including guidance related to transactions involving 

commodities and nonfunctional currency• Final regulations on the treatment of upfront payments on swaps under 

§956• Regulations under §871(m)

Page 43: 9 00am   general banking update

IRS Business Plan Items • Revenue Procedure under §1441 updating Revenue Procedure 89‐47 on central 

withholding agreements• Final regulations under §909 on foreign tax credit splitting events.• Regulations under §482 on global dealing operations• Final regulations under §987• Guidance on §988 transactions, including hedging transactions• Guidance under Chapter 3 (§§1441‐1446) and under Chapter 4 (§§1471‐1474)• Guidance under §6038D• Guidance under §6050H regarding information reporting of mortgage insurance 

premiums• Guidance under §6050P regarding the 36‐month rule for reporting cancellation of 

indebtedness• Guidance under §§7701(o) and 6662(b)(6) regarding codification of the economic 

substance doctrine

Page 44: 9 00am   general banking update

Tax Credit Matters• The Emerging Issues Task Force (EITF) reached a consensus‐for‐

exposure on EITF Issue 13‐B: Accounting for Investments in Affordable Housing Tax Credits.  

• The EITF concluded that the conditions required to use the effective yield method to account for investments in qualified affordable housing projects should be revised to be less restrictive.

• The Task Force recommendation is to revise the conditions in EITF 94‐1 for using the effective yield method (i.e., recognizing the entity’s portion of both the Low Income Housing Tax Credits (LIHTC) and the earnings or losses of the LIHTC investment net as a component of income taxes). 

• Considerations for the potential new standard