Community Bank Update

Presented by:Presented by:

Presented by:

• COMMUNITY BANK UPDATE

Colleen Delger – Banner CorporationNikki Yarborough – Dixon Hughes Goodman LLPMark Reis – Moss Adams LLP

Presented by:

Disclaimer

The material appearing in this presentation is for informational purposes only and should not be construed as advice of any kind, including, without limitation, legal, accounting, or investment advice. This information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant‐client relationship. Although this information may have been prepared by professionals, it should not be used as a substitute for professional services. If legal, accounting, investment, or other professional advice is required, the services of a professional should be sought.

Presented by:

• AGENDA

– IRS Audit Update– Mergers & Acquisitions– Recent Developments

Presented by:

• IRS Audit Update

– IRS examination activity – IRS personnel status– Examinations focusing on the following:

• Bad debt deductions for loan charge‐offs• Interest on non‐performing loans• Selling costs on loans and loan foreclosures

– LB&I Directive

Presented by:

• IRS Personnel Status

Selected Personnel Type

Number of Employees at Close of 2013

Number of Employeesat Close of 2014

Revenue Agents 12,212 11,422Tax Examiners 8,894 8,496Revenue Officers 4,681 4,353Appeals Officers 800 758

Presented by:

• Loan Charge‐Offs

– §166(a)(1) Wholly worthless debts• There shall be allowed as a deduction any debt which becomes worthless within the taxable year

– §166(a)(2) Partially worthless debts• When satisfied that a debt is recoverable only in part, the Secretary may allow such debt, in an amount not in excess of the part charged off within the taxable year, as a deduction.

Presented by:

• Loan Charge‐Off Issues on Examinations

– Evidence of worthlessness– Timing of “Charge‐Off”– Inclusion of estimated selling costs

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• Interest on Non‐Performing Loans

– Application of IRC §451 and the All Events Test/Rev. Rul. 80‐361/Treas. Reg. §1.446‐2

– Rev. Rul. 2007‐32– Examinations focused on:

• Factual determination and accounting• Accrual method of accounting and income inclusion• Bad debt deductions under IRC §166

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• Selling Costs

– Regulatory and GAAP requirement to determine FMV

– Increases loss on impaired loans and upon foreclosure

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• LB&I Directive

– Provides an administrative resolution generally based upon accepting charge‐off amounts reported by Banks and Bank Subsidiaries for GAAP and regulatory purposes as sufficient evidence of worthlessness.

Presented by:

• LB&I Directive

– Examination guidance:• General facts and circumstances test under Treas. Reg. §1.166‐2(a)

• Conclusive presumption rule of Treas. Reg. §1.166‐2(d)(1)

• Bank using the conformity election under Treas. Reg. §1.166‐2(d)(3)

Presented by:

• Conformity Election

– Treasury Regulation Sec. 1.166‐2(d)(3)• Express determination letter requirement• Formally adopted filing IRS Form 3115• Is easily revoked

Presented by:

• Conformity Election Benefits

– Election, in theory, is intended to reduce some of the historic disagreements between taxpayers and the IRS over the timing of bad debt deductions and loan losses.

– The election should provide some protection for banks upon examination by the IRS.

Presented by:

• Conformity Election Drawbacks

– Requires bank to secure an express determination letter from its primary federal regulator.

– Does not apply to bank owned subsidiaries.– May limit flexibility with respect to timing of bad debt deductions under IRC §166. This may impact planning related to IRC §382 limitations.

Presented by:

• Interest on Non‐Performing Loans

– Accrual basis taxpayer must follow requirements under IRC §451.

– Timing issues focused on collectability and bad debt deductions under IRC §166.

– Rev. Rul. 2007‐32 outlines treatment of interest on non‐performing loans.

– Principal payments for GAAP vs interest payments for tax.

Presented by:

• Debt Modification

– Treas. Reg. §1.1001‐3 provides guidance on the modification of a debt instrument.

– Significant modifications result in a deemed taxable exchange.

Presented by:

• Mergers and Acquisitions

– Due Diligence Best Practices– IRC Sec 382/IRS Notice 2003‐65– IRC Sec 280G/409A– Transaction Costs– Reporting Organizational Actions– Accounting Methods

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• Due Diligence Best Practices

– Communication– Who should be on the team – internally and externally?– Don’t assume that tax issues have been considered by anyone.

– Establish expectations upfront on timing and deliverable of the results of the due diligence.

Presented by:


– Structure – How are you going to acquire target?– Stock or asset purchase from tax perspective.– Tax‐free or taxable transaction– Choosing which entity in the group will acquire the target– Tax structure can affect economics – should be considered from the outset

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– Review target corporation’s structure.– Review target corporation’s federal and state income tax returns for open years, including amended returns and carryback claims.

– Review sales tax and payroll returns.– Review target corporation’s deferred tax inventory and other information disclosed in income tax footnote included in the financial statements.

– Tax structure can affect economics – should be considered from the outset

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– Review tax memos and opinions.– Ask about current and past IRS or state exam activity.– Ask about business operations to determine if there are potential state tax nexus issues.

– Determine target corporation’s tax accounting methods. Are optimal methods being used? Are there exposures and correction alternatives.

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– Determine if the target corporation has been involved in prior acquisitions.

– Determine if the target corporation has taken any uncertain tax positions.

– Review target corporation’s employment agreements for change in control clauses.

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• IRC Section 382 Considerations

– In general, the risk to the acquirer is that the NOL carryforwards may expire or have substantial limitations. This becomes a question of value.

– The loss of value for future tax benefits may reduce the target’s DTA that are be reported in day one accounting.

Presented by:

• Notice 2003‐65

– Provides two safe harbor approaches for determining built‐in gains and losses

• Section 1374 approach treats any bad debt deduction incurred within 12 months following the ownership change as a realized built‐in loss.

• AMT exposure under Section 56(g)(4)(G) due to requirement for reduction of asset basis for ACE, which is used in determining AMTI.

Presented by:

• IRC Sec 280G

– Corporations undergoing a change in control are denied deductions

– for any and all excess parachute payments / "CIC benefits“– In addition, the recipient‐individual of these payments must pay an extra 20% excise tax in addition to regular taxes

Presented by:

• IRC Sec 280G

– The employer must withhold the excise tax if the payment constitutes “wages”

– CIC clauses can be found in any type of employment agreement or plan (Stock based, SERP, SCP, Split Dollar Life Insurance, etc.)

Presented by:

• IRC Sec 280G

– In general, a payment is a "CIC benefit“ if the payment would not have been made had no change in ownership or control occurred even if the payment is also conditioned on the occurrence of another event

– Also applies to the acceleration of payments

Presented by:

• IRC Sec. 280G

– Special considerations exist regarding:• Whether benefits are vested or not• Whether there was an acceleration of benefits requiring future performance

• Whether there was an acceleration of benefits based on contingent vesting

• Valuing such benefits• Establishing the present value of such benefits

Presented by:

• Transaction Costs

– Rev. Proc. 2011‐29– Covered Transaction (Treasury Regulation §1.263(a)(5)(e)(3)

– Treatment of Capitalized Costs (Treasury Regulation §1.263(a)(5)(g)

– Updated IRS Directives – Milestone Payments

Presented by:

• Reporting of Organization Actions

– Requires issuers of stock and securities to report actions undertaken by the issuer that affect a holder’s per share basis in such securities

– Reporting is made to the owners of the applicable securities and to the IRS

– Types of transactions covered are: mergers and tax‐free reorganizations, stock dividends, stock splits, and non‐dividend distributions

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– Reporting is required to be provided to each holder of record by January 15th of the year following the calendar year in which the organizational action occurred; and

– Reporting is required to the IRS within 45 days following the organizational action, or if earlier, by January 15th (see above)

Presented by:


– Both reporting requirements can be satisfied by timely posting the required information on the taxpayer’s public website within 45 days of the organizational action and keeping it there for 10 years.

– IRS Form 8937 – Report of Organizational Actions Affecting Basis of Securities

– Reporting for actions that occurred on or after 1/1/2011

Presented by:

• Accounting Methods

– Change Resulting From Transactions• Transactions covered by IRC §381 regulations.

– Rev. Proc. 2015‐13• Alternative adjustment periods for method changes if an eligible acquisition transaction occurs in the year of change or subsequent period.

Presented by:

• Proposed IRC Sec. 597 Regulations

– Significant Changes• Remove all references to the term “highest guaranteed value”• Provide that an institution is treated as having made a transfer to an agency that was made by another member of its affiliated group, regardless of whether a consolidated return is filed

• Clarify that the entity that holds the “covered asset” will be treated as the owner of the asset.

• Clarify that the amount paid for assets subsequently acquired under an option is integrated into the purchase price.

Presented by:

• Recent Developments

– Highway Trust Fund Legislation• Basis Reported by Estates• Mortgage Reporting• Tax Filing Deadlines• Statute of Limitations (in case of basis overstatement)• Transfer of Excess Pension Assets to Retiree Health Accounts

• TSA Fees

Presented by:

• IRS Audit Guide for LIHTC

– Nine separate documents that cover high level issues, including auditing taxpayers.

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