Limitation on Use of Built-In Losses Following a Bank Ownership Change Suspended
10/27/2008On September 30, 2008, the Internal Revenue Service (IRS) issued Notice 2008-83 (Notice) providing that, pending further guidance, deductions for losses with respect to loans or bad debts of a bank will not be subject to certain limitations that would otherwise apply following a change in ownership.
Section 382 of the Internal Revenue Code (Code) imposes certain limitations on the use of net operating losses (NOLs) and deductions for “built-in losses” of corporations following an ownership change. NOLs represent realized losses of the corporation. Built-in losses represent potential losses, i.e., losses on assets of the corporation which have a value less than their tax basis not yet realized for tax purposes. The Notice relaxes the limits applicable to deductions of built-in losses with respect to loans and bad debts following an ownership bank change although it does not alter the current section 382 limits placed on the use of NOLs following an ownership change. Prior to the Notice, section 382 imposed significant limitations on deductions for built-in losses that were recognized in the five year period following an ownership change.
An “ownership change” for purposes of section 382 occurs when the ownership of a “loss corporation” (a corporation with NOLs or built-in losses) by 5 percent shareholders changes by more than 50 percent over a three year period or since the last ownership change.
The Notice, which only addresses limitations imposed by section 382, suspends the section 382 limitation for built-in losses for banks. A “bank” is defined in section 581 of the Code, and includes most commercial financial institutions and excludes investment banks.
The Notice only applies to deductions for losses related to “loans” and “bad debts” of a bank. The Notice does not further define assets so questions have been raised as to whether this applies to mortgage or asset backed securities.
