Bti east-11-5-morning-keynote-the-great-recession

Presented by:

THE GREAT RECESSION: LESSONS LEARNED DURING THE CRISIS

Rick CywinskiNational Coordinator of Receivership [email protected]

David JonesTax Audit [email protected]

Disclaimer: This presentation has been prepared by the FDIC tax department. The FDICdoes not provide legal or tax advice. Any tax-related discussion contained in thispresentation, including any attachments, is the opinion of the presenters and not theofficial position of the FDIC.

Presented by:

Bank Closing Crisis – Affect on FDIC Tax DepartmentWhat Happens When a Bank Fails (from a tax perspective)Disaffiliations of Consolidated Groups under Reg. 1.597-4(g)

Tax Audits

Why does the FDIC engage the IRS

What gives the FDIC the authority to act as the taxpayer

Audit issues

Tax Refunds – The Battle for Ownership

Solutions for the Next Crisis

Discussion Topics

Bank Profitability 2004-2008

20

0

20

30

10

10

40

30

315 317.5 336 336.5 374.5 367 362 146.5 120.5

-155

7/04 12/04 7/05 12/05 7/06 12/06 7/07 12/07 7/08 12/08

Net Income $ Billions

3

Run on a Bank - Circa 1933

4

IndyMac – July 2008

5

Run on a Bank - Circa 2008

6

Annual Number of Failed Institutions1985 – 2015*

531

157

1985 2000 2005 2010 2015

100

300

500

0

200

400

600

1990 1995

6

*Through August 20157

Bank Failures by FDIC Region(2008)

AL GA

5

FL

2Regions (25 Failures)

Atlanta –8

Chicago –2

Dallas –3

Kansas City –4

New York –0

San Francisco –8

MS

AR

1

TX 2

MO 2

SC

NC

VA WV 1

KY

OHINIL

1

KS 1

NE

SD

MN

1

IA

WIMI

1

OK

NY MA

NJ PA

MD

WY

CO

NM

ID

UT

AZ

WA

OR

NV 3CA 5

LA

PR

MT ND

ME

NHVT

CT RI

DE

TN

HI

AK

8


AL 3

GA

25

FL 14Regions (140 Failures)

Atlanta –44

Chicago –38

Dallas –5

Kansas City –17

New York –6

San Francisco –30

* States where Failures were supervised by another regionAZ – 2 CHICA – 3 CHICO – 1 KCFL – 1 CHI, 1 KCIL – 1 ATLTX – 3 CHI

MS

AR

TX 5*

MO 3

SC

NC 2

VA 1 WV

KY 1

OH 2IN 1IL

21 *

KS 3

NE 1

SD 1

MN 6

IA 1

WI 1MI 4

OK 1

NY 1 MA

NJ

2 PA 1

MD 2

WY 1

CO 3*

NM

ID 1

UT 2

AZ 5*

WA 3

OR 3

NV 3CA 17*

LA

PR

MT ND

ME

NHVT

CT RI

DE

TN

HI

AK

9


AL 1 GA 21

FL 29 Regions (157 Failures)

Atlanta – 56

Chicago –25

Dallas –6

Kansas City –20

New York –15

San Francisco –35

* States where Failures were supervised by another regionAZ – 1 KCOK – 1 KCUT – 1 NY

MS 1

AR 1

TX 1

MO 6

SC 4

NC

VA 1 WV

KY

OH 2 IN

IL 16

KS 3

NE 1

SD

MN 8

IA

WI 2 MI 5

OK 1 *

NY 3 MA 1

NJ 1

PA 2

MD 4

WY

CO

NM 2

ID

UT 3 *

AZ 4 *

WA 11

OR 3

NV 4

CA 12

LA 1

PR 3

MT ND

ME

NHVT

CT RI

DE

TN

HI

AK

10


AL 2 GA 23

FL 13 Regions (92 Failures)

Atlanta –45

Chicago –15

Dallas –12

Kansas City –7

New York –2

San Francisco –11

* States where Failures were supervised by another regionAZ – 1 CHIIL – 1 KC

MS 1

AR

TX 1

MO 1

SC 3

NC 2

VA 2 WV

KY

OH IN 1

IL 9 *

KS 1

NE 1

SD

MN 2

IA 1

WI 3MI 2

OK 2

NY MA

NJ 1

PA 1

MD

WY

CO 6

NM 1

ID

UT 1

AZ 4 *

WA 3

OR

NV 1

CA

LA 1

PR

MT ND

ME

NHVT

CT RI

DE

TN

HI

AK

11


AL 1 GA 10

FL 8 *

Regions ( 51 Failures)

Atlanta – 21

Chicago –12

Dallas –4

Kansas City –8

New York –5

San Francisco –1

* States where Failures were supervised by another regionFL – 1 CHIKS – 1 CHI

MS

AR

TX

MO 4

SC 2

NC 1

VA WV

KY

OH IN 1

IL 8

KS 1 *

NE

SD

MN 4

IA

WI MI 1

OK 1

NY MA

NJ 1

PA 2

MD 2

WY

CO

NM

ID

UT

AZ

WA

OR

NV

CA 1

LA

PR

MT ND

ME

NHVT

CT RI

DE

TN 3

HI

AK

12

AL GA 3 *


Atlanta – 7

Chicago – 9

Dallas – 4

Kansas City – 1

New York – 1

San Francisco – 2

MS

AR

TX 2

MO

SC

NC 2 *

VA WV

KY 1

OH IN

IL 1

KS

NE

SD

MN 1

IA

WI 2 MI

OK

NY MA

NJ PA

MD

WY

CO

NM

ID

UT

AZ 3 *

WA 1

OR

NV 1 *

CA

LA

PR

MT ND

ME

NHVT

CT 1 RI

DE

TN 2

HI

AK

* States where Failures were supervised by another regionAZ – 2 CHIGA – 1 CHINC – 1 CHINV – 1 CHI


13


AL

GA 1

FL 1Regions ( 18 Failures)

Atlanta –3

Chicago –7

Dallas –2

Kansas City –1

New York – 3

San Francisco –2

MS

AR

TX

MO

SC 1

NC

VA 1 WV

KY

OH 1 INIL 5

KS

NE

SD

MN

1

IA

WIMI

OK 2

NY MA

NJ PA 1

MD 2

WY

CO

NM

ID 1

UT

AZ

WA

OR

NV

CA - 1

LA

PR

MT ND

ME

NHVT

CT RI

DE

TN

HI

AK

14


ALGA 1


Atlanta –2

Chicago –2

Dallas –0

Kansas City –0

New York – 1

San Francisco –0

MS

AR

TX

MO

SC

NC

VA WV

KY

OH INIL 2

KS

NE

SD

MN

IA

WIMI

OK

NY MA

NJ PA

MD

WY

CO

NM

ID

UT

AZ

WA

OR

NVCA

LA

PR 1

MT ND

ME

NHVT

CT RI

DE

TN

HI

AK

15

Bank Failures by FDIC Region(2007 through May 8, 2015)

AL

7

GA

90 *

FL

72 *Regions (515 Failures)

Atlanta – 187

Chicago - 111

Dallas - 36

Kansas City - 58

New York - 34

San Francisco - 89

* States where Failures were supervised by another regionAZ – 5 CHI, 1 KCCA – 3 CHICO – 1 KCFL – 3 CHI, 1 KCGA – 1 CHIIL – 1 ATL, 1 KCKS – 1 CHINC – 1 CHI

MS

2

AR

2

TX

11 *

MO

16

SC

10

NC 7 *

VA 5WV 1

KY 2

OH 6IN

3

IL

63 *

KS

9 *

NE

3

SD

1

MN

23

IA

2

WI

8 MI

13

OK

7 *

NY 4MA 1

NJ 5PA 8

MD 10

WY

1

CO

9 *

NM

3

ID

2

UT

6 *

AZ

15 *

WA

18

OR

6

NV

12 *

CA

40 *

LA

2

PR 4

MT ND

ME

NHVT

CT 1 RI

DE

TN 5

HI

AK

* States where Failures were supervised by another regionNV – 1 CHIOK – 1 KCTX – 3 CHIUT – 1 NY 16

2007 2010 2011 2012 2013

The DIF reserve ratio went negative in mid-2009, but has steadily recovered with the decline in failures

2008 2009

0.4

0.8

1.2

0

0.6

1

1.4

-0.6

-0.4

-0.2

0.2

2014

1.22

0.76

0.22

-.039

0.12

0.80

1.01

0.35

0.68

-0.15

Deposit Insurance Fund Reserve RatioPercent of Insured Deposits (Quarter End)

17

NO. OF INSTITUTIONS ON THE FDIC’S PROBLEM LIST 1992 - 2014

0

200

400

600

800

1000

1200

1400

1600

1992 1995 1998 2001 2003 2006 2009 2012 2014

1,430 291

18

New Tax Law Overview

The Worker, Homeownership, and Business Assistance Act of 2009 (WHBAA)

2008 and 2009 NOLs eligible for 5 year carryback

19

TARP Recipients Excluded from 5 Year Carryback

20

Receivership Tax Task Force

Created to breathe life into the FDIC’s tax capabilities

21

Audits

Compliance

Refunds

IRSFDIC

Litigation

Agency Status

Approach

22

Established single points of contact and negotiated “limited scope

audits”

Meeting with the IRS

IRSFDIC

23

Agency Status

Allows FDIC to represent the

consolidated group

IRSFDIC

Agency Status

24

Agency Status - Case Study

The Holding company, some times represented by the BankruptcyTrustee, is considered the taxpayer representative. The IRS disallowed$34MM in estimated selling costs attributable to bad debts. The holdingcompany concedes the disallowance, but the FDIC Receiver wishes toappeal. Since the Trustee has full authority for tax matters, does the FDICReceivership have the right to contest the proposed adjustments?

Answer according to the IRS Technical Coordinator

Ultimately, only the Bankruptcy Trustee acting for the common parent canreach an agreed adjustment for the consolidated group, unless the FDICinvokes its right to be an agent for the consolidated group.

25

Resolving a Failing Bank

Most common type of resolution is a Purchase and

Assumption transaction

IRSFDIC

26

Resolution Types

Purchase and Assumption Transaction (P&A)

Depositor Insured National Bank (DINB)

Bridge Bank / Conservatorship

Payout

P&A with Loss Share

27

P&A with Loss ShareFDIC reaches an agreement to reimburse the Assuming Institution for a percentage of its credit losses

SINGLE FAMILY

Can extend up to 10 years

Must follow FDIC loan modification program

Credit loss coverage provided when

• Loans are charged off or modified• Short sale• Foreclosed real estate is sold• Loans are sold at end of contract • Portfolio loan sales with FDIC concurrence

Credit loss coverage is allowed for up to 3 months of accrued but unpaid interest

28

P&A with Loss Share

FDIC reaches an agreement to reimburse the Assuming Institution for a percentage of its credit losses

COMMERCIAL

Can extend up to 5 years

Credit loss coverage provided when

• Assets are written down according to examination criteria of the purchaser’s primary regulator

• Assets are sold (portfolio sales occur with FDIC concurrence)

When assets are initially written down, credit loss coverage is allowed for up to 3 months of accrued but unpaid interest

P& A WITH LOSS SHARE AGREEMENTS29

Tax Compliance

Closing is a non-event for tax purposes and the filing

process continues until the receivership terminates

Compliance

IRSFDIC

Agency Status

30

Disaffiliation

Holding company has only 120 days after the bank is closed to elect disaffiliation and a “toll charge” may be

triggered

Compliance

IRSFDIC

Agency Status

31

Disaffiliation

If a Holding Company Does Not DisaffiliateIt must continue to file consolidated returns until the receivership is terminated (usually several years) or the holding company is dissolved, possibly through bankruptcy

It could have exposure to tax liabilities generated by the failed bank receivership

• Receivership is exempt from income tax IRC 7507, 12 USC 1825(b), Reg §1.597-6

• Holding company will be liable under joint and several liability rules

32

DisaffiliationWorthless Stock Loss (WSL)STRATEGY – in tax refund disputes the HC may try to assert that HC’s WSL rather than the bank’s NOL was used to recoup the bank’s refund. But the HC cannot use the WSL, with respect to a subsidiary bank when:

1. The HC failed to elect to disaffiliate within 120 days after the bank was placed into receivership – Treas. Reg. 1.597-4(g)(5)(i)

2. There can be NO ASSETS remaining in the Receivership. Assets always remain, including the tax refund and the potential of contingent recoveries –Treas. Reg. 1.1502-19(e)

3. The HC failed to reduce the basis in their stock by the subsidiaries NOL. This is a requirement to eliminate duplication of tax benefits and virtually wipes out the parent’s stock basis – Treas. Reg. 1.1502-32

33

Receivership Claims Priority Status

1) Administrative Costs

2) Depositor Liabilities

FDIC Insured Depositors

Uninsured Depositors

3) General Creditors

4) Subordinated Creditors (IRS’ claim falls below this item)

5) Equity Shareholders34

Audit Strategy

The IRS treats the FDIC like any other taxpayer

Estimated selling costs are a key audit issue

Audits

Compliance

IRSFDIC

Agency Status

35

Audit Issues

Estimated Selling Costs (ESC)• Public Notice for ESCs (2013-35)• Bank of Kirksville• LB&I Directive 04-1014-008

36

Capitalization of OREO ExpensesAM 2013-001

Special Valuation Allowances• FAA 20123002F• Reg. Section 1.166-2(d)(4)

Regulator’s Report Of Examination (ROE)

Privacy Issues

Can the FDIC release the ROE to the IRS?

Do the disclosure restrictions as defined in Part 309 of the FDIC Rules and Regulations restrict the release of the ROE?

The ROE is needed to support bad debts with no conformity election – without the ROE how do we satisfy the IRS?

Can we release certain pages of the ROE section illustrating charge-offs?

What about OTS, OCC, and FRB Reports as well?

37

Litigation Approach

Audits

Compliance

IRSFDIC

Litigation

Agency Status

38

Opposing Viewpoints

HC / Trustee Others

Hedge Funds

FDIC-R39

Receiver

FDIC-R40

BK Trustee

HC / Trustee

FDIC-R41

Tax Sharing Agreement

Some courts have concluded:

• The TSA creates a Debtor-Creditor relationship and NOT an agency or trust relationship

• The “Interagency Policy Statement on Income Tax Allocation in a Holding Company Structure” does not constitute a rule of law or have the force of law

• The tax refund is property of the bankruptcy estate

42

Hedge Funds

FDIC-R43

Hedge Funds

Others

Others

FDIC-R44

U.S. Courts of Appeals

45

End Game

Audits

Compliance

Refunds

IRSFDIC

Litigation

Agency Status

46

Solutions for the Next Crisis

Legislative Approach, Regulatory Approach, Dodd Frank

• FDIC Legislative Affairs Division

• Addendum to the Interagency Policy Statement on Income Tax Allocation in an HC Structure

• Resolution of a Systemically Important Financial Institution (SIFI)

47

Addendum to the Interagency Policy Statement

The [holding company] is an agent for the [IDI and its subsidiaries] (the ‘‘Institution’’) with respect to all matters relatedto consolidated tax returns and refund claims, and nothing in this agreement shall be construed to alter or modify thisagency relationship. If the [holding company] receives a tax refund from a taxing authority, these funds are obtained asagent for the Institution.

The [holding company] shall forward promptly the amounts held in trust to the Institution. Nothing in this agreement isintended to be or should be construed to provide the [holding company] with an ownership interest in a tax refund that isattributable to income earned, taxes paid, and losses incurred by the Institution. The [holding company] hereby agreesthat this tax sharing agreement does not give it an ownership interest in a tax refund generated by the tax attributes ofthe Institution.

Any tax refund attributable to income earned, taxes paid, and lossesincurred by the Institution is the property of and owned by theInstitution, and shall be held in trust by the [holding company] for thebenefit of the Institution.

48

SIFI Resolutions Single Point of Entry (SPOE)

49

QUESTIONS

50

51

Rick CywinskiNational Coordinator of Receivership [email protected]

David JonesTax Audit [email protected]