The Internal Revenue Service (the “IRS”) on September 30, 2008 issued Notice 2008-83 to provide guidance to banks in the current volatile economic environment. Notice 2008-83 provides that properly allocable deductions by a bank of losses on loans or loan loss reserves will not be treated as attributable to periods prior to an ownership change pursuant to section 382(h) of the Internal Revenue Code (the “Code”). In general, Section 382 of the Code limits a corporation’s deduction for net operating loss carryovers and recognized built-in losses subsequent to an ownership change. An ownership change, as defined in section 382(g) of the Code, is, generally, a change of 50% or more of the ownership of a corporation within a three-year period.
Prior to Notice 2008-83, losses recognized by banks on the disposition of loans and bad debt deductions could have been treated as attributable to the period before the ownership change. Such losses and deductions would then have been subject to the limitations proscribed in Section 382. The new guidance removes a potential barrier to new equity ownership of struggling banks by assuring banks that the IRS will not challenge deductions as being attributable to periods prior to the ownership change.Banks may rely upon this notice until the IRS issues further guidance.