The Internal Revenue Service (the “IRS”) on October 14, 2008 issued Notices 2008-100 and 2008-101 (the “Notices”) to provide guidance to banks participating in the Federal government’s Capital Purchase Program (the “CPP”), included as part of the Emergency Economic Stabilization Act of 2008’s Troubled Asset Relief Program (the “TARP”). The Notices provide for exceptions to the application of certain provisions of Sections 382 and 597 of the Internal Revenue Code of 1986 (the “Code”) in the case of capital infusions from the Treasury Department pursuant to the CCP. Notice 2008-100 provides guidance to corporations regarding the application of Section 382 of the Code. Notice 2008-101 provides guidance regarding the application of the “Federal financial assistance” provision contained in Section 597 of the Code.
Notice 2008-100 provides that any shares of stock of a bank acquired by the Treasury Department pursuant to the CPP shall not be considered to have caused an ownership change with respect to the Treasury Department’s ownership of the stock of such bank. 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 2008-100, the Treasury Department’s acquisition of certain stock of a bank under the CPP could have resulted in an ownership change, thereby limiting the bank’s ability to utilize prior losses to reduce its taxable income.
Additionally, Notice 2008-100 provides that shares of stock of a bank redeemed from the Treasury Department shall be treated as if they had never been outstanding for purposes of determining if such redemption has effected an ownership change with respect to other shareholders. Furthermore, Notice 2008-100 provides guidance concerning (i) the effect of the CPP on a bank’s status as a member or parent of an affiliated group, (ii) the Treasury Department’s acquisition of warrants to purchase bank stock, and (iii) the treatment of options acquired by the Treasury Department. Notice 2008-100 further provides that, for purposes of Section 382(l)(1) of the Code, any capital infusion made by the Treasury Department in a bank pursuant to the CPP shall not be considered to have been made as part of a plan a principal purpose of which was to avoid or increase any limitation imposed by Section 382 of the Code.
Notice 2008-101 provides that no amount furnished by the Treasury Department to a bank pursuant to the TARP shall be treated as “financial assistance” within the meaning of Section 597 of the Code. Section 597 of the Code generally treats money and other property received by a bank from the Federal Deposit Insurance Corporation as “Federal financial assistance.” Such assistance is generally treated as taxable income to the recipient bank and, prior to Notice 2008-101, could have included the Treasury Department’s acquisition of certain stock of the bank under the TARP.Banks may rely on the guidance contained in the Notices unless and until the IRS issues further guidance. While the IRS intends to issue regulations that set forth the rules described in Notice 2008‑100, such regulations will not apply, however, to acquisitions by the Treasury Department prior to the publication of such regulations or pursuant to written binding contracts entered into prior to the publication of such regulations.