Alert March 12, 2013

IRS Office of Chief Counsel Makes Publicly Available Field Attorney Advice Memorandum Concerning Capitalization of Costs of Holding OREO Property

The Office of Chief Counsel of the IRS made a field attorney advice memorandum (the “Memorandum”) publicly available that discusses whether, and to what extent, a bank’s costs related to holding other real estate owned (OREO) property must be capitalized under Section 263A of the Internal Revenue Code. The Memorandum was released by the IRS on August 10, 2012 and was recently noted in an article published by the Bureau of National Affairs.

The Memorandum states that under Section 263A direct costs and an allocable share of indirect costs associated with an OREO property produced or held primarily for resale must be capitalized up to the dollar amount of the basis of such property.  To the extent, however, that the OREO property is held for the production of rental or investment income, rental operating expenses for the OREO property would not be required to be capitalized under Section 263A.

The discussion in the Memorandum does not break new legal ground, but (in the aftermath of the 2007-2010 financial crises) it is useful in that it provides confirming advice that is in accordance with existing IRS precedent and tax principles.  Although useful as general guidance, it is important for banks to be aware that a field attorney advice memorandum, such as the Memorandum, cannot be cited or relied upon as precedent.