The first deadline – June 30, 2013 – under Delaware’s new unclaimed property Voluntary Disclosure Agreement (VDA) program is fast approaching! This initial deadline offers the maximum program benefits to VDA participants: Prior to the new VDA program, holders were required to report and remit any past due unclaimed property starting in 1981. However, holders who enter into the new VDA program by June 30, 2013 qualify for a limited look-back period through 1996. Holders who sign up by June 30, 2014 qualify for a look-back period through 1993.
For those who may not be aware, Delaware’s new VDA program is an amnesty program primarily aimed at helping non-compliant companies become compliant under the law. The business-friendly program is run by the Department of State, and is designed so companies can “catch up” on their past due unclaimed property obligations, avoid interest and penalties, and significantly reduce their unclaimed property liability. Completion of the program also offers companies a full release of all past due unclaimed property liability in a reasonably short and efficient process.
The Office of Associate Chief Counsel (Income Tax & Accounting) recently released a memorandum (the “Chief Counsel memorandum) that holds that a bank that acquires OREO through foreclosure proceedings (either through actual proceedings or by deed-in-lieu of foreclosure) with respect to a loan originated by the bank is not considered to acquire the OREO for resale within the meaning of §263A of the Internal Revenue Code and the applicable Treasury Regulations thereunder. This Chief Counsel Memorandum contradicts, at least in part, a memorandum issued last June by Associate Area Counsel (Detroit) (Large Business & International) (the “Area Counsel Memorandum”) that concluded that certain OREO acquired through foreclosure, which was held solely for resale and not for the production of rental or investment income, was considered to be acquired by a bank for resale within the meaning of §263A and the underlying regulations. Accordingly, the previously issued Area Counsel Memorandum concluded that acquisition costs incurred in connection with the foreclosure proceedings, such as legal fees and other direct costs incurred in connection with the foreclosure, as well as certain production costs incurred while holding the property for resale, including real estate taxes, insurance, repairs, maintenance, capital improvements, and utilities, had to be capitalized in whole or in part and in effect recovered as part of the basis of the OREO when computing gain or loss on the sale of the OREO. (Print Version of this Alert Available.)
The rationale for the conclusion in the Area Counsel Memorandum is that the bank clearly acquired the foreclosed property for resale since the federal and state regulations generally restrict the period that OREO may be held by a bank (although extensions can be granted) and also require that banks make good faith efforts to dispose of the OREO. The Area Counsel Memorandum reached this conclusion even though federal and state regulations would not have allowed the bank to otherwise acquire and deal in such property as a business carried on to make a profit. The Chief Counsel Memorandum takes a different view of the activities that generally must be carried on in order for a taxpayer to fall under the capitalization provisions of §263A, which is whether the bank is acquiring property with a view to re-sell it at a profit as part of the bank’s normal business activities. The Chief Counsel Memorandum concludes that the bank is acting in its capacity as a lender and not a traditional reseller of real property. The bank is economically compelled to acquire the property as a last resort to recover funds that it originally loaned in order to minimize its losses.
In general, when an S corporation sells its assets, the gain on sale flows through to, and is reportable by, the shareholders and is not subject to a corporate level tax. In the case of an S corporation that previously was a C corporation, however, such S corporation is subject to a corporate level tax on its “built-in gain” if the asset sale occurs during the “recognition period.”
Generally, an asset’s built-in gain is the amount of gain that would be recognized if the corporation sold such asset immediately before it converted to an S corporation and the recognition period is the first ten years following the conversion to an S corporation. The recognition period was shortened to seven years for sales occurring during a taxpayer’s 2009 and 2010 tax years and to five years for sales occurring during a taxpayer’s 2011 tax year. The recently enacted American Taxpayer Relief Act of 2012 extended this shortened five-year recognition period for any built-in gains recognized during either the 2012 or 2013 tax years. For the 2014 and later tax years, the recognition period will again be ten years, unless legislation to the contrary is passed before then. Thus, an S corporation that converted from a C corporation at least five years ago should consider the tax benefits of an asset sale occurring in 2013 to avoid the corporate level tax on built-in gain.
If you would like to discuss how this matter may affect your bank, please contact a member of Bryan Cave’s Financial Institutions or Tax Advice and Controversy client service groups. We also encourage you to attend our 2013 S-Corp Conference.
A collection of new banking resources from around the internet:
- October 2012 TARP Report to Congress – “By any objective standards, the Troubled Asset Relief Program has worked: it helped stop widespread financial panic, it helped prevent what could have been a devastating collapse of our financial system, and it did so at a cost that is far less than what most people expected at the time the law was passed.” Taxpayers have realized a $22 billion positive return on their investments in banks.
- FDIC Advises Bank to Prepare for Expiration of Unlimited Deposit Insurance – Unlimited insurance for transaction accounts is scheduled to end on December 31, 2012, barring action by Congress or the FDIC. The FDIC has also provided a set of Frequently Asked Questions.
- Federal Reserve Announces 2013 Stress Tests – 19 firms will be expected to complete a Comprehensive Capital Analysis and Review (CCAR) and an additional 11 bank holding companies will complete a Capital Plan Review (CapPR), with all participants having $50 billion or more of total consolidated assets.
- Fed Governor Duke’s Speech on Community Banks – Governor Duke explains why community banks (measured as $10 billion or less in asset size) should be subject to different rules under BASEL III.
- Agencies Expect BASEL III Delay – Bryan Cave will continue to monitor BASEL III developments, particularly as they impact community banks.
- FDIC Announces New Pre-Exam Tool – New electronic tool intended to reduce the size of pre-exam document request lists.
- SEC Announces Agenda for Small Business Forum – This November 14th forum will look at the SEC’s implementation (or lack thereof) of the JOBS Act.
- FDIC Financial Institution Letter on Serving Customers Affected by Hurricane Sandy – The FDIC recognizes that efforts to work with borrowers in the affected communities can be consistent with safe-and-sound banking practices and in the public interest.
A collection of new banking resources from around the internet:
- BASEL III Regulatory Capital Calculator – The federal banking regulators released this regulatory capital estimation tool to assist community banks evaluate the proposed BASEL III capital rules.
- SEC Disclosure Guidance for Banks – The SEC used this slide presentation in a presentation to the 2012 AICPA National Conference on Banks and Savings Institutions.
- FDIC Revised Approach to Citing Violations in Examination Reports – This Financial Institution Letter (FIL-41-2012) describes how the FDIC will permit examiners to distinguish the severity of violations identified in call reports, with a goal of allowing institutions to appropriately prioritize efforts to address issues identified during the examination.
- Case-Shiller July 2012 Home Price Indices – Case-Shiller has released its July update to the Case-Shiller Home Price Indices, showing average home prices increased by 1.6% in July versus June 2012.
Chris Rylands and Corey Slagle with Bryan Cave have just posted about common misconceptions about Internal Revenue Code 409A on BenefitsBryanCave.com. Section 409A frequently impacts bank’s abilities to compensate their directors and officers in either a deferred manner or upon a change in control.
Every 409A attorney knows the look. It’s a look that is dripping with the 409A attorney’s constant companion – incredulity. “Surely,” the client says, “IRS doesn’t care about [insert one of the myriad 409A issues that the IRS actually, for some esoteric reason, cares about].” In many ways, the job of the 409A attorney is that of knowing confidant – “I know! Isn’t it crazy! I can’t fathom why the IRS cares. But they do.”
There are a lot of misconceptions out there about how this section of the tax code works and to whom it applies. While we cannot possibly address every misconception, below is a list of the more common ones we encounter.
Many bankers are spending their evenings attempting to work through the very dense and long Joint Notices of Proposed Rulemakings that together propose new capital standards for financial institutions. Even though the proposed Basel III rules would not become effective until January 1, 2013 and the proposed risk-weighting rules would not become effective until January 1, 2015, bankers need to begin to understand how these rules will affect their capital planning now. While the regulatory agencies are busily assuring bankers that the vast majority of financial institutions would have been in compliance if the proposed rules had been effective on March 31, 2012, the rules, as proposed, will certainly change how many financial institutions approach their capital planning and asset mixes.
One facet of the rule that may impact many community banks and their borrowers is the proposed risk-weighting of certain commercial real estate (CRE) loans. While acquisition, development, and construction (ADC) lending has certainly fallen out of favor with regulators and bankers in recent years, many bank boards realize that a part of their long-term success will be a re-entry into this market. Many lenders are very experienced in underwriting ADC loans and have deep relationships with successful real estate developers. While bank boards are more cautious with respect to ADC and CRE lending concentrations, continuing to engage in lending activities that have provided good returns over the long-term still makes sense.
The Notice of Proposed Rulemaking entitled “Regulatory Capital Rules—Standardized Approach for Risk-Weighted Assets; Market Discipline and Disclosure Requirements” will apply to all banking organizations other than bank holding companies with less than $500 million in total consolidated assets. As a part of the new risk-weighting rules, certain higher risk CRE loans will carry a 150% risk-weighting, as opposed to the standard 100% risk-weighting. Those higher risk loans are proposed to be defined as a credit facility that finances or has financed the acquisition, development, or construction of real property, unless the facility finances:
(1) one- to four-family residential property; or
(2) commercial real estate projects in which:
i. the LTV ratio is less than or equal to the applicable maximum LTV ratio in the agencies’ real estate lending standards (generally 65 to 80%);
ii. the borrower has contributed capital in the form of cash or unencumbered readily marketable assets (or has paid development expenses out-of-pocket) of at least 15% of the real estate’s appraised “as completed” value; and
iii. the borrower contributed the amount of capital required under 2(ii) before the bank advances funds and the capital contributed by the borrower, or internally generated by the project, is contractually required to remain in the project throughout the life of the project (i.e., when permanent financing is obtained).
The proposed rule defines those ADC loans not meeting the criteria above as High Volatility Commercial Real Estate (HVCRE) loans.
The Jumpstart Our Business Startups Act (the “JOBS Act”), which was enacted on April 5, 2012, established, among other things, new shareholder headcount thresholds relating to SEC registration. For banks and bank holding companies (“BHCs”), registration and reporting under Section 12(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is required for any class of securities held by more than 2,000 shareholders of record as of the end of a given fiscal year, and deregistration is permitted for any class of securities held by fewer than 1,200 shareholders of record under the timing rules described below. The reports in question include annual (10-K), quarterly (10-Q) and periodic (8-K) reports; proxy statements; Forms 3, 4 and 5; Schedule 13D and 13G reports; and other reports required under the Exchange Act.
The JOBS Act allows a bank or BHC to terminate its registration under Section 12(g) of the Exchange Act effective 90 days after filing a Form 15 certifying that it has fewer than 1,200 shareholders of record. For a bank/BHC that currently has fewer than 1,200 shareholders of record, termination can be effected without a stock buyback, share reclassification or other “going-private” transaction. Instead, a board resolution, Form 8-K, press release and, if desired, a letter to shareholders would be all that would be required. This is frequently referred to as “going dark” or “turning off the lights.” The new thresholds also apply to going-private transactions, however, and banks and BHCs that did not previously have the resources to cash out a significant number of shareholders or that had more shareholders of record than could be accommodated reasonably in multiple classes of stock via a share reclassification transaction may wish to revisit the idea of going private in the wake of the JOBS Act.
A bank or BHC that terminates its Section 12(g) registration and reporting obligations will remain eligible to avoid re-registration and reporting so long as it has fewer than 2,000 shareholders of record (or 1,200 if it has ever previously filed a registration statement for an offering of securities under the Securities Act of 1933, as amended (the “Securities Act”)), at the end of a given fiscal year. Examples of Securities Act registration statements include Forms S-1 (public offering), S-3 (short-form public offering), S-8 (employee benefit plans) and S-4 (business combinations). The different threshold for companies that have previously filed a registration statement arises from Section 15(d) of the Exchange Act, which requires such companies to file periodic reports under the Exchange Act for the remainder of the fiscal year in which a Securities Act registration statement was declared effective.
The decision to deregister involves balancing the advantages and disadvantages of “going dark” to the bank/BHC and its shareholders, and each bank or BHC will need consider the issues in light of its particular facts and circumstances. In general, relevant considerations include:
Many financial institutions, particularly community banks, have enhanced the experience level of their boards by adding a director who is a banker or serves on the board of another financial institution. In general, utilizing a director who has current experience with another financial institution is a great way to add valuable perspective to a variety of issues that the board may encounter. In addition, as private equity funds made substantial investments in financial institutions, they often bargained for guaranteed board seats. The individuals selected by private equity firms as board representatives often serve on a number of different bank boards. As market conditions have led to increased bank failures, however, a problem has resurfaced that may cause some financial institutions to take a closer look at nominating directors who also serve other financial institutions: cross-guarantee liability to the FDIC.
The concept of cross-guarantee liability was added to the Federal Deposit Insurance Act by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). The pertinent provision states that any insured depository institution shall be liable for any loss incurred by the FDIC in connection with:
- the default (failure) of a “commonly controlled” insured depository institution; or
- open bank assistance provided to a “commonly controlled” institution that is in danger of failure.
This means that if two banks are “commonly controlled” and one of them fails, the other bank can be held liable to the FDIC for the amount of its losses or estimated losses in connection with the failure. As many of us see each Friday, the amounts of these estimated losses are often quite high. In fact, the FDIC’s estimated losses for 2011 bank failures were approximately 20 percent of total failed bank assets for the year. Accordingly, the prospect of cross-guarantee liability can be a tremendous financial issue for the surviving bank.
On March 27, 2012, the House of Representatives approved the version of the JOBS Act, as amended by the Senate, by a vote of 380 to 41. Accordingly the legislation has been sent to President Obama for signature, who has previously indicated his support of the legislation. The White House has indicated that the President anticipates signing the JOBS Act early in the week of April 2, 2012.
The text of the final JOBS Act is available here. We have previously summarized the provisions of the JOBS Act generally applicable to the community banks, as well as the impact of the Senate amendment to the JOBS Act. In this post we focus on the timing implications for effectiveness of the amendments to Regulation D and shareholder thresholds for SEC registration and deregistration.
With regard to Regulation D, Section 201 of the JOBS Act requires the SEC to eliminate the prohibitions on general solicitation and general advertising in connection with Rule 506 and Rule 144A offerings, so long as the securities are only sold to accredited investors and qualified institutional buyers, respectively. The JOBS Act requires the SEC to implement these changes no later than 90 days after the JOBS Act is signed by the President. Until the SEC amends the existing regulations, general solicitation and general advertising will remain prohibited.
With regard to the shareholder threshold changes, Sections 501 and 601 of the JOBS Act immediately amend the statutory provisions related to the number of shareholders of record at which a company must register and when the company is permitted to register. The statutory changes are effective immediately upon enactment of the JOBS Act. However, the SEC has also adopted regulatory requirements based on the original statutory language that will likely need to be amended in order to fully take advantage of the revised thresholds.