[House Report 104-324]
[From the U.S. Government Publishing Office]
104th Congress Report
HOUSE OF REPRESENTATIVES
1st Session 104-324
_______________________________________________________________________
THRIFT CHARTER CONVERSION TAX ACT OF 1995
November 7, 1995.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Archer, from the Committee on Ways and Means, submitted the
following
R E P O R T
[To accompany H.R. 2494]
[Including cost estimate of the Congressional Budget Office]
The Committee on Ways and Means, to whom was referred the
bill (H.R. 2494) to amend the Internal Revenue Code of 1986 to
provide for the treatment of bad debt reserves of savings
associations which are required to convert into banks, and for
other purposes, having considered the same, report favorably
thereon with an amendment and recommend that the bill as
amended do pass.
CONTENTS
Page
I. Introduction......................................................4
A. Purpose and summary................................... 4
B. Background and need for legislation................... 4
C. Legislative history................................... 5
II. Explanation of the bill...........................................5
A. Treatment of bad debt deductions and reserves for bad
debt of thrift institutions (sec. 2)................. 5
B. Tax treatment of special assessments (sec. 3)......... 14
III.Votes of the committee...........................................15
IV. Budget effects of the bill.......................................16
A. Committee estimate of budgetary effects............... 16
B. Statement regarding new budget authority and tax
expenditures......................................... 16
C. Cost estimate prepared by the Congressional Budget
Office............................................... 16
V. Other matters to be discussed under house rules..................17
A. Committee oversight findings and recommendations...... 17
B. Summary of findings and recommendations of the
Committee on Government Reform and Oversight......... 17
C. Inflationary impact statement......................... 18
VI. Changes in existing law made by the bill, as reported............18
The amendment is as follows:
Strike out all after the enacting clause and insert in lieu
thereof the following:
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Thrift Charter Conversion Tax Act of
1995''.
SEC. 2. TREATMENT OF RESERVES FOR BAD DEBTS OF SAVINGS ASSOCIATIONS
WHICH ARE REQUIRED TO CONVERT INTO BANKS.
(a) In General.--Section 593 of the Internal Revenue Code of 1986
(relating to reserves for losses on loans) is hereby repealed.
(b) Conforming Amendments.--
(1) Subsection (d) of section 50 of such Code is amended by
adding at the end the following new sentence:
``Paragraphs (1)(A), (2)(A), and (4) of the section 46(e) referred to
in paragraph (1) of this subsection shall not apply to any taxable year
beginning after December 31, 1995.''
(2) Subsection (e) of section 52 of such Code is amended by
striking paragraph (1) and by redesignating paragraphs (2) and
(3) as paragraphs (1) and (2), respectively.
(3) Subsection (a) of section 57 of such Code is amended by
striking paragraph (4).
(4) Section 246 of such Code is amended by striking
subsection (f).
(5) Clause (i) of section 291(e)(1)(B) of such Code is
amended by striking ``or to which section 593 applies''.
(6) Subparagraph (A) of section 585(a)(2) of such Code is
amended by striking ``other than an organization to which
section 593 applies''.
(7) Section 595 of such Code is hereby repealed.
(8) Section 596 of such Code is hereby repealed.
(9) Subsection (a) of section 860E of such Code is amended--
(A) by striking ``Except as provided in paragraph
(2), the'' in paragraph (1) and inserting ``The'',
(B) by striking paragraphs (2) and (4) and
redesignating paragraphs (3) and (5) as paragraphs (2)
and (3), respectively, and
(C) by striking in paragraph (2) (as so redesignated)
all that follows ``subsection'' and inserting a period.
(10) Paragraph (3) of section 992(d) of such Code is amended
by striking ``or 593''.
(11) Section 1038 of such Code is amended by striking
subsection (f).
(12) Clause (ii) of section 1042(c)(4)(B) of such Code is
amended by striking ``or 593''.
(13) Subsection (c) of section 1277 of such Code is amended
by striking ``or to which section 593 applies''.
(14) Subparagraph (B) of section 1361(b)(2) of such Code is
amended by striking ``or to which section 593 applies''.
(15) The table of sections for part II of subchapter H of
chapter 1 of such Code is amended by striking the items
relating to sections 593, 595, and 596.
(c) Effective Date.--
(1) In general.--Except as provided in paragraph (2), the
amendments made by this section shall apply to taxable years
beginning after December 31, 1995.
(2) Repeal of section 595.--The amendment made by subsection
(b)(7) shall apply to property acquired in taxable years
beginning after December 31, 1995.
(d) 6-Year Spread of Adjustments.--
(1) In general.--In the case of any taxpayer who is required
by reason of the amendments made by this section to change its
method of computing reserves for bad debts--
(A) such change shall be treated as a change in a
method of accounting,
(B) such change shall be treated as initiated by the
taxpayer and as having been made with the consent of
the Secretary, and
(C) the net amount of the adjustments required to be
taken into account by the taxpayer under section 481(a)
of the Internal Revenue Code of 1986--
(i) shall be determined by taking into
account only applicable excess reserves, and
(ii) as so determined, shall be taken into
account ratably over the 6-taxable year period
beginning with the first taxable year beginning
after December 31, 1995.
(2) Applicable excess reserves.--
(A) In general.--For purposes of paragraph (1), the
term ``applicable excess reserves'' means the excess
(if any) of--
(i) the balance of the reserves described in
section 593(c)(1) of such Code (as in effect on
the day before the date of the enactment of
this Act) as of the close of the taxpayer's
last taxable year beginning before January 1,
1996, over
(ii) the balance of such reserves as of the
close of the taxpayer's last taxable year
beginning before January 1, 1988.
(B) Special rule for thrifts which become small
banks.--In the case of a bank (as defined in section
581 of such Code) which was not a large bank (as
defined in section 585(c)(2) of such Code) for its
first taxable year beginning after December 31, 1995--
(i) the balance taken into account under
subparagraph (A)(ii) shall not be less than the
amount which would be the balance of such
reserve as of the close of its last taxable
year beginning before January 1, 1996, if the
additions to such reserve for all taxable years
had been determined under section 585(b)(2)(A)
of such Code, and
(ii) the opening balance of the reserve for
bad debts as of the beginning of such first
taxable year shall be the balance taken into
account under subparagraph (A)(ii) (determined
after the application of clause (i) of this
subparagraph).
The preceding sentence shall not apply for purposes of
paragraphs (4), (5), and (6).
(3) Suspension of recapture if residential loan requirement
met.--
(A) In general.--In the case of a taxpayer which
meets the residential loan requirement of subparagraph
(B) for any taxable year--
(i) no adjustment shall be taken into account
under paragraph (1) for such taxable year, and
(ii) such taxable year shall be disregarded
in determining--
(I) whether any other taxable year is
a taxable year for which an adjustment
is required to be taken into account
under paragraph (1), and
(II) the amount of such adjustment.
(B) Residential loan requirement.--A taxpayer meets
the residential loan requirement of this subparagraph
for any taxable year if--
(i) the principal amount of the residential
loans made by the taxpayer during such year is
not less than the base amount for such year, or
(ii) the principal amount of the residential
loans made by the taxpayer during each of the 2
preceding taxable years is not less than the
base amount for such preceding years.
Clause (ii) shall not apply for purposes of determining
whether a taxpayer meets the residential loan
requirement of this subparagraph for any taxable year
beginning before January 1, 1998.
(C) Residential loan.--For purposes of this
paragraph, the term ``residential loan'' means any loan
described in clause (v) of section 7701(a)(19)(C) of
such Code but only if such loan is incurred in
acquiring, constructing, or improving the property
described in such clause.
(D) Base amount.--For purposes of subparagraph (B),
the base amount is the average of the principal amounts
of the residential loans made by the taxpayer during
the 6 most recent taxable years beginning before
January 1, 1996. At the election of the taxpayer who
made such loans during each of such 6 taxable years,
the preceding sentence shall be applied without regard
to the taxable year in which such principal amount was
the highest and the taxable year in such principal
amount was the lowest. Such an election may be made
only for the first taxable year beginning after
December 31, 1995, and, if made for such taxable year,
shall apply to all succeeding taxable years unless
revoked with the consent of the Secretary of the
Treasury or his delegate.
(E) Inflation adjustment of base amount.--In the case
of a taxable year beginning in a calendar year after
1996, the amount determined under subparagraph (D)
shall be increased by an amount equal to--
(i) the amount so determined, multiplied by
(ii) the cost-of-living adjustment determined
under section 1(f)(3) of such Code for such
calendar year, by substituting ``calendar year
1995'' for ``calendar year 1992'' in
subparagraph (B) thereof.
(F) Controlled groups.--In the case of a taxpayer
which is a member of any controlled group of
corporations described in section 1563(a)(1) of such
Code, subparagraph (B) shall be applied with respect to
such group.
(4) Continued application of fresh start under section 585
transitional rules.--In the case of a taxpayer to which
paragraph (1) applied and which was not a large bank (as
defined in section 585(c)(2) of such Code) for its first
taxable year beginning after December 31, 1995--
(A) In general.--For purposes of determining the net
amount of adjustments referred to in section
585(c)(3)(A)(iii) of such Code, there shall be taken
into account only the excess of the reserve for bad
debts as of the close of the last taxable year before
the disqualification year over the balance taken into
account by such taxpayer under paragraph (2)(A)(ii) of
this subsection.
(B) Treatment under elective cut-off method.--For
purposes of applying section 585(c)(4) of such Code--
(i) the balance of the reserve taken into
account under subparagraph (B) thereof shall be
reduced by the balance taken into account by
such taxpayer under paragraph (2)(A)(ii) of
this subsection, and
(ii) no amount shall be includible in gross
income by reason of such reduction.
(5) Continued application of section 593(e).--Notwithstanding
the amendments made by this section, in the case of a taxpayer
to which paragraph (1) of this subsection applies, section
593(e) of such Code (as in effect on the day before the date of
the enactment of this Act) shall continue to apply to such
taxpayer as if such taxpayer were a domestic building and loan
association but the amount of the reserve taken into account
under such section 593(e) shall be only the balance taken into
account by such taxpayer under paragraph (2)(A)(ii) of this
subsection.
(6) Certain items included as section 381(c) items.--The
balance of the applicable excess reserves, and the balance
taken into account by a taxpayer under paragraph (2)(A)(ii) of
this subsection, shall be treated as items described in section
381(c) of such Code.
(7) Regulations.--The Secretary of the Treasury or his
delegate shall prescribe such regulations as may be necessary
to carry out this subsection, including regulations providing
for the application of paragraph (3) in the case of mergers,
spin-offs, and other reorganizations.
SEC. 3. DEDUCTION FOR SPECIAL ASSESSMENTS.
For purposes of subtitle A of the Internal Revenue Code of 1986, the
amount allowed as a deduction under section 162 of such Code for a
taxable year shall include the amount paid during such year as a
special assessment under section 7(b)(6)(B) of the Federal Deposit
Insurance Act, as amended by the Thrift Charter Conversion Act of 1995,
as contained in subtitle B of title II of H.R. 2491 of the 104th
Congress, as passed by the House of Representatives.
I. INTRODUCTION
a. purpose and summary
The bill (H.R. 2494, as amended) amends the Internal
Revenue Code of 1986 to repeal the reserve method of
determining deductions for bad debts by thrift institutions
under section 593 and to provide rules to implement the change
of the method of accounting required by the repeal of such
section. The bill also clarifies that certain special
assessments to be paid to the Savings Association Insurance
Fund by thrift institutions are deductible.
b. background and need for legislation
Title II (Chapter 2, subtitle B) of H.R. 2491 (``Seven-Year
Balanced Budget Reconciliation Act of 1995''), which passed the
House of Representatives on October 26, 1995, would require
savings and loan institutions (``thrift institutions'') to
forego their Federal thrift charters and become either State-
chartered depository institutions or Federally-chartered banks.
Under proposed Treasury regulations, if a thrift institution
becomes a bank, the thrift institution would be required to
change its method of accounting for bad debts and would be
subject to recapture of all or a portion of its bad debt
reserve. It is understood that such recapture would require the
institution immediately to record, for financial accounting
purposes, a current or deferred tax liability for the amount of
bad debt recapture for which liabilities previously had not
been recorded (generally, with respect to the pre-1988
reserves), regardless of when such recapture is taken into
account for Federal income tax purposes. It is further
understood that the recording of this tax liability generally
would decrease the regulatory capital of the new bank.
In addition, Title II of H.R. 2491 would require thrift
institutions to pay a special assessment to the Savings
Association Insurance Fund (``SAIF''). The SAIF generally is
the insurance fund for deposits in thrift institutions. There
is some question as to whether the special assessments paid to
the SAIF would be deductible currently or required to be
capitalized.
The Committee bill addresses the tax questions that arise
concerning the H.R. 2491 banking legislation, and the
provisions of the Committee bill are described in Part II of
this report.
c. legislative history
H.R. 2494 was introduced by Chairman Archer, Mr. Leach, and
Ms. Roukema on October 11, 1995, and the Committee on Ways and
Means held a public hearing on H.R. 2494 on October 26, 1995.
The Committee on Ways and Means marked up H.R. 2494 on November
1, 1995, and approved Chairman Archer's amendment in the nature
of a substitute to the bill as introduced.
II. EXPLANATION OF THE BILL
a. treatment of bad debt deductions and reserves for bad debt of thrift
institutions (sec. 2 of the bill and sec. 593 of the code)
Present Law and Background
Tax treatment of bad debt deductions of savings institutions
Generally, a taxpayer engaged in a trade or business may
deduct the amount of any debt that becomes wholly or partially
worthless during the year (the ``specific charge-off'' method).
Certain thrift institutions (building and loan associations,
mutual savings banks, or cooperative banks) are allowed
deductions for bad debts under rules more favorable than those
granted to other taxpayers (and more favorable than the rules
applicable to other financial institutions). Qualified thrift
institutions may compute deductions for bad debts using either
the specific charge-off method or the reserve method of section
593 of the Internal Revenue Code. To qualify for this reserve
method, a thrift institution must meet an asset test, requiring
that 60 percent of its assets consist of ``qualifying assets''
(generally cash, government obligations, and loans secured by
residential real property). This percentage must be computed at
the close of the taxable year, or at the option of the
taxpayer, as the annual average of monthly, quarterly, or
semiannual computations of similar percentages.
If a thrift institution uses the reserve method of
accounting, it must establish and maintain a reserve for bad
debts and charge actual losses against the reserve, and is
allowed a deduction for annual additions to restore the reserve
to its permitted balance. Under section 593, a thrift
institution annually may elect to calculate its addition to its
bad debt reserve under either (1) the ``percentage of taxable
income'' method applicable only to thrift institutions, or (2)
the ``experience'' method that also is available to small
banks.
Under the ``percentage of taxable income'' method, a thrift
institution generally is allowed a deduction for an addition to
its bad debt reserve equal to 8 percent of its taxable income
(determined without regard to this deduction and with
additional adjustments). Under the experience method, a thrift
institution generally is allowed a deduction for an addition to
its bad debt reserve equal to the greater of: (1) an amount
based on its actual average experience for losses in the
current and five preceding taxable years, or (2) an amount
necessary to restore the reserve to its balance as of the close
of the base year. For taxable years beginning before 1988, the
``base year'' was the last taxable year before the most recent
adoption of the experience method (i.e., generally, the last
year the taxpayer was on the percentage of taxable income
method). For taxable years beginning after 1987, the base year
is the last taxable year beginning before 1988. Prior to 1988,
computing bad debts under a ``base year'' rule allowed a thrift
institution to claim a deduction for bad debts for an amount at
least equal to the thrift institution's actual losses that were
incurred during the taxable year.
Bad debt methods of commercial banks
A small commercial bank (i.e., one with adjusted bases of
assets of $500 million or less) only may use the experience
method or the specific charge-off method for purposes of
computing its deduction for bad debts. A large commercial bank
must use the specific charge-off-method of section 166. If a
small bank becomes a large bank, it must recapture its existing
bad debt reserve (i.e., include the amount of the reserve in
income) through one of two elective methods. Under the 4-year
recapture method, the bank generally includes 10 percent of the
reserve in income in the first taxable year, 20 percent in the
second year, 30 percent in the third year, and 40 percent in
the fourth year. Under the cut-off method, the bank generally
neither restores its bad debt reserve to income nor may it
deduct losses relating to loans held by the bank as of the date
of the required change in the method of accounting. Rather, the
amount of such losses are charged against and reduce the
existing bad debt reserve; any losses in excess of the reserve
are deductible. Any reserve balance in excess of the balance of
related loans is includible in income.
Recapture of bad debt reserves by thrift institutions
If a thrift institution becomes a commercial bank, or if
the institution fails to satisfy the 60-percent qualified asset
test, it is required to change its method of accounting for bad
debts and, under proposed Treasury regulations,\1\ is required
to recapture its bad debt reserve. The percentage-of-taxable-
income portion of the reserve generally is included in income
ratably over a 6-taxable year period. The experience method
portion of the reserve is not restored to income if the former
thrift institutions qualifies as a small bank. If the former
thrift institution is treated as a large bank, the experience
method portion of the reserve is restored to income either
ratably over a 6-taxable year period, or under the 4-year
recapture method or the cut-off method described above.
\1\ Prop. Treas. reg. sec. 1.593-13.
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In addition, a thrift institution may be subject to a form
of reserve recapture even if the institution continues to
qualify for the percentage of taxable income method.
Specifically, if a thrift institution distributes to its
shareholders an amount in excess of its post-1951 earnings and
profits, such excess is deemed to be distributed from the
institution's bad debt reserve and is restored to income. In
the case of any distribution in redemption of stock or in
partial or complete liquidation of an institution, the
distribution is treated as first coming out of the bad debt
reserves of the institution (sec. 593(e)).
Proposed banking legislation (H.R. 2491)
Treatment of thrift institutions under H.R. 2491
Title II (Chapter 2, subtitle B) of H.R. 2491, which passed
the House of Representatives on October 26, 1995, would require
savings and loan institutions to forgo their Federal thrift
charters and become either State-chartered depository
institutions or Federally-chartered banks. Under proposed
Treasury regulations, if a thrift institution becomes a bank,
the institution would be required to recapture all or a portion
of its bad debt reserve. As described in detail below, the
Committee understands that such recapture would require the
institution immediately to record, for financial accounting
purposes, a current or deferred tax liability for the amount of
bad debt recapture for which liabilities previously had not
been recorded (generally, with respect to the pre-1988
reserves), regardless of when such recapture is taken into
account for Federal income tax purposes. The Committee further
understands that the recording of this liability generally
would decrease the regulatory capital of the new bank.
Financial accounting treatment of tax reserves of bad debts of thrift
institutions
In general, for financial accounting purposes, a
corporation must record a deferred tax liability with respect
to items that are deductible for tax purposes in a period
earlier than they are expensed for book purposes. The deferred
tax liability signifies that, although a corporation may be
reducing its current tax expense because of the accelerated tax
deduction, the corporation will become liable for tax in a
future period when the timing item ``reserves'' (i.e., when the
item is expensed for book purposes but for which the tax
deduction had already been allowed). Under the applicable
accounting standard (Accounting Principles Board Opinion 23),
deferred tax liabilities generally were not required for pre-
1988 tax deductions attributable to the bad debt reserve method
of thrift institutions because the potential reversal of the
bad debt reserve was indefinite (i.e., generally, a reversal
only would occur by operation of sec. 593(e), a condition
within the control of a thrift institution). However, the
establishment of 1987 as a base year increased the likelihood
of bad debt reserve reversals with respect to post-1987
additions to the reserve and the Committee understands that
thrift institutions generally have recorded deferred tax
liabilities for these additions.\2\
\2\ For taxable years beginning before 1988, the base year balance
of a thrift institution was the reserve balance whenever the
institution changed from one bad debt method to another (e.g., from the
percentage of taxable income method to the experience method). How the
establishment of 1987 as a permanent base year changed the nature of
the bad debt reserves of thrift institutions between pre-1988 years and
post-1987 years (which, in turn, changed the financial accounting
treatment of such reserves) can be illustrated by the following
example:
Assume that a thrift institution (``T'') always had used the
percentage of taxable income (``PTI'') method to deduct bad debts
through 1986 when its reserve balance was $10,000. Further assume that
in 1987, T: (1) has insufficient taxable income to use the PTI method,
(2) has actual bad debt losses of $1,000, and (3) under the six-year
average formula of the experience method, would be allowed a deduction
of $900. Under these facts, T would be allowed a bad debt deduction of
$1,000 (rather than $900) in 1987 because $1,000 is the amount
necessary to restore the reserve to its base year (PTI) level.
Specifically, in 1987, T would charge the year-end 1986 reserve of
$10,000 for the $1,000 actual loss and then add (and deduct) $1,000 to
the reserve so that the balance of the reserve at year end 1987 is once
against $10,000. Thus, T's former PTI deductions, which gave rise to
the $10,000 reserve balance, generally would not be restored to income
(unless subject to sec. 593(e)).
Further assume that in 1988, T has sufficient taxable income to be
allowed a PTI deduction of $1,500, increasing the balance of the
reserve to $11,500 at year-end 1988. Further assume that in 1989, T:
(1) again has insufficient taxable income to use the PTI method, (2)
has actual bad debts of $2,500, and (3) under the six-year average
formula of the experience method would be allowed a deduction of $900.
Under these facts, T would be allowed a deduction of $1,000 (i.e., the
amount necessary to restore the reserve to its base year (year-end
1987) level). Specifically, T would charge the year-end 1988 reserve
balance of $11,500 for the $2,500 actual loss and then add (and deduct)
$1,000 to the reserve to restore the balance to the $10,000 base year
amount. Thus, T's post-1987 PTI deduction of $1,500 is restored to
income (i.e., T actually had losses of $2,500 in 1989, but only was
allowed to deduct $1,000).
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Reasons for Change
The Committee believes that the reserve method of bad debts
accorded to qualified thrift institutions under present law
results in a mismeasurement of economic income and provides
those institutions with a tax benefit not provided to
similarly-situated depository institutions.
The Committee also believes that whenever a taxpayer
changes its method of accounting, it is appropriate to
implement such change in a manner such that items of income or
expense are not taken into account twice--once under the old
method and again under the new method. Thus, under present law,
most accounting method changes are implemented under section
481 which requires the calculation of an adjustment that
reflects the cumulative effect of the method change and that is
restored to income over a specified period of time.
Specifically, under present law, whenever a thrift institution
no longer qualifies for the reserve method of accounting for
bad debts, the bad debt reserve of the thrift institution must
be restored to income.
A provision of H.R. 2491, as passed by the House of
Representatives on October 26, 1995, will require Federally-
chartered savings and loan institutions to become Federally-
chartered banks or State-chartered depository institutions.
Under proposed Treasury regulations, the choice of charter will
have different Federal income tax effects--those institutions
choosing bank charters will have a recapture of their bad debt
reserves while those institutions choosing State thrift
charters may escape recapture. Further, the Committee
understands that, because thrift institutions had not provided
deferred taxes with respect to a portion of their bad debt
reserves for financial and regulatory accounting purposes,
requiring recapture at this time would reduce the regulatory
capital of thrift institutions converting to banks.
The Committee believes that in order to further national
banking policy, certain changes to the Internal Revenue Code
are warranted. First, the Committee believes that, in order to
provide similar treatment to similarly-situated depository
institutions, the special bad debt reserve methods available to
qualified thrift institutions should be repealed. In
implementing this change in accounting method, the Committee
believes it is appropriate to provide relief from the recapture
of that portion of the bad debt reserves for which thrift
institutions have not recorded deferred tax liabilities for
financial and regulatory accounting purposes. The Committee
believes that this relief should not directly benefit the
shareholders of the institution in a manner similar to the way
in which present-law section 593(e) provides a limitation on
the direct enjoyment of the benefits of section 593 by
shareholders of a thrift institution.
Finally, the Committee is concerned that the proposed
banking legislation may cause a change in thrift institutions'
traditional roles as home mortgage lenders and may result in a
shortage in the availability of mortgage loans in some regions.
The Committee bill addresses this issue by providing an
incentive for former thrift institutions to continue to provide
a level of residential mortgage financing. The Committee
recognizes that it may be appropriate to reexamine, in the
future, this and other issues raised by the bill.
Explanation of Provisions
Repeal of section 593
The bill repeals the section 593 reserve method of
accounting for bad debts by thrift institutions, effective for
taxable years beginning after 1995. Under the bill, thrift
institutions that qualify as small banks are allowed to utilize
the experience method applicable to such institutions, while
thrift institutions that are treated as large banks are
required to use only the specific charge-off method. Thus, the
percentage of taxable income method of accounting for bad debts
is no longer available for any institution. The bill also
repeals the following present-law provisions that only apply to
thrift institutions to which section 593 applies: (1) the
denial of a portion of certain tax credits to a thrift
institution (sec. 50(d)(1)); (2) the special rules with respect
to the foreclosure of property securing loans of a thrift
institution (sec. 595); (3) the reduction in the dividends
received reduction of a thrift institution (sec. 596); and (4)
the ability of a thrift institution to use a net operating loss
to offset its income from a residual interest in a REMIC.
Treatment of recapture of bad debt reserves
In general
A thrift institution required to change its method of
computing reserves for bad debts will treat such change as a
change in a method of accounting, initiated by the taxpayer,
and having been made with the consent of the Secretary of the
Treasury.\3\ Any section 481(a) adjustment required to be taken
into account with respect to such change generally will be
determined solely with respect to the ``applicable excess
reserves'' of the taxpayer. The amount of applicable excess
reserves shall be taken into account ratably over a 6-taxable
year period, beginning with the first taxable year beginning
after 1995, subject to the residential loan requirement
described below. In the case of a thrift institution that
becomes a ``large bank'' (as determined under sec. 585(c)(2)),
the amount of the institution's applicable excess reserves will
be the excess of (1) the balance of its reserves described in
section 593(c)(1) (i.e., its supplemental reserve for losses on
loans, its reserve for losses on qualifying real property
loans, and its reserve for losses on nonqualifying loans) as of
the close of its last taxable year beginning before January 1,
1996, over (2) the balance of such reserves as of the close of
its last taxable year beginning before January 1, 1988 (i.e.,
the ``pre-1988 reserves''). Thus, unless the taxpayer meets the
residential loan requirement described below, a thrift
institution that is treated as a large bank generally is
required to recapture its post-1987 additions to its bad debt
reserves, whether such additions are made pursuant to the
percentage of taxable income method or the experience method.
\3\ A thrift institution that uses a reserve method described in
section 593 will be deemed to have changed its method of computing
reserves for bad debts even though such institution will be allowed to
use the reserve method of section 585.
---------------------------------------------------------------------------
In the case of a thrift institution that becomes a ``small
bank'' (as determined under sec. 585(c)(2)), the amount of the
institution's applicable excess reserves will be the excess of
(1) the balance of its reserves described in section 593(c)(1)
as of the close of its last taxable year beginning before
January 1, 1996, over (2) the greater of the balance of: (a)
its pre-1988 reserves or (b) what the institution's reserves
would have been at the close of its last taxable year beginning
before January 1, 1996, had the institution always used the
experience method described in section 585(b)(2)(A) (i.e., the
six-year average method). For purposes of the future
application of section 585, the beginning balance of the small
bank's reserve for its first taxable year beginning after
December 31, 1995, will be the greater of the two amounts
described in (2) in the preceding sentence, and the balance of
the reserve at the close of the base year (for purposes of sec.
585(b)(2)(B)) will be the amount of its pre-1988 reserves. If
such small bank later becomes a large bank, any section 481(a)
adjustment amount required to be taken into account under
section 585(c)(3) will not include any portion of the bank's
pre-1988 reserve. Similarly, if the bank elects the cut-off
method to implement its conversion to large bank status, the
amount of the reserve against the bank charges its actual
losses will not include any portion of the bank's pre-1988
reserve and the amount by which the pre-1988 reserve exceeds
actual losses will not be included in gross income.
The balance of the pre-1988 reserves will continue to be
subject to the provisions of present-law section 593(e)
(requiring recapture in the case of certain excess
distributions to, and redemptions of, shareholders). Thus,
section 593(e) will continue to apply to an institution
regardless of whether the institution becomes a bank or remains
a thrift institution. In addition, the balance of the pre-1988
reserve will be treated as a tax attribute to which section 381
applies. Treasury regulations are expected to provide rules for
the continued application of section 593(e) in the case of
mergers, acquisitions, spin-offs, and other reorganizations of
thrift and other institutions. The Committee strongly believes
that any such regulations should provide that if the stock of
an institution with a pre-1988 reserve is acquired by another
taxpayer, the pre-1988 reserve will not be restored to income
by reason of the acquisition. Similarly, if an institution with
a pre-1988 reserve is merged or liquidated tax-free into a
bank, the pre-1988 reserve should not be restored to income by
reason of the merger or liquidation.\4\ Rather, the bank will
inherit the pre-1988 reserve and the post-1951 earnings and
profits of the former thrift institution and section 593(e)
will apply to the bank as if it were a thrift institution. That
is, the pre-1988 reserve will be restored into income in the
case of any distribution in redemption of the stock of the bank
or in partial or complete liquidation of the bank following the
merger or liquidation. In the case of any other distribution,
the pre-1988 reserve will not be restored to income unless the
distribution is in excess of the sum of the post-1951 earnings
and profits inherited from the thrift institution and the post-
1913 earnings and profits of the acquiring bank. Treasury
regulations should address the case where the shareholders of
an institution with a pre-1988 reserve are ``cashed out'' in a
taxable merger of the institution and a bank. Such regulations
may provide that the pre-1988 reserve may be restored to income
if such redemption represents a concealed distribution from the
former thrift institution. For example, cash received by former
thrift shareholders pursuant to a taxable reverse merger may
represent a concealed distribution if, immediately preceding
the merger, the acquiring bank had no available resources to
distribute and its existing debt structure, indenture
restrictions, financial condition, or regulatory capital
requirements precluded it from borrowing money for purposes of
making the cash payment to the former thrift shareholders.
Treasury regulations also should address the treatment of boot
received in a tax-free reorganization.
\4\ The issue of whether section 593(e) applies in cases where a
thrift institution is merged into a bank does not arise under present
law because such merger results in a charter change under present law,
requiring full bad debt reserve recapture.
---------------------------------------------------------------------------
Further, it is anticipated that any balance of a taxpayer's
pre-1988 reserve will be restored to income if the taxpayer no
longer qualifies as a bank, as defined by section 581.
Residential loan requirement
Under a special rule, if the taxpayer meets the
``residential loan requirement'' for any taxable year, the
recapture of the applicable excess reserves otherwise to be
taken into account as a section 481(a) adjustment for such year
will be suspended. The residential loan requirement will
continue to apply to subsequent taxable years until the
taxpayer recaptures its entire section 481(a) adjustment (i.e.,
the residential loan requirement would no longer apply once the
taxpayer has failed to meet the requirement in six separate
taxable years and has thus recaptured its entire adjustment). A
taxpayer meets the residential loan requirement if, for any
taxable year, the principal amount of residential loans made by
the taxpayer during the year is not less than its base amount.
A taxpayer will be deemed to meet the residential loan
requirement for any taxable year beginning after December 31,
1997, if the taxpayer met the requirement for the two preceding
years (determined without the application of this special, two-
out-of-three rule).
For the first taxable year beginning after December 31,
1995, the ``base amount'' for a taxpayer means the average of
the principal amounts of the residential loans made by the
taxpayer during the six most recent taxable years beginning
before January 1, 1996. At the election of the taxpayer, the
base amount may be computed by disregarding the taxable years
within that 6-year period in which the principal amounts of
loans made during such years were highest and lowest. This
election must be made for the first taxable year beginning
after December 31, 1995, and applies to all succeeding years
unless revoked with the consent of the Secretary of the
Treasury or his delegate. For taxable years beginning after
December 31, 1996, the base amount is indexed for inflation.
For purposes of the residential loan requirement, a loan
will be deemed to be ``made'' by a financial institution to the
extent the institution is, in fact, the principal source of the
loan financing. Thus, any loan only can be ``made'' once. The
Committee expects that Treasury regulations may provide that
loans ``made'' by a financial institution may include, but are
not limited to, loans (1) originated directly by the
institution through its place of business or its employees, (2)
closed in the name of the institution, (3) originated by a
broker that acts as an agent for the institution, and (4)
originated by another person (other than a financial
institution) and that are acquired by the institution pursuant
to a preexisting, enforceable agreement to acquire such loans.
In addition, Treasury regulations also may provide that loans
``made'' by a financial institution may include loans
originated by another person (other than a financial
institution) acquired by the institution soon after origination
if such acquisition is pursuant to a customary practice of
acquiring such loans from such person. A loan acquired by a
financial institution from another financial institution
generally will be considered to be made by the transferor
rather than the transferee of the loan; however, such loan may
be completely disregarded if a principal purpose of the
transfer was to allow the transferor to meet the residential
loan requirement. A loan may be considered to be made by a
financial institution even if such institution has an
arrangement to transfer such loan to the Federal National
Mortgage Association or the Federal Home Loan Mortgage
Corporation.
For purposes of the residential loan requirement, a
``residential loan'' is a loan described in section
7701(a)(19)(C)(v) (generally, loans secured by residential real
and church property and certain mobile homes),\5\ but only to
the extent the loan is made to the owner of the property to
acquire, construct, or improve the property. Thus, mortgage
refinancings and home equity loans are not considered to be
residential loans, except to the extent the proceeds of the
loan are used to acquire, construct, or improve qualified
residential real property. The Committee understands that
pursuant to the Home Mortgage Disclosure Act, financial
institutions are required to disclose the purpose for which
loans are made. The Committee further understands that for
purposes of this disclosure, institutions are required to
classify loans as home purchase loans, home improvement loans,
refinancings, and multifamily dwelling loans (whether for
purchase, improvement or refinancing of such property). The
Committee expects that taxpayers (and the Secretary of the
Treasury in promulgating guidance) may take such reporting into
account, and make such adjustments as are appropriate,\6\ in
determining: (1) whether or not a loan qualifies as a
``residential loan'' and (2) whether the institution ``made''
the loan. A taxpayer must use consistent standards for
determining whether loans qualify as residential loans made by
the institution both for purposes of determining its base
amount and for purposes of determining whether it met the
residential loan requirement for a taxable year.
\5\ For this purpose, as under present law, if a multifamily
structure securing a loan is used in part for nonresidential purposes,
the entire loan will be deemed a residential real property loan if the
planned residential use exceeds 80 percent of the property's planned
use (determined as of the time the loan is made). In addition, loans
made to finance the acquisition or development of land will be deemed
to be loans secured by an interest in residential real property if,
under regulations prescribed by the Secretary of the Treasury, there is
a reasonable assurance that the property will become residential real
property within a period of three years from the date of acquisition of
the land.
\6\ For example, adjustments will be required with respect to the
reporting of multifamily dwellings in order to distinguish home
purchase, home improvement, and refinancing loans.
---------------------------------------------------------------------------
The residential loan requirement is determined on a
controlled group basis. Thus, for example, if a controlled
group consists of two thrift institutions with applicable
excess reserves that are wholly owned by a bank, the
residential loan requirement will be met (or not met) with
respect to both thrift institutions by comparing the principal
amount of the residential loans made by all three members of
the group during the taxable year to the group's base amount.
The group's base amount will be the average principal amount of
residential loans made by all three members of the group during
the base period. The election to disregard the high and low
taxable years during the 6-year base period also would be
applied on a controlled group basis (i.e., generally by
treating the members of the group as one taxpayer so that all
members of the group must join in the election, and the same
corresponding years of each member would be so disregarded).
The balance of a taxpayer's applicable excess reserve is
treated as a tax attribute to which section 381 applies. Thus,
if an institution with an applicable excess reserve is acquired
in a tax-free reorganization, the balance of such reserve will
not be immediately restored to income but will continue to be
subject to the residential loan requirement in the hands of the
acquirer. Treasury regulations will provide rules for the
application of the residential loan requirement in the case of
mergers, acquisitions, and other reorganizations of thrift and
other institutions. The Committee expects that if a financial
institution joins or merges into (or leaves) a group of
financial institutions, the base amount of the acquiring (or
remaining) group will be appropriately adjusted to reflect the
base amount of the acquired (or departing) institution for
purposes of determining whether the group meets the residential
loan requirement for the year of the acquisition (or departure)
and subsequent years. Similarly, for purposes of determining
whether the group meets the special two-out-of-three rule for
the year of, and the year following, the acquisition (or
departure), the group must determine whether or not it would
have satisfied the test had the new member also been a member
of the group (or had the departing member never been a member
of the group). Finally, if a controlled group of institutions
had made an election to disregard its high and low years in
computing its base amount, it is anticipated that such election
shall be binding on any institution that subsequently joins the
group and the election shall be applied to the new member by
disregarding the high and low years of the new member even if
such years do not correspond to the years applicable to the
other members of the group.
Finally, the Committee expects that any balance of a
taxpayer's applicable excess reserve will be restored to income
if the taxpayer no longer qualifies as a bank, as defined by
section 581.
Effective Date
The repeal of section 593 is effective for taxable years
beginning after December 31, 1995. The repeal of section 595 is
effective for property acquired in taxable years beginning
after December 31, 1995.
B. Tax Treatment of Special Assessments (sec. 3 of the bill and sec.
162 of the Code)
Present Law and Background
Title II (Chapter 1, subtitle B) of H.R. 2491, as passed by
the House, would require thrift institutions to pay a special
assessment to the Savings Association Insurance Fund
(``SAIF''). The SAIF generally is the insurance fund for
deposits in thrift institutions. The amount of the assessment
would be the amount necessary to ensure that the SAIF has
reserves of $1.25 for each $100 of insured deposits, and the
due date of the payment would be the first business day of
January 1996. Effective January 1, 1998, the SAIF would be
merged with the Bank Insurance Fund (``BIF'') (the insurance
fund for deposits in banks). Thrift institutions and banks also
are required to pay annual premiums to the SAIF and BIF,
respectively, based on the amount of their insured deposits.
Currently, the premium rate for the SAIF deposits is
substantially higher than the premium rate for BIF deposits.
After the merger of the SAIF and BIF in 1998, under H.R. 2491,
thrift institutions and banks would be subject to the same
lower deposit insurance rates generally applicable to banks.
In general, a taxpayer is allowed to deduct ordinary and
necessary expenses paid or incurred in carrying on a trade or
business during the taxable year (sec. 162). However, amounts
that give rise to a permanent improvement or betterment must be
capitalized rather than deducted currently (sec. 263). Whether
an expenditure is deductible under section 162 or must be
capitalized under section 263 is often a matter of dispute
between the IRS and taxpayers, and has been the subject of
significant litigation. Most recently, in INDOPCO v.
Commissioner, 503 U.S. 79 (1992), the U.S. Supreme Court noted
that the capitalization of expenditures is the norm and that a
current ``income tax deduction is a matter of legislative grace
and that the burden of clearly showing the right to the claimed
deduction is on the taxpayer.'' \7\ In INDOPCO, the Supreme
Court found that the record supported the lower courts'
findings that the investment banking fees in question produced
significant benefits extending beyond the tax year in which
they were incurred so as to warrant capitalization. The scope
of the INDOPCO decision and its application to the payments of
the special assessments provided in H.R. 2491 may be open to
interpretation.
\7\ INDOPCO, citing Interstate Transit Lines v. Comm., 319 U.S.
590, 593 (1943); Deputy v. DuPont, 308 U.S. 488, 493 (1940); and New
Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (19934).
---------------------------------------------------------------------------
Reasons for Change
The Committee believes that the treatment of the special
assessments paid to the SAIF pursuant to H.R. 2491 should be
statutorily clarified in a manner consistent with the analysis
of the Treasury Department for the proper treatment of such
payments under present law.\8\
\8\ See, e.g., the testimony of Cynthia G. Beerbower, Deputy
Assistant Secretary (Tax Policy) Department of the Treasury, on H.R.
2494 before the House Committee on Ways and Means, October 26, 1995,
which provides that it is the view of the Treasury Department that the
special assessments would be deductible under current law.
---------------------------------------------------------------------------
Explanation of Provision
The bill provides that the special assessments paid to the
SAIF are deductible when paid. Because such payments relate to
the current needs of the SAIF fund, the Committee understands
that section 172(f) does not apply to any net operating loss
occurring as a result of the deduction provided by the bill. No
inference is intended with respect to the treatment of any
payment or assessment not described in the bill.
Effective Date
The provision is effective upon enactment.
III. VOTES OF THE COMMITTEE
In compliance with clause 2(l)(2)(B) of rule XI of the
Rules of the House of Representatives, the following statement
is made concerning the votes of the Committee in its
consideration of the bill, H.R. 2494.
Motion to report the bill
The bill, H.R. 2494, as amended, was ordered favorably
reported by voice vote on November 1, 1995, with a quorum
present.
IV. BUDGET EFFECTS OF THE BILL
A. Committee Estimate of Budgetary Effects
In compliance with clause 7(a) of rule XIII of the Rules of
the House of Representatives, the following statement is made
concerning the effects on the budget of this bill, H.R. 2424,
as reported.
The bill, as amended, is estimated to have the following
effects on budget receipts for fiscal years 1996-2000:
ESTIMATED BUDGET EFFECTS OF H.R. 2494, THE THRIFT CHARTER CONVERSION TAX ACT OF 1995 AS REPORTED BY THE COMMITTEE ON WAYS AND MEANS
[In millions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
1996- 1996- 1996-
Provision Effective 1996 1997 1998 1999 2000 2001 2002 2000 2002 2005
--------------------------------------------------------------------------------------------------------------------------------------------------------
The ``Thrift Charter Conversion Tax Act tyba 12/31/95................ 69 106 103 105 106 107 100 489 696 952
of 1995''.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note.--Details may not add to totals due to rounding.
Source: Joint Committee on Taxation.
B. Statement Regarding New Budget Authority and Tax Expenditures
In compliance with subdivision (B) of clause 2(l)(3) of
rule XI of the Rules of the House of Representatives, the
Committee states that the bill as amended involves no new
budget authority.
The Committee further states that the bill as amended
involves a reduction of tax expenditures of $489 million for
the fiscal year period 1996-2000. (For year-by-year amounts,
see revenue table in Part IV.A., above.)
C. Cost Estimate Prepared by the Congressional Budget Office
In compliance with subdivision (C) of clause 2(l)(3) of
rule XI of the Rules of the House of Representatives, requiring
a cost estimate prepared by the Congressional Budget Office
(``CBO''), the following statement prepared by CBO is provided.
U.S. Congress,
Congressional Budget Office,
Washington, DC, November 7, 1995.
Hon. Bill Archer,
Chairman, Committee on Ways and Means,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office and the
Joint Committee on Taxation (JCT) have reviewed H.R. 2494, as
ordered reported by the House Committee on Ways and Means on
November 1, 1995. The JCT estimates that this bill would
increase receipts by $69 million in fiscal year 1996 and by
$696 million over fiscal years 1996 through 2002. CBO concurs
with the estimate.
H.R. 2494 addresses the tax treatment of thrift
institutions in two ways. First, the bill would repeal the
reserve method of accounting allowed under section 593 of the
Internal Revenue Code for the bad debts of thrifts. A thrift
institution would be required to include in taxable income over
a six-year period some portion of its post-1987 additions to
its bad debt reserve. The inclusion in income would be
suspended during years in which the institution made qualifying
residential loans in excess of a specified base amount. Second,
the bill would provide that a special assessment paid by
thrifts, established in H.R. 2491 (the ``Seven-Year Balanced
Budget Reconciliation Act of 1995''), passed by the House of
Representatives on October 26, 1995, would be allowed as a
deduction in computing taxable income. No direct revenue effect
is estimated for this second provision.
CBO understands that the JCT estimate represents the
effects of H.R. 2494 on governmental receipts (revenue) under
the assumption that it is a stand-alone bill, as well as the
combined effect on governmental receipts of H.R. 2494 and the
thrift provisions of H.R. 2491. As discussed in my letter to
Chairman Leach dated October 6, 1995, the reconciliation
provisions of the House Committee on Banking and Financial
Services, included in H.R. 2491, could cause many federal
thrifts to reorganize as banks, which could affect future
corporate income tax revenues. The JCT estimates, however, that
any such effect from H.R. 2491 would be dominated by the effect
of H.R. 2494 if it were included in H.R. 2491. The revenue
effects of H.R. 2494 are summarized below:
REVENUE EFFECTS OF H.R. 2494
[By fiscal year, in millions of dollars]
----------------------------------------------------------------------------------------------------------------
1996 1997 1998 1999 2000 2001 2002
----------------------------------------------------------------------------------------------------------------
Change in Revenues............................... 69 106 103 105 106 107 100
----------------------------------------------------------------------------------------------------------------
If you wish further details, please feel free to contact me
or your staff may wish to contact Mark Booth.
Sincerely,
James L. Blum
(For June E. O'Neill, Director).
V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE
a. committee oversight findings and recommendations
With respect to subdivision (A) of clause 2(l)(3) of rule
XI of the Rules of the House of Representatives, relating to
oversight findings, the Committee advises that it was as a
result of the Committee's oversight activities concerning the
treatment of thrift institution conversion legislation included
in H.R. 2491 as passed by the House and the tax-related issues
involved in that legislation that the Committee concluded that
it is appropriate to enact the provisions contained in the bill
as amended. (See also Parts I.B. and I.C. of this report for a
discussion of the background of this bill and the legislative
history of, and hearings on, the bill.)
b. summary of findings and recommendations of the committee on
government reform and oversight
With respect to subdivision (D) of clause 2(l)(3) of rule
XI of the Rules of the House of Representatives, the Committee
advises that no oversight findings or recommendations have been
submitted to this Committee by the Committee on Government
Reform and Oversight with respect to the provisions contained
in this bill.
c. inflationary impact statement
In compliance with clause 2(l)(4) of rule XI of the Rules
of the House of Representatives, the Committee states that the
provisions of the bill are not expected to have an overall
inflationary impact on prices and costs in the operation of the
national economy.
VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED
In compliance with clause 3 of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets, new
matter is printed in italic, existing law in which no change is
proposed is shown in roman):
INTERNAL REVENUE CODE OF 1986
* * * * * * *
Subtitle A--Income Taxes
* * * * * * *
CHAPTER 1--NORMAL TAXES AND SURTAXES
* * * * * * *
Subchapter A--Determination of Tax Liability
* * * * * * *
PART IV--CREDITS AGAINST TAX
* * * * * * *
Subpart E--Rules for Computing Investment Credit
* * * * * * *
SEC. 50. OTHER SPECIAL RULES.
(a) * * *
* * * * * * *
(d) Certain Rules Made Applicable.--For purposes of this
subpart, rules similar to the rules of the following provisions
(as in effect on the day before the date of the enactment of
the Revenue Reconciliation Act of 1990) shall apply:
(1) * * *
* * * * * * *
(7) Section 48(r) (relating to certain 501(d)
organizations.
Paragraphs (1)(A), (2)(A), and (4) of the section 46(e)
referred to in paragraph (1) of this subsection shall not apply
to any taxable year beginning after December 31, 1995.
* * * * * * *
Subpart F--Rules for Computing Targeted Jobs Credit
* * * * * * *
SEC. 52. SPECIAL RULES.
(a) * * *
* * * * * * *
(e) Limitations With Respect to Certain Persons.--Under
regulations prescribed by the Secretary, in the case of--
[(1) an organization to which section 593 (relating
to reserves for losses on loans) applies,]
[(2)] (1) a regulated investment company or a real
estate investment trust subject to taxation under
subchapter M (section 851 and following), and
[(3)] (2) a cooperative organization described in
section 1381(a), rules similar to the rules provided in
subsections (e) and (h) of section 46 (as in effect on
the day before the date of the enactment of the Revenue
Reconciliation Act of 1990) shall apply in determining
the amount of the credit under this subpart.
* * * * * * *
PART VI--ALTERNATIVE MINIMUM TAX
* * * * * * *
SEC. 57. ITEMS OF TAX PREFERENCE.
(a) General Rule.--For purposes of this part, the items of
tax preference determined under this section are--
(1) * * *
* * * * * * *
[(4) Reserves for losses on bad debts of financial
institutions.--In the case of a financial institution
to which section 593 applies, the amount by which the
deduction allowable for the taxable year for a
reasonable addition to a reserve for bad debts exceeds
the amount that would have been allowable had the
institution maintained its bad debt reserve for all
taxable years on the basis of actual experience.]
* * * * * * *
PART VIII--SPECIAL DEDUCTIONS FOR CORPORATIONS
* * * * * * *
SEC. 246. RULES APPLYING TO DEDUCTIONS FOR DIVIDENDS RECEIVED.
(a) * * *
* * * * * * *
[(f) Cross Reference.--
[For special rule relating to mutual savings banks, etc., to
which section 593 applies, see section 596.]
* * * * * * *
PART XI--SPECIAL RULES RELATING TO CORPORATE PREFERENCE ITEMS
* * * * * * *
SEC. 291. SPECIAL RULES RELATING TO CORPORATE PREFERENCE ITEMS.
(a) * * *
* * * * * * *
(e) Definitions.--For purposes of this section--
(1) Financial institution preference item.--The term
``financial institution preference item'' includes the
following:
(A) * * *
(B) Interest on debt to carry tax-exempt
obligations acquired after december 31, 1982,
and before august 8, 1986.--
(i) In general.--In the case of a
financial institution which is a bank
(as defined in section 585(a)(2)) [or
to which section 593 applies], the
amount of interest on indebtedness
incurred or continued to purchase or
carry obligations acquired after
December 31, 1982, and before August 8,
1986, the interest on which is exempt
from taxes for the taxable year, to the
extent that a deduction would (but for
this paragraph or section 265(b)) be
allowable with respect to such interest
for such taxable year.
* * * * * * *
Subchapter H--Banking Institutions
* * * * * * *
PART I--RULES OF GENERAL APPLICATION TO BANKING INSTITUTIONS
* * * * * * *
SEC. 585. RESERVES FOR LOSSES ON LOANS OF BANKS.
(a) Reserve for Bad Debts.--
(1) * * *
(2) Bank.--For purposes of this section--
(A) In general.--The term ``bank'' means any
bank (as defined in section 581) [other than an
organization to which section 593 applies].
* * * * * * *
PART II--MUTUAL SAVINGS BANKS, ETC.
Sec. 591. Deduction for dividends pain on deposit.
* * * * * * *
[Sec. 593. Reserves on losses on loans.]
* * * * * * *
[Sec. 595. Foreclosure on property securing loans.
[Sec. 596. Limitation on dividends receiving deduction.]
* * * * * * *
[SEC. 593. RESERVES FOR LOSSES ON LOANS.
[(a) Reserve for Bad Debts.--
[(1) In general.--Except as provided in paragraph
(2), in the case of--
[(A) any domestic building and loan
association,
[(B) any mutual savings bank, or
[(C) any cooperative bank without capital
stock organized and operated for mutual
purposes and without profit,
there shall be allowed a deduction for a reasonable
addition to a reserve for bad debts. Such deduction
shall be in lieu of any deduction under section 166(a).
[(2) Organization must meet 60-percent asset test of
section 7701(a)(19).--This section shall apply to an
association or bank referred to in paragraph (1) only
if it meets the requirements of section 7701(a)(19)(C).
[(b) Addition to Reserves for Bad Debts.--
[(1) In general.--For purposes of subsection (a), the
reasonable addition for the taxable year to the reserve
for bad debts of any taxpayer described in subsection
(a) shall be an amount equal to the sum of--
[(A) the amount determined to be a reasonable
addition to the reserve for losses on
nonqualifying loans, computed in the same
manner as is provided with respect to additions
to the reserves for losses on loans of banks
under section 585(b)(2), plus
[(B) the amount determined by the taxpayer to
be a reasonable addition to the reserve for
losses on qualifying real property loans, but
such amount shall not exceed the amount
determined under paragraph (2) or (3),
whichever is the larger, but the amount
determined under this subparagraph shall in no
case be greater than the larger of--
[(i) the amount determined under
paragraph (3), or
[(ii) the amount which, when added to
the amount determined under
subparagraph (A), equals the amount by
which 12 percent of the total deposits
or withdrawable accounts of depositors
of the taxpayer at the close of such
year exceeds the sum of its surplus,
undivided profits, and reserves at the
beginning of such year (taking into
account any portion thereof
attributable to the period before the
first taxable year beginning after
December 31, 1951).
[(2) Percentage of taxable income method.--
[(A) In general.--Subject to subparagraphs
(B) and (C), the amount determined under this
paragraph for the taxable year shall be an
amount equal to 8 percent of the taxable income
for such year.
[(B) Reduction for amounts referred to in
paragraph (1)(a).--The amount determined under
subparagraph (A) shall be reduced (but not
below 0) by the amount determined under
paragraph (1)(A).
[(C) Overall limitation on paragraph.--The
amount determined under this paragraph shall
not exceed the amount necessary to increase the
balance at the close of the taxable year of the
reserve for losses on qualifying real property
loans to 6 percent of such loans outstanding at
such time.
[(D) Computation of taxable income.--For
purposes of this paragraph, taxable income
shall be computed--
[(i) by excluding from gross income
any amount included therein by reason
of subsection (e),
[(ii) without regard to any deduction
allowable for any addition to the
reserve for bad debts,
[(iii) by excluding from gross income
an amount equal to the net gain for the
taxable year arising from the sale or
exchange of stock of a corporation or
of obligations the interest on which is
excludable from gross income under
section 103,
[(iv) by excluding from gross income
dividends with respect to which a
deduction is allowable by part VIII of
subchapter B, reduced by an amount
equal to 8 percent of the dividends
received deduction (determined without
regard to section 596) for the taxable
year, and
[(v) if there is a capital gain rate
differential (as defined in section
904(b)(3)(D)) for the taxable year, by
excluding from gross income the rate
differential portion (within the
meaning of section 904(b)(3)(E)) of the
lesser of--
[(I) the net long-term
capital gain for the taxable
year, or
[(II) the net long-term
capital gain for the taxable
year from the sale or exchange
of property other than property
described in clause (iii).
[(3) Experience method.--The amount determined under
this paragraph for the taxable year shall be computed
in the same manner as is provided with respect to
additions to the reserves for losses on loans of banks
under section 585(b)(2).
[(c) Treatment of Reserve for Bad Debts.--
[(1) Establishment of reserves.--Each taxpayer
described in subsection (a) which uses the reserve
method of accounting for bad debts shall establish and
maintain a reserve for losses on qualifying real
property loans, a reserve for losses on nonqualifying
loans, and a supplemental reserve for losses on loans.
For purposes of this title, such reserves shall be
treated as reserves for bad debts, but no deduction
shall be allowed for any addition to the supplemental
reserve for losses on loans.
[(2) Certain pre-1963 reserves.--Notwithstanding the
second sentence of paragraph (1), any amount allocated
pursuant to paragraph (5) (as in effect immediately
before the enactment of the Tax Reform Act of 1976)
during a taxable year beginning before January 1, 1977,
to the reserve for losses on qualifying real property
loans out of the surplus, undivided profits, and bad
debt reserves (determined as of December 31, 1962)
attributable to the period before the first taxable
year beginning after December 31, 1951, shall not be
treated as a reserve for bad debts for any purpose
other than determining the amount referred to in
subsection (b)(1)(B), and for such purpose such amount
shall be treated as remaining in such reserve.
[(3) Charging of bad debts to reserves.--Any debt
becoming worthless or partially worthless in respect of
a qualifying real property loan shall be charged to the
reserve for losses on such loans, and any debt becoming
worthless or partially worthless in respect of a
nonqualifying loan shall be charged to the reserve for
losses on nonqualifying loans; except that any such
debt may, at the election of the taxpayer, be charged
in whole or in part to the supplemental reserve for
losses on loans.
[(d) Loans Defined.--For purposes of this section--
[(1) Qualifying real property loans.--The term
``qualifying real property loan'' means any loan
secured by an interest in improved real property or
secured by an interest in real property which is to be
improved out of the proceeds of the loan, but such term
does not include--
[(A) any loan evidenced by a security (as
defined in section 165(g)(2)(C));
[(B) any loan, whether or not evidenced by a
security (as defined in section 165(g)(2)(C)),
the primary obligor on which is--
[(i) a government or political
subdivision or instrumentality thereof;
[(ii) a bank (as defined in section
581); or
[(iii) another member of the same
affiliated group;
[(C) any loan, to the extent secured by a
deposit in or share of the taxpayer; or
[(D) any loan which, within a 60-day period
beginning in one taxable year of the creditor
and ending in its next taxable year, is made or
acquired and then repaid or disposed of, unless
the transactions by which such loan was made or
acquired and then repaid or disposed of are
established to be for bona fide business
purposes.
For purposes of subparagraph (B)(iii), the term
``affiliated group'' has the meaning assigned to such
term by section 1504(a); except that (i) the phrase
``more than 50 percent'' shall be substituted for the
phrase ``at least 80 percent'' each place it appears in
section 1504(a), and (ii) all corporations shall be
treated as includible corporations (without any
exclusion under section 1504(b)).
[(2) Nonqualifying loans.--The term ``nonqualifying
loan'' means any loan which is not a qualifying real
property loan.
[(3) Loan.--The term ``loan'' means debt, as the term
``debt'' is used in section 166.
[(4) Treatment of interests in remic's.--A regular or
residual interest in a REMIC shall be treated as a
qualifying real property loan; except that, if less
than 95 percent of the assets of such REMIC are
qualifying real property loans (determined as if the
taxpayer held the assets of the REMIC), such interest
shall be so treated only in the proportion which the
assets of such REMIC consist of such loans. For
purposes of determining whether any interest in a REMIC
qualifies under the preceding sentence, any interest in
another REMIC held by such REMIC shall be treated as a
qualifying real property loan under principles similar
to the principles of the preceding sentence, except
that if such REMIC's are part of a tiered structure,
they shall be treated as 1 REMIC for purposes of this
paragraph.
[(e) Distributions to Shareholders.--
[(1) In general.--For purposes of this chapter, any
distribution of property (as defined in section 317(a))
by a domestic building and loan association or an
institution that is treated as a mutual savings bank
under section 591(b) to a shareholder with respect to
its stock, if such distribution is not allowable as a
deduction under section 591, shall be treated as made--
[(A) first out of its earnings and profits
accumulated in taxable years beginning after
December 31, 1951, to the extent thereof,
[(B) then out of the reserve for losses on
qualifying real property loans, to the extent
additions to such reserve exceed the additions
which would have been allowed under subsection
(b)(3),
[(C) then out of the supplemental reserve for
losses on loans, to the extent thereof,
[(D) then out of such other accounts as may
be proper.
This paragraph shall apply in the case of any
distribution in redemption of stock or in partial or
complete liquidation of the association, or an
institution that is treated as a mutual savings bank
under section 591(b), except that any such distribution
shall be treated as made first out of the amount
referred to in subparagraph (B), second out of the
amount referred to in subparagraph (C), third out of
the amount referred to in subparagraph (A), and then
out of such other accounts as may be proper. This
paragraph shall not apply to any transaction to which
section 381 applies, or to any distribution to the
Federal Savings and Loan Insurance Corporation (or any
successor thereof) or the Federal Deposit Insurance
Corporation in redemption of an interest in an
association, if such interest was originally received
by any such entity in exchange for assistance provided
under a provision of law referred to in section 597(c).
[(2) Amounts charged to reserve accounts and included
in gross income.--If any distribution is treated under
paragraph (1) as having been made out of the reserves
described in subparagraphs (B) and (C) of such
paragraph, the amount charged against such reserve
shall be the amount which, when reduced by the amount
of tax imposed under this chapter and attributable to
the inclusion of such amount in gross income, is equal
to the amount of such distribution; and the amount so
charged against such reserve shall be included in gross
income of the taxpayer.
[(3) Special rules.--
[(A) For purposes of paragraph (1)(B),
additions to the reserve for losses on
qualifying real property loans for the taxable
year in which the distribution occurs shall be
taken into account.
[(B) For purposes of computing under this
section the amount of a reasonable addition to
the reserve for losses on qualifying real
property loans for any taxable year, any amount
charged during any year to such reserve
pursuant to the provisions of paragraph (2)
shall not be taken into account.]
* * * * * * *
[SEC. 595. FORECLOSURE ON PROPERTY SECURING LOANS.
[(a) Nonrecognition of Gain or Loss as a Result of
Foreclosure.--In the case of a creditor which is an
organization described in section 593(a), no gain or loss shall
be recognized, and no debt shall be considered as becoming
worthless or partially worthless, as the result of such
organization having bid in at foreclosure, or having otherwise
reduced to ownership or possession by agreement or process of
law, any property which was security for the payment of any
indebtedness.
[(b) Character of Property.--For purposes of sections 166 and
1221, any property acquired in a transaction with respect to
which gain or loss to an organization was not recognized by
reason of subsection (a) shall be considered as property having
the same characteristics as the indebtedness for which such
property was security. Any amount realized by such organization
with respect to such property shall be treated for purposes of
this chapter as a payment on account of such indebtedness, and
any loss with respect thereto shall be treated as a bad debt to
which the provisions of section 166 (relating to allowance of a
deduction for bad debts) apply.
[(c) Basis.--The basis of any property to which subsection
(a) applies shall be the basis of the indebtedness for which
such property was security (determined as of the date of the
acquisition of such property), properly increased for costs of
acquisition.
[(d) Regulatory Authority.--The Secretary shall prescribe
such regulations as he may deem necessary to carry out the
purposes of this section.
[SEC. 596. LIMITATION ON DIVIDENDS RECEIVED DEDUCTION
[In the case of an organization to which section 593 applies
and which computes additions to the reserve for losses on loans
for the taxable year under section 593(b)(2), the total amount
allowed under sections 243, 244, and 245 (determined without
regard to this section) for the taxable year as a deduction
with respect to dividends received shall be reduced by an
amount equal to 8 percent of such total amount.]
* * * * * * *
Subchapter M--Regulated Investment Companies and Real Estate Investment
Trusts
* * * * * * *
PART IV--REAL ESTATE MORTGAGE INVESTMENT CONDUITS
* * * * * * *
SEC. 860E. TREATMENT OF INCOME IN EXCESS OF DAILY ACCRUALS ON RESIDUAL
INTERESTS.
(a) Excess Inclusions May Not be Offset by Net Operating
Losses.--
(1) In general.--[Except as provided in paragraph
(2), the] The taxable income of any holder of a
residual interest in a REMIC for any taxable year shall
in no event be less than the excess inclusion for such
taxable year.
[(2) Exception for certain financial institutions.--
Paragraph (1) shall not apply to any organization to
which section 593 applies. The Secretary may by
regulations provide that the preceding sentence shall
not apply where necessary or appropriate to prevent
avoidance of tax imposed by this chapter.]
[(3)] (2) Special rule for affiliated groups.--All
members of an affiliated group filing a consolidated
return shall be treated as 1 taxpayer for purposes of
this subsection[, except that paragraph (2) shall be
applied separately with respect to each corporation
which is a member of such group and to which section
593 applies.].
[(4) Treatment of certain subsidiaries.--
[(A) In general.--For purposes of this
subsection, a corporation to which section 593
applies and each qualified subsidiary of such
corporation shall be treated as a single
corporation to which section 593 applies.
[(B) Qualified subsidiary.--For purposes of
this subsection, the term "qualified
subsidiary" means any corporation--
[(i) all the stock of which, and
substantially all the indebtedness of
which, is held directly by the
corporation to which section 593
applies, and
[(ii) which is organized and operated
exclusively in connection with the
organization and operation of 1 or more
REMIC's.]
[(5)] (3) Coordination with section 172.--Any excess
inclusion for any taxable year shall not be taken into
account--
(A) in determining under section 172 the
amount of any net operating loss for such
taxable year, and
(B) in determining taxable income for such
taxable year for purposes of the 2nd sentence
of section 172(b)(2).
* * * * * * *
Subchapter N--Tax Based on Income From Sources Within or Without the
United States
* * * * * * *
PART IV--DOMESTIC INTERNATIONAL SALES CORPORATIONS
* * * * * * *
Subpart A--Treatment of Qualifying Corporations
* * * * * * *
SEC. 992. REQUIREMENTS OF A DOMESTIC INTERNATIONAL SALES CORPORATION.
(a) * * *
* * * * * * *
(d) Ineligible Corporations.--The following corporations
shall not be eligible to be treated as a DISC--
(1) * * *
* * * * * * *
(3) a financial institution to which section 581 [or
593] applies,
* * * * * * *
Subchapter O--Gain or Loss on Disposition of Property
* * * * * * *
PART III--COMMON NONTAXABLE EXCHANGES
* * * * * * *
SEC. 1038. CERTAIN REACQUISITIONS OF REAL PROPERTY.
(a) * * *
* * * * * * *
[(f) Reacquisitions by Domestic Building and Loan
Associations.--This section shall not apply to a reacquisition
of real property by an organization described in section 593(a)
(relating to domestic building and loan associations, etc.).]
* * * * * * *
SEC. 1042. SALES OF STOCK TO EMPLOYEE STOCK OWNERSHIP PLANS OR CERTAIN
COOPERATIVES.
(a) * * *
* * * * * * *
(c) Definitions; Special Rules.--For purposes of this
section--
(1) * * *
* * * * * * *
(4) Qualified replacement property.--
(A) * * *
(B) Operating corporation.--For purposes of
this paragraph--
(i) In general.--The term ``operating
corporation'' means a corporation more
than 50 percent of the assets of which
were, at the time the security was
purchased or before the close of the
replacement period, used in the active
conduct of the trade or business.
(ii) Financial institutions and
insurance companies.--The term
``operating corporation'' shall
include--
(I) any financial institution
described in section 581 [or
593], and
(II) an insurance company
subject to tax under subchapter
L.
* * * * * * *
Subchapter P--Capital Gains and Losses
* * * * * * *
PART V--SPECIAL RULES FOR BONDS AND OTHER DEBT INSTRUMENTS
* * * * * * *
Subpart B--Market Discount on Bonds
* * * * * * *
SEC. 1277. DEFERRAL OF INTEREST DEDUCTION ALLOCABLE TO ACCRUED MARKET
DISCOUNT.
(a) * * *
* * * * * * *
(c) Net Direct Interest Expense.--For purposes of this
section, the term ``net direct interest expense'' means, with
respect to any market discount bond, the excess (if any) of--
(1) the amount of interest paid or accrued during the
taxable year on indebtedness which is incurred or
continued to purchase or carry such bond, over
(2) the aggregate amount of interest (including
original issue discount) includible in gross income for
the taxable year with respect to such bond.
In the case of any financial institution which is a bank (as
defined in section 585(a)(2)) [or to which section 593
applies], the determination of whether interest is described in
paragraph (1) shall be made under principles similar to the
principles of section 291(e)(1)(B)(ii). Under rules similar to
the rules of section 265(a)(5), short sale expenses shall be
treated as interest for purposes of determining net direct
interest expense.
* * * * * * *
Subchapter S--Tax Treatment of S Corporations and Their Shareholders
* * * * * * *
PART I--IN GENERAL
* * * * * * *
SEC. 1361. S CORPORATION DEFINED.
(a) * * *
* * * * * * *
(b) Small Business Corporation.--
(1) * * *
(2) Ineligible corporation defined.---For purposes of
paragraph (1), the term ``ineligible corporation''
means any corporation which is--
(A) a member of an affiliated group
(determined under section 1504 without regard
to the exceptions contained in subsection (b)
thereof),
(B) a financial institution to which section
585 applies (or would apply but for subsection
(c) thereof) [or to which section 593 applies],
* * * * * * *