Banking & Finance Law Report

Archives: Tax Law

Subscribe to Tax Law RSS Feed

Ohio Bank Tax Legislation

On September 26, 2016, Rep. Armstutz introduced two pieces of legislation in the Ohio House that could impact the tax rate of the Ohio financial institutions tax (“FIT”) that is paid by banks and other financial institutions doing business in Ohio. These bills are H.B. 599 and H.B. 600.  These bills are alternatives.  Both would not be enacted.

The FIT took effect starting in 2014 and replaced the Ohio corporate franchise tax and dealers in intangibles taxes on financial institutions. Sometimes when a new tax is introduced to replace an existing tax, there are tax rate adjuster provisions in the legislation that are designed to “right-size” the tax rate over time to generate approximately the same amount of revenue as the old tax generated, or to generate a certain targeted amount of revenue for budgeting purposes.

H.B. 599 would delete the future rate adjuster provisions entirely that are set to be calculated during 2016 that would either increase or decrease the rates for years 2017 and thereafter.  Under H.B. 599, the current rates would continue indefinitely.

H.B. 600, alternatively, would use $212 million as the “2016 target” for the amount of revenue raised by the FIT.  It would increase the …

Ohio Financial Institutions Tax and National Banks

In September, at the request of an Ohio-based national bank, the Office of the Comptroller of the Currency issued an opinion challenging the application of the Ohio Financial Institutions Tax (FIT) to national banks with their principal office in Ohio.

The opinion held that the FIT contradicted a federal statute that provides a national bank should be treated as a state bank chartered by the state in which the national bank has its principal office when state taxes are assessed.

The challenger maintain that the FIT contradicted federal law because Ohio chartered banks have a tax credit against the FIT for regulatory assessments paid to the Ohio Division of Financial Institutions but the FIT does not provide corresponding credit for national banks. The OCC agreed.

The opinion concluded that:

“Ohio law provides that each bank organization organized under Title XI of the Ohio Revised Code may claim a non-refundable tax credit against the FIT for regulatory assessments paid to the Ohio Division of Financial Institutions. The law provides no similar credit for regulatory assessments paid by bank organizations not organized under Title XI of the Ohio Revised Code, and it provides no credit for assessments paid to other financial regulators. 

Tax Considerations in Settlement Agreements Regarding Cancellation of Debt

Although not every settlement agreement has to be reviewed by a tax lawyer if you are representing a creditor or a debtor and the subject matter of the settlement involves the compromise of a debt or a cancellation of an indebtedness, there are some basic tax matters which must be considered.

If you are representing the creditor, you should consider whether the cancellation or compromise of the debt will be deemed income for tax purposes.  This consideration will lead to a determination of whether the creditor must issue a Form 1099-C to the IRS and to the debtor.

If you are representing the debtor, you must consider whether the settlement qualifies as a contested liability dispute.  If the debtor-taxpayer, in good faith, disputes the liability of the obligation, then a subsequent settlement of the disputed debt may not result in income, and thus, the creditor would not have to issue a Form 1099-C.

The recent Sixth Circuit case of McClusky v. Century Bank, FSB, 2015 U.S. App. LEXIS 1419 (2015) concerns the consequences of failing to consider possible tax issues, and provides an excellent summary of the law applicable to the settlement of a dispute involving the cancellation or …

Final IRS Regulations Issued on Restricted Stock Grants

Restricted stock grants have been a popular executive compensation component for over a decade now. With a restricted stock grant, the employer gives shares of stock to the employee, but subject to two main conditions. One condition is a vesting condition, which generally requires the employee to remain continuously employed with the employer for a period of years, satisfy performance targets, or both. If the employee fails to satisfy the vesting requirements, the employee forfeits the stock. The other condition is that during the vesting period, the employee is prohibited from selling or otherwise transferring the stock.

Restricted stock is popular because it provides a link between the performance of the company and the compensation of the employee. At the same time, unless a complete disaster occurs, the employee generally is guaranteed of receiving some payment because the compensation is equal to the value of the stock, rather than only the appreciation in the value of the stock. In a turbulent economy, that protection is valued by employees.

With any executive compensation arrangement, however, it is important to consult the tax rules. Generally, the value of the stock to the employee who receives a restricted stock grant is not taxed …

Ohio Financial Institutions Tax – Draft Regulations

The Ohio Department of Taxation recently released draft administrative regulations (the “Regulations”) designed to implement the new Ohio financial institutions tax. The new tax takes effect Jan. 1, 2014 and replaces the corporation franchise tax and dealers in intangible tax, which financial institutions have historically paid in Ohio.

The Regulations state that the tax has been designed based upon two fundamental concepts:

  1. The tax return will be reported on a consolidated basis at the highest level of ownership rather than on a separate entity basis.
  2. The equity of the consolidated reporting group will be based upon generally accepted accounting principles reported to the appropriate federal regulatory agency rather than on a federal income tax basis.

The most significant aspects of the Regulations deal with how financial institutions will file tax returns to pay the tax. Bank organizations that are owned through a holding company structure will report the equity of the holding company and all of the entities over which the bank holding company exercises significant influence on a form called an “FR Y-9.” A financial institution that is required to file the FR Y-9C pursuant to Federal Reserve Board regulations will instead report the total equity capital from its …

Tax Treatment of OREO

The Internal Revenue Service has recently reversed course regarding federal income tax treatment for banks for certain costs associated with OREOs ("other real estate owned").  The newer guidance should liberalize the ability of banks to take immediate deductions with respect to certain costs associated with OREOS.  The IRS has released a Chief Counsel Memorandum stating that a bank that acquires OREOs through foreclosure or deed-in-lieu 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 (which Code Section requires capitalization of certain costs).  This Chief Counsel Memorandum partially contradicts a memorandum issued last June.

This newer guidance means that, for OREOs acquired under the circumstances addressed in the new memorandum (that is, OREO acquired in connection with a loan originated by the bank), legal fees and other costs incurred to acquire the OREO through foreclosure as well as costs incurred while carrying the OREO prior to sale (including real estate taxes, insurance, repairs, maintenance, capital improvements, and utilities), should be fully deductible either when paid or incurred depending on the bank’s method of accounting.  This is in contrast to the previous guidance …

Ohio General Assembly Approves Bank Tax Reform Legislation

On December 11, 2012, the Ohio General Assembly approved a measure (H.B. 510) that will reform how banks and other financial institutions are taxed by the State of Ohio. Governor John Kasich is expected to sign the bill into law today. If enacted, the changes will take effect for tax years starting in 2014.

This bill expands reforms instituted in 2005 when the State of Ohio overhauled its business tax regime by phasing out the corporation franchise tax and the personal property tax for most corporations and implemented the commercial activity tax in their place. Financial institutional taxation did not substantially change at that time. Until now, financial institutions were subject to one of two alternative taxes, the corporation franchise tax and the intangibles tax. The new law will replace these two taxes with a single financial institutions tax. 

The new tax would broaden the tax base by reducing deductions and exemptions, but generally apply lower tax rates. The tax base would be closely tied to equity capital reported for financial regulatory purposes and allocated to Ohio using a single factor based on Ohio gross receipts.

Different tax rates would apply to different tiers of capital.  The bill would cause the first $200 million of Ohio …

Financial Institutions Tax Reform Stalled in Ohio Senate

Legislation to significantly change the way Ohio taxes financial institutions is tied up in the Ohio legislature – for the time being, anyway. Although the Ohio House of Representatives passed H.B. 510 to overhaul Ohio taxation of financial institutions in the spring, the Ohio Senate stalled work on the legislation before its summer recess. 

Stated reasons for the delay are that the Senate has more pressing legislation to deal with (the financial institutions reform bill would not take effect until 2014) and because of some concern that the estimates of the amount of revenue that would be raised from the new tax structure are too optimistic. However, Senate leadership has expressed commitment to passing the legislation later in the year. 

The governor and others are touting the bill as shifting the relative tax burden from smaller banks to larger banks while lowering rates overall. 

The bill is designed to do four things:  (1) close “loopholes” that some think are being used by larger, multi-state institutions, (2) replace two alternative taxes (the corporate franchise tax and the intangibles tax) with a single tax, (3) reduce tax rates, and (4) change the “apportionment” formulas that financial institutions use to apportion what is taxable capital …

Ohio Financial Institutions Tax Reform

The Ohio House of Representatives has passed H.B. 510 which overhauls the taxation of financial institutions by the State of Ohio. The legislation is expected to move through the Ohio Senate committee process immediately. The governor and others are touting the bill as shifting the relative tax burden from smaller banks to larger banks while lowering rates overall.

The bill is designed to do four things:  (1) close “loopholes” that some think are being used by larger, multi-state institutions (for example, shifting funds among affiliates and exempting goodwill), (2) replace two alternative taxes (the corporate franchise tax and the intangibles tax) with a single tax, (3) reduce tax rates, and (4) change the “apportionment” formulas that financial institutions use to apportion what is taxable capital inside Ohio versus their entire capital.

The new law would tax all of a bank’s Ohio-sourced capital without deductions, although different tax rates would apply to different tiers of capital. As amended and passed by the Ohio House, the bill could cause the first $200 million of Ohio capital to be taxed at 0.8%, capital between $200 million and $1.3 billion would be taxed at 0.4%, and capital above $1.3 billion would be taxed at 0.25%. There have been …

Obtaining Property Tax Relief in Ohio

The real estate market in Ohio continues to face significant challenges. With many property values declining throughout the state, challenging property tax assessments to obtain tax relief is an important strategy for financial institutions to consider.

How does the complaint process work?
Property taxes in Ohio are paid in "arrears," meaning taxes paid in 2011 are for tax year 2010. By March 31, 2011, a property owner can file a complaint with the Board of Revision in the county in which the property is located to challenge the assessed value of the property for tax year 2010.

The complaint must include certain information including the current assessed value of the property as well as the owner’s opinion of the correct value as of January 1, 2010. The taxpayer will be given a hearing with the Board of Revision, at which the taxpayer can argue for a lower value and at which the local school district may argue to retain the current valuation. An appraisal by a qualified appraiser that supports the taxpayer’s opinion of value is generally suggested for commercial and industrial property.

Value of controlling property taxes
Real property taxes are often a significant non-productive expense of property owners. …