Banking & Finance Law Report

Tag Archives: OREO Property

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 …

Operating Subsidiaries – Protecting the Bank When Taking Title to Real Estate

With certain limitations, a bank may own real estate it acquires by foreclosure, conveyance in lieu of foreclosure, or other legal proceedings in satisfaction of a debt previously contracted. Ownership of such property can create potential liability for the bank in a number of ways, though most commonly from personal injuries which occur on the property (another possibility with the potential to be very costly is environmental liability). While insurance can mitigate much of this risk, it has its limitations and a bank has options to be further protected.

One way to mitigate the risk is for a bank to own such property in an operating subsidiary wholly owned by the bank. Ownership of the property in an operating subsidiary would help limit the liability exposure to the assets of the subsidiary and protect the bank itself. Thus, the bank’s income and assets from other activities are insulated from the risks associated with property ownership. While common for large banks, many small banks do not have this level of protection in place, often because of the administrative burden associated with establishing a wholly owned subsidiary.

Under Ohio law, establishing an operating subsidiary requires a bank to submit a letter of …