Pub. 8 2013-2014 Issue 4

November | December 2013 13 Extraordinary Service for Extraordinary Members. we’re Always CLOSE BY NetWorks is the Electronic Funds Transfer (EFT) service provider that Nebraskans have used and learned to trust like family for over 30 years. Since our offices are right here in Nebraska, you can count on us to provide quick and personalized service for all of your EFT needs. Give us a call and let’s talk about how we can simplify EFT for you. You will talk with a fellow Nebraskan and not some automated system. www.netseft.com Toll Free 800-735-6833 Local 402-434-8202 nificant number of shares from other shareholders can trigger an ownership change. “Loss Corporation” Under Section 382 A bank is a loss corporation if it is a corporation with a carryforward of net operating loss, capital loss, or tax credits or with net unrealized built-in loss (NUBIL) at the time of an owner- ship change. 11 Examples of potential NUBILs for banks include loan and re- ceivable loss reserves not yet charged off for tax purposes, as well as impairments of securities recorded for financial state- ment purposes but not recorded for tax purposes. The statute does, however, recognize a de minimis exception for determining a loss corporation subject to the limitations: If NUBIL does not exceed the lesser of $10 million or 15 percent of the fair market value of total assets, then the NUBIL will be deemed zero. 12 As a practical matter, it is important to recognize that, even with an other- wise profitable bank, a decline in asset values can create a loss corporation for federal tax purposes, as built-in losses can result from loan and receivable loss reserves not yet deducted for tax pur- poses, unrealized securities portfolio losses or impairments, or unrealized losses on other assets that have declined in value. Dividend vs. Capital Gain Even in a “tax-free” merger, any por- tion of the purchase price paid in cash rather than stock (commonly referred to as “boot”) is taxable to the acquired bank’s shareholders. 13 Differences in tax treatment boot paid in a merger or acquisition also can have implications for the bank and its owners. If the target bank’s stock is held by a corporation, the corporation will likely prefer dividend treatment—such treatment allows it to take advantage of the dividends- received deduction or, if the banks that are parties to the merger are part of a consolidated group, to treat the pay- ment as a nontaxable intercompany dividend. Furthermore, capital gains for investors and shareholders are in most cases taxed at a lower rate than dividends. 14 It is important, therefore, to determine whether boot exchanged in a bank merger will be taxed as a divi- dend or as capital gain. Determining whether boot is taxed as a dividend or capital gain can be  Proposition — continued on page 14 complicated. Generally speaking, a bank should treat the transaction as if the acquiring bank purchased the target bank’s stock with the acquiring bank’s stock and, right after the hypothetical acquisition, the bank redeemed a por- tion of the stock in exchange for boot. The transaction would be considered a sale or exchange, and taxed as a capital 11 Section 382(k)(1). 12 Section 382(h)(3)(B). 13 Section 351(b). 14 Pursuant to the American Taxpayer Relief Act, signed into law on Jan. 2, 2013, qualified dividends and long-term capital gains are taxed at 0 percent for taxpayers in the 10 percent and 15 percent income tax brackets; ordinary dividends are taxed at the taxpayer’s ordinary income tax rate, regardless of tax bracket; and the long-term capital gains tax rate is 20 percent (0 percent for taxpayers in the 10 percent and 15 percent tax brackets).