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Wednesday, October 03, 2012 7:12:53 AM
http://www.cfo.com/article.cfm/14561062
The case at hand involves a parent company, which we'll call ParentBank, and a subsidiary, SubBank. SubBank, which, according to the IRS, "provided a broad range of banking services," was seized by the Office of Thrift Supervision and placed into receivership of the Federal Deposit Insurance Co. The FDIC then sold SubBank's assets to another company, "BuyerBank." As a result of the seizure and the asset sale, ParentBank and a nonbanking subsidiary, "NonBank," filed for protection under Chapter 11 of the U.S. Bankruptcy Code.
In the receivership sale, BuyerBank bought practically all of SubBank's assets and assumed all its deposits and other of its liabilities for cash in a taxable transaction. ParentBank reported a net loss on its consolidated income-tax return related to the receivership sale.
ParentBank had reported that more than 90% of SubBank's aggregate gross receipts for all taxable years had been from interest income on, and gains from the sale of, real estate loans (including mortgage-backed securities) and consumer loans; service charges, fees, and commissions; and other noninterest income from operations. All such gains qualified for ordinary income treatment under Section 582(c) of the Internal Revenue Code, according to the IRS.
The IRS concluded that SubBank's loss from the worthlessness of its S stock would be an ordinary loss, rather than a capital loss. In doing so, the service essentially ruled that Congress really didn't intend for such rulings to turn on a black-and-white decision. Instead, Congress intended that we analyze the activities that the company undertook to earn that interest income. If those activities are business activities, then the corporation should not be penalized for the interest income it has earned. Interest income, in short, is no longer inherently passive.
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