Thursday, May 13, 2004

Guest Blogger Linda Beale (Illinois) reports on the Banking & Financial Institutions panel at the ABA Tax Section May Meeting in Washington, D.C.:

The Banking and Financial Institutions panel at the ABA Tax Section meeting discussed the IRS perspective on new developments impacting financial institutions. Phillip Cook (Alston & Bird) moderated a panel of senior counsel members from the IRS Financial Services Industry Office in New York: Vince Guiliano, Ted Leighton, and John Sweeney. In a love-fest between the financial institution members of the tax bar and the IRS, IRS personnel highlighted three key developments in which the IRS has issued or is preparing to issue primarily taxpayer-friendly guidance advocated by financial institution lobbyists: (1) credit card fees, (2) accrual of interest on non-performing loans, and (3) the §475 conformity safe-harbor proposal.

The guidance on credit card issues is in a new revenue ruling and two new revenue procedures. Revenue Ruling 2004-52 provides that annual credit card fees are not interest for federal tax purposes, on the basis that they do not merely compensate for use of money but relate to all benefits under the terms of the credit card agreement. Therefore, they are not treated as OID and are not subject to the special §1272(a)(6) rules for accounting for OID on debt subject to prepayments. The annual fee is includible under the all-events test, but Revenue Procedure 2004-32 permits ratable inclusion over the period covered by the fee, supporting the financial accounting conformity position advocated by credit card banks. Under Revenue Procedure 2004-33, late fees are interest and a taxpayer may elect to treat late fees as OID subject to the prepayment rules of §1272(a)(6). The revenue procedure provides audit protection in those cases in which a taxpayer adopted that method in self-help accounting for late fees prior to issuance of the revenue procedure. The proper mode of accounting for OID under §1272(a)(6) remains subject to ambiguities—issues include selection of a reasonable prepayment assumption, whether fees are aggregated or treated separately, and whether a billing with additional charges added to a carryover amount should be treated as a reissuance of old debt or whether instead the new charges constitute a new OID debt instrument. The IRS representatives strongly hinted that guidance on these and other issues under §1272(a)(6) may be included in the next business plan. (These issues are also significant for the REMIC industry, in which OID on REMIC regular interests, treated as debt for tax purposes, is subject to the prepayment adjustments required under the §1272(a)(6) formula.)

The IRS is continuing to consider, at the request of the banking industry, book-tax conformity for non-performing loans. In particular, the goal is to make the rules more taxpayer-friendly for securitizations, where the loans are off-book for regulatory purposes.

The IRS is also moving forward with its regulation project on mark-to-market valuation of derivatives, which began with the May 2003 release of an ANPRM (Ann. 2003-35) proposing a book-tax conformity safe harbor and has continued with an advance industry resolution (AIR) program on mark-to-market book-tax conformity, both heavily lobbied for by the Securities Industry Association. Ted Leighton praised the efforts and indicated IRS delight with the results of the AIR program to date. Both the IRS and industry representatives argue that the conformity proposal will simplify accounting issues, reduce administrative burdens, and eliminate controversies. (The blogger notes that most rules that yield to the taxpayer the hard work of determining how much taxable income a taxpayer has do eliminate controversies and relieve the IRS of administrative tasks; however, making life easier for taxpayers and the IRS is not necessarily the appropriate benchmark for evaluating new tax rules, especially in the arcane area of derivatives valuation.) There will likely be a Notice of Proposed Rulemaking by June 30. All indications from the meeting are that the Notice will give the industry exactly what it wants.