Press Release Tools E-mail This Press Release Printer-Friendly Format

WASHINGTON, D.C. — America’s Community Bankers has given the Treasury Department a comprehensive tax burden relief program for community banks that includes expansion of the Subchapter S option, suggestions for resolving mortgage-related tax issues, ways to improve retirement account rules, and a plea for relief from information reporting requirements.

ACB said its catalog of suggestions "would make a start at restoring the competitive equilibrium that should exist between community banks and other financial intermediaries."

Members of ACB’s Tax Committee recently discussed community bank tax issues with Treasury and Internal Revenue Service officials. Treasury is preparing a report for Congress on ways of reducing the tax burden on small banks.

"Community banks are being challenged today by competitors that have found ways to mimic traditional bank services and products, while operating in more tax efficient structures than those permitted for banks," ACB said. "The structural disequilibrium has been exaggerated by various tax regulatory and audit activities that have not been adequately thought through in terms of the need to promote fairness between similarly situated competitors.

"In some cases, heavy administrative burdens are being imposed on community banks by regulations that have been exceedingly complex in an effort to eliminate all possibility of cheating. In fact, in the areas of tax information reporting, administrative burdens have been imposed on banks because they are being made to function, more and more, as tax compliance radar," ACB said.

Subchapter S. "One of the most important steps toward competitive equilibrium for community banks would be the enactment of the comprehensive series of Subchapter S reforms" contained in bills pending on Congress, ACB said. "One of the strongest commitments the Treasury could make to the continued viability of community banking would be to publicly support" enactment of reforms.

Of eight suggested reforms, ACB focused on two that are most likely to be included in tax legislation this year. One would codify that income from assets required to conduct a banking business, such as income from investing for liquidity purposes, is not passive. The second would clarify that shares of stock issued to directors under state law will not be considered a second class of stock for Subchapter S eligibility. If Congress doesn’t act, ACB said that Treasury appears to have the authority to resolve these issues through regulation.

Mortgage Issues. ACB recommended that the IRS acquiesce to the federal appeals court decision overturning the agency’s position in the PNC Bancorp case. The IRS wanted to require lenders to capitalize "loan origination costs" and recover them over the life of the loan. Industry practice has been to deduct those costs in the year they are incurred.

ACB’s compromise solution was to suggest that the IRS regard the costs of originating any one loan to be immaterial for tax purposes.

On another issue, as a matter of fairness to community banks, ACB recommended that the IRS permit the amortization of purchased mortgage servicing rights on a loan-level basis. Currently, the IRS requires the entire cost of a pool of loans to be amortized over nine years, even if individual loans prepay or are disposed of. The longer recovery period means a reduced price to small mortgage originators when they sell servicing.

Retirement Accounts. While community banks are committed to increasing the level of personal savings, ACB said many community banks "are not enthusiastic" about offering various types of Individual Retirement Accounts because of their complexity and variety.

ACB said there has been a failure to coordinate the rules for traditional IRAs, Roth IRAs and Education IRAs, and the result is "mind-boggling complexity." And each year, the administration’s budget proposal includes several new special purposes savings plans.

Many community banks, ACB said, find it too expensive to offer these retirement accounts, except as retail outlets for third party securities firms. ACB recommended creating a special, higher contribution limit for traditional and Roth IRAs that are maintained at small community banks. The current annual limit of $2,000, would be $2,500 for the special accounts. In addition to enabling small banks to compete with large banks and mutual funds, "our proposal could significantly increase the funds available to small community banks for lending to their communities," ACB said.

ACB also recommended that the IRS should reconsider its regulations in a way that would make the Retirement CD a viable product. The Retirement CD adapts the terms and conditions of certificates of deposit to qualify for treatment as a tax-deferred annuity. This would have "enormous potential to enable to compete with insurance companies and large banks," ACB said. It would allow small banks to issue annuities directly rather than just selling the annuities issued by insurance companies.

Congress eliminated deposit insurance for tax-deferred annuities and the IRS eliminated the lump-sum distribution feature. Both actions favored the insurance industry. ACB urged that the Retirement CD be allowed to offer a partial cash surrender option.

Information Reporting. "One of the greatest compliance burdens facing community institutions is the preparation and filing of tax information returns," ACB said. Banks already are required to file at least one information return for every customer and for persons who are not customers but have some relationship with a customer.

ACB said the most "egregious" example of new reporting responsibilities created by Congress and expanded on by the IRS will require the filing of an information return on any payment made to an attorney in connection with legal services, even if a check made payable to another person is delivered to an attorney as an intermediary. As an example, ACB said that a check made payable to a seller in a mortgage transaction that is endorsed over for deposit in an attorney’s escrow account in the course of a real estate closing would be subject to the reporting requirement. Information reporting wouldn’t even help the IRS determine an attorney’s income, but would generate so much extraneous information that any useful information would be swamped, ACB said.

ACB said the reporting required by the "delivery rule" will be very expensive for community banks to implement (they may have to perform the task manually) because bank computer systems are geared to customer’s taxpayer identification numbers, not the names or addresses of their attorneys. The rule’s effective date is Jan. 1, 2001.

ACB also urged:

• Encouraging small community banks to invest in tax-exempt bonds issued locally by providing an expanded exemption from paying tax on the interest earned. Under ACB’s suggestion only 10 percent of the interest earned on qualified tax exempt obligations would be disallowed, down from the current 20 percent disallowance. Decreasing the disallowance "will increase the ability of small community banks to compete with the large commercial banks, which have traditionally dominated the municipal bond market," ACB said.

• Increasing the net operating loss carryback period for community banks to five years from the current two. ACB said that extending the carryback period "will mitigate against community banks having to curtail lending and call loans during a recession, just when their communities need credit the most."

• Eliminating the tax treatment of foreclosed property as inventory and subject to tax. Holding foreclosed property for sale is an ordinary and necessary business expense of banking that should be deductible. Community banks are less likely than some banks to transfer forecloses to a separate real estate management subsidiary because of cost and administrative burdens, ACB said.

• Maintaining the current real estate investment trust rules that community banks use to raise capital and reduce state taxes. The administration has proposed eliminating the use of "controlled" REITs.

The text of the 32-page letter is available by fax and courier or it can be accessed on ACB’s website by clicking HERE.