Tax Relief under TARP

Many unresolved issues continue to surround the financial relief program as evidenced by a flurry of diverse actions today. The nation’s banking regulators—the Federal Reserve, the Federal Deposit Insurance Agency, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision—issued a joint release about tax relief for banking organizations that have suffered losses on their Fannie Mae and Freddie Mac holdings. The regulators will allow banking organizations “to recognize the effect of the tax change enacted in Section 301 of the Emergency Economic Stabilization Act of 2008 (EESA) in their third quarter 2008 regulatory capital calculations.” Without today’s decision, banking institutions would not have seen any tax benefit until the fourth quarter of 2008.

Also today, leaders of the Independent Community Bankers Association (ICBA) met with President Bush and Secretary Paulson to discuss the Treasury’s capital purchase program. The FDIC will be the main overseer of that program; however, institutions’ primary regulators (e.g., OCC or OTS) will assist the FDIC. The Treasury has released some details of the program, but according to an ICBA press release, more details are needed. Association leaders urged Treasury to provide “details on how mutual, Subchapter S corporation, privately held and non-publicly traded community banks can participate.”

The ICBA has offered suggestions for modifying the TARP Capital Purchase Program. We understand the ICBA along with others are working with Treasury to make the needed changes and expect Treasury to release more detailed guidance next week. Some of the ICBA suggestions include:

  •  IRS agreeing not to allow capital injection to alter S Corp status; this would not cost taxpayers.
  • Alter the dividend restrictions, which could be problematic for Subchapter S banks and privately held banks.
  • For community banks that are in mutual form and do not issue stock, the program should be adjusted so they can participate. 
  • Some stockholder-owned community banks do not have an identified market value, which is a problem given the warrant requirements. ICBA has proposed alternatives related to a national bank index.

In other news this afternoon, the Treasury Department released guidelines for small businesses that want to pursue procurement opportunities in the EESA program. The guidelines contain a list of Web sites where small businesses can sign up for information alerts and input their capabilities. 

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