New Financial Institution Taxation, Compliance Measures in Force

New Financial Institution Taxation, Compliance Measures in Force

Banks and financial institutions face a host of new taxation and compliance standards in the wake of distressed economic conditions and Treasury's movement to drive enhanced transparency.  Measures in place or pending include:

  • Proposed Fee on Liabilities of Large Banks. A proposed fee on liabilities of financial institutions with $50 billion or more in consolidated assets. The proposal is designed to recover the $117 billion in Troubled Asset Relief Program (TARP) expenditures that have not been recovered. The $50 billion asset test would apply to the consolidated assets of the financial institution. No small or community bank would be covered by the fee. Financial institutions subject to the fee would include firms that were insured depository institutions, bank holding companies, thrift holding companies, insurance or other companies that owned insured depository institutions, or securities broker-dealers as of January 14, 2010, or that become one of these types of firms after January 14, 2010. (LEXIS users can access Taxation of Financial Institutions § 1.10 for additonal insight.)
  • Bank Secrecy Act. Under the Bank Secrecy Act, financial institutions must report and maintain records for transactions in cash or currency that exceed $10,000. The Bank Secrecy Act is administered by the Financial Crimes Enforcement Network (FinCEN), which is an agency within the Department of Treasury. In addition, the Internal Revenue Code contains its own reporting requirement for cash transactions that exceed $10,000. Although the Code reporting requirement does not apply to financial institutions, the report filed by the bank is filed on the same form as used for IRS reporting, IRS/FinCEN Form 8300. The Act also requires U.S. residents or a person in and doing business in the United States to file a report with the U.S. Treasury if he or she has a financial account in a foreign country with a value exceeding $10,000 at any time during the calendar year. (For additional insights, see Taxation of Financial Institutions § 27.04.)
  • Effectively Connected Income. Foreign bank income from specified activities is effectively connected income. In determining whether most "income" falls within the "effectively connected" rules, two factors are used for all businesses: (1) whether the income is derived from assets used in, or held for use in, the conduct of a U.S. business; and (2) whether the activities of the U.S. business are a material factor in the realization of the income. In applying these factors, an important (although not necessarily controlling) consideration is whether the asset or income involved is separately accounted for on the books of account kept for the U.S. business. Taxation of Financial Institutions § 23.04[1].
  • Bad Debt Recapture. Revenue Procedure 2009-39 modifies procedures for changing accounting methods and for changes when a bank elects S Corporation status. See Taxation of Financial Institutions § 14.07[1][a] for more details.
  • Tax-Exempt Credit Unions. Income derived from an outside broker-dealer providing products and services to credit union members was substantially related to the credit union's tax-exempt purposes. Bellco Credit Union v. United States, 2009 U.S. Dist. LEXIS 106087 (D. Colo. 2009). For analysis, see Taxation of Financial Institutions § 1.05B .