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Commercial Banking Industry Edition

Uncle Sam’s Tax Audit Assistant for Commercial Banking was developed from information available in the financial group of the Internal Revenue Service, from the Banking Industry Specialists and from Internal Revenue Agents from around the country. Even though commercial banking is specifically addressed in this manual, many of the issues and techniques are appropriate for use during the audit of savings and loans, mortgage companies, and finance companies.

The Commercial Banking Manual was designed to be a tool to assist Internal Revenue Audit Agents conducting an audit in the Commercial Banking Industry and are not familiar with auditing bank returns. It is useful as a reference during pre-audit planning to identify potential issues. It also assists the examiner in knowing the types of records and techniques necessary to identify and develop the issues. Also, familiarity with terminology unique to banking enables the auditor to communicate more effectively with the taxpayers and representatives throughout the audit process.

Generally, the income and deductions of a banking entity are computed in the same way as those of other corporations. They are also subject to the same federal income tax rates that apply to other corporations. The term “bank” in recent years has become increasingly blurred, but is usually applied to any establishment engaged in the various functions associated with a bank. These functions include the receiving, collecting, lending, and servicing of money. IRC Sections 581 though 585 provide special rules directly applicable to the taxation of banks.

SIGNIFICANT ISSUES

Significant issues involve areas with considerable examination potential. They are issues encountered in the field, but are not yet coordinated. The banking ISP has identified eight significant issues to be considered during all examinations. 

DOWNLOAD YOUR COPY OF UNCLE SAM’S TAX AUDIT ASSISTANT FOR THE COMMERCIAL BANKING INDUSTRY TODAY to find these eight items explained in detail.

  1. Are taxpayers properly identifying hedging transactions or should IRC Section 1256 apply?
  2. What level of substantiation must the taxpayer provide in order to be allowed a foreign tax credit?
  3. Can a taxpayer use “borrower” letters as proof of payment?
  4. What is the proper method for allocating expensed from the parent company to the branch operation?
  5. Is the Brazilian Foreign Tax Credit a creditable foreign tax for U.S. tax purposes and if the tax is creditable, is the Brazilian Central Bank exempt from tax?
  6. Is the taxpayer using SFAS 91 – The current inclusion into income of all fees, and the capitalization of all direct expenses related to the origination of the loan?
  7. What is the proper method for allocating expenses from the parent company to the branch operation?

If you don’t understand how the answers to these questions can affect your tax liability, you could find yourself in trouble during a tax audit. 

GUARANTEED to be chock-full of ALL of the information you need to survive an audit from the IRS in an easy to understand format!

TABLE OF CONTENTS

  • Introduction
  • Formation of the Group xiii
  • Utilization of the Commercial Banking Guide xiv
  • Chapter 1
    • General Overview of the Banking Industry
    • Definition of a Bank 1-1
    • Industry Regulation 1-3
    • The Office of the Comptroller of the Currency 1-4
    • The Federal Reserve Bank 1-4
    • The Federal Deposit Insurance Company 1-5
    • The Office of Thrift Supervision 1-5
    • State Regulatory Agencies 1-5
  • Chapter 2
    • Starting the Examination Process
    • Introduction to the Audit 2-1
    • Coordinated Issues 2-2
    • Significant Issues 2-2
    • Return Identification Process 2-3
    • Pre-Audit Planning 2-4
  • Chapter 3
    • Specialization Within the IRS
    • Involving Specialists in an Examination 3-1
    • Engineer 3-1
    • Computer Audit Specialist 3-2
    • Financial Products Specialist 3-2
    • International Examiner 3-3
    • Employee Plans Specialist 3-4
    • Employment Tax Specialist 3-4
    • Insurance Specialist 3-5
    • Economist 3-5
    • District Counsel and Industry Counsel 3-5
    • Market Segment Specialization Program 3-6
    • Industry Specialization Program 3-7
    • Summary 3-7
  • Chapter 4
    • Interest on Nonperforming Loans
    • Introduction 4-1
    • Examination Techniques 4-2
    • Law 4-5
    • Summary 4-5
  • Chapter 5
    • Core Deposits and Covenants Not to Compete
    • Core Deposits 5-1
    • IRC Section 197 5-1
    • Examination Techniques for Cases Under
    • IRC Section 197 5-2
    • Core Deposits Prior to IRC Section 197 5-2
    • Intangibles Settlement Initiatives --
    • Pre-IRC Section 197 Cases 5-3
    • Application of Pre-IRC Section 197 Law to
    • Core Deposit Intangibles 5-3
    • Examination Techniques for Cases Before
    • IRC Section 197 5-6
    • Covenants Not to Compete 5-7
    • The Economic Reality Test 5-8
    • The Mutual Intent Test 5-11
    • The Strong Proof Doctrine and the
    • Danielson Rule 5-13
    • Valuation of a Convenant Not to Compete 5-14
    • Effect of IRC Section 197 5-16
    • Examination Techniques 5-16
    • Summary 5-18
  • Chapter 6
    • Gain/Loss on Foreclosed Property
    • Introduction 6-1
    • Computing the Basis of the Loan for
    • Tax Purposes 6-2
    • Examination Techniques 6-3
    • Coordinated Issue Paper 6-5
  • Chapter 7
    • Gross-Up Net Loans
    • Introduction 7-1
    • Coordinated Issue Paper 7-1
    • International Tax Issues 7-2
    • Brazilian Foreign Tax Credits 7-3
    • Mexican Foreign Tax Credits 7-3
    • Articles 7-4
  • Chapter 8
    • Mortgage Servicing Rights
    • Introduction 8-1
    • Examination Areas 8-2
    • Background Information 8-2
    • Sale of Mortgage Loans &
    • Mortgage Backed Securities 8-3
    • Excess Servicing Fee 8-4
    • Computation of the Excess Servicing Fee 8-5
    • Prepayment of Mortgages 8-5
    • Law 8-6
    • SFAS 65 8-6
    • Examination Limits and Restrictions 8-7
    • Examination Techniques 8-8
    • Analysis of Rulings 8-10
    • Articles 8-12
  • Chapter 9
    • Loan Origination Costs
    • Introduction 9-1
    • Book Reporting of Loan Origination Costs 9-1
    • Tax Reporting of Loan Origination Costs 9-2
    • Law 9-4
    • Change in Accounting Method 9-7
    • Examination Techniques 9-8
    • Summary 9-10
  • Chapter 10
    • Bad Debts
    • Introduction 10-1
    • Definition of a "Large" Bank 10-2
    • Reserve Method 10-2
    • Specific Charge-Off Method 10-3
    • Charge-Off Mandated by Regulations 10-4
    • Breakdown of Loan Classifications Used by
    • Banking Regulators 10-5
    • Conformity Election for Bad Debt Charge-Offs 10-7
    • Bad Debt Recoveries 10-8
    • Bad Debt Reserve Recapture 10-8
    • Examination Techniques 10-10
    • Miscellaneous Items/Terms 10-12
    • Summary 10-13
  • Chapter 11
    • FSLIC Assistance
    • Background 11-1
    • Enactment of FIRREA 11-2
    • S&L's Acquired Prior to FIRREA 11-3
    • Analysis of the Issue 11-3
    • Years Ending On or After March 4, 1991 11-4
    • Examination Techniques 11-5
    • Post FIRREA Federal Assistance Payments 11-5
  • Chapter 12
    • Failed Thrift Institutions Operated by the RTC
    • Introduction 12-1
    • Who is Covered by the Agreement 12-1
    • Failed Thrift Receiverships 12-2
    • RTC Certification 12-3
    • Taxes Covered by the Agreement 12-4
    • Case Processing 12-5
    • Examination Considerations 12-5
    • Report Preparation 12-5
    • Joint Committee Considerations 12-6
    • Case Closing 12-6
    • Unagreed Cases 12-6
    • Refunds 12-7
    • Service Center Overview 12-7
  • Chapter 13
    • Acquisition Costs and Other Capital Expenses
    • Introduction 13-1
    • Examination Techniques 13-3
    • Law and Discussion 13-4
    • General Information 13-4
    • Takeover Attempts 13-5
    • Abandoned Mergers 13-6
    • Target vs. Acquiring Company 13-6
    • Other Capital Expenditures 13-7
    • Branch Costs 13-7
    • Credit Card Start-Up Costs 13-7
    • Automatic Teller Machine Fees 13-8
    • Advertising 13-8
    • Summary 13-8
  • Chapter 14
    • Leveraged Buyout Loans
    • Introduction 14-1
    • Investment Bankers 14-1
    • Examination Techniques –
    • Non-Cash Compensation 14-1
    • Examination Techniques -
    • Fees Paid to the Bank 14-3
    • Summary 14-4
  • Chapter 15
    • Amortization
    • Introduction 15-1
    • Law Changes 15-1
    • Amortization Items 15-2
    • Law 15-2
    • General Examination Techniques 15-3
    • Purchased Servicing Rights 15-4
    • Examination Techniques 15-5
    • Organizational and Business Start-Up Costs 15-6
    • Examination Techniques 15-8
    • Work Force in Place 15-8
    • Generic Position Papers 15-9
    • Amortization of Assembled Workforce 15-9
    • Covenants Not to Compete 15-9
    • Customer Based Intangibles 15-9
    • Employment Contracts 15-9
    • Amortization of Market Based Intangibles 15-9
    • Amortization of Order Backlog 15-10
  • Chapter 16
    • Fee Income
    • Introduction 16-1
    • Commitment Fees 16-1
    • Service Fees 16-1
    • Points 16-2
    • Examination Techniques 16-3
    • Law 16-6
    • Original Issue Discount 16-6
    • Summary 16-9
  • Chapter 17
    • Income Received in Advance
    • Introduction 17-1
    • Law 17-1
    • Accrual Method of Accounting 17-2
    • Issues 17-3
    • Credit Card Fees 17-3
    • Rental/Lease Income 17-4
    • Prepaid Interest 17-4
    • Commitment Fees and Service Fees 17-4
    • Automobile Lease Payments –
    • Capital Cost Reduction Payments 17-5
    • Facts 17-5
    • Law & Analysis 17-6
    • Examination Techniques 17-9
    • Summary 17-10
  • Chapter 18
    • Tax-Exempt Obligations
    • Introduction 18-1
    • Determination of Tax-Exempt Status 18-1
    • Examination Techniques 18-1
    • Interest and Expenses Relating to
    • Tax-Exempt Income 18-2
    • Examination Techniques 18-4
    • Sale of Tax-Exempt Obligations 18-5
    • Examination Techniques 18-5
    • Bond Premiums on Tax-Exempt Obligations 18-5
    • Original Issue Discount on
    • Tax-Exempt Obligations 18-6
    • Summary 18-6
  • Chapter 19
    • Discharge of Indebtedness
    • Introduction 19-1
    • Premature Withdrawal Penalties 19-1
    • Repurchase of Bonds 19-2
    • Examination Techniques 19-3
    • Forgiveness of a Borrower's Indebtedness 19-4
    • Summary 19-5
  • Chapter 20
    • Loan Swaps
    • Introduction 20-1
    • Mortgages Swapped for
    • Mortgage Backed Securities 20-1
    • Mortgage Pools Swapped for
    • Mortgage Pools 20-2
    • Foreign Loans Swapped for Foreign Loans 20-4
    • Repurchase Agreements 20-5
    • Real Estate Mortgage
    • Investment Conduits (REMIC) 20-6
    • Loan Restructurings 20-7
    • Examination Techniques 20-9
    • Summary 20-10
  • Chapter 21
    • Miscellaneous Issues
    • Introduction 21-1
    • Accrual of Original Issue Discount and
    • Market Discount 21-1
    • CAP Interest 21-2
    • Change of Accounting Method 21-2
    • Currency Transaction Reporting (CTR) 21-3
    • Dividend Received Deduction 21-3
    • Entrance and Exit Fees Paid to
    • Convert From an S&L to a Bank 21-3
    • Exemption for Insolvent Banks 21-4
    • Miscellaneous Income 21-5
    • Net Operating Loss Carrybacks 21-5
    • Regulatory Agency Penalties 21-5
    • Stock Dividend and Issuance Costs 21-6
    • Built-In-Loss Limitations on NOLS 21-6
    • S-Corporation Status 21-6
  • APPENDIX
    • Resource & Reference Materials
    • Banking Research Manuals A-1
    • Banking Publications A-3
    • IRS Materials A-3
    • Non-Tax Publications A-4
    • Bank Tax Seminars and Conferences A-5
    • Synopsis of Law, Decisions, & Rulings
    • Introduction A-7
    • Bad Debts A-7
    • Capital Expenditures A-8
    • Core Deposits and Other Intangibles A-8
    • Financial Products A-9
    • Foreign Banking A-10
    • Loan Origination Costs A-11
    • Loan Swaps A-11
    • Miscellaneous Issues A-11
    • Mortgage Servicing Rights A-12
    • Nonperforming Loans A-13
    • Original Issue Discount A-13
    • Premature Withdrawal Penalty Income A-13
  • GLOSSARY G-1

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