United States

Indiana: FDIC Shared Loss Agreement Payments Included in Financial Institutions Tax Base

Mar 19, 2018
From KPMG TaxWatch

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In a recent letter of findings, the Indiana Department of State Revenue addressed whether payments received as a result of shared-loss agreements with the FDIC were excluded from the Indiana Financial Institution Tax (FIT) base. In filing their Indiana FIT returns, the taxpayer deducted these payments on the basis that payments from FDIC obligations were exempt from tax under the Federal Deposit Insurance Act. Under Indiana law, a franchise tax measured by the taxpayer's apportioned income is imposed on financial institutions for the privilege of exercising their franchise or transacting the business in the state. In computing the Indiana FIT, the starting point is federal gross income subject to certain additions and subtractions. One such subtraction applies to “income that [the] United States Constitution or any statute of the United States prohibits from being used to measure the tax.” Although departmental guidance on this subtraction clarified that U.S. government obligations include certain obligations issued by the FDIC, the guidance also noted that the exemption from tax does not apply when the tax at issue is a nondiscriminatory franchise tax. 

After the Department determined that the payments made by the FDIC were properly included in the FIT base because the Indiana FIT is a nondiscriminatory franchise tax, the taxpayer appealed. In sum, the taxpayer argued that under federal banking law, income derived from all “notes, debentures, bonds or other such obligations” issued by the FDIC were exempt from state tax. The Department disagreed. Noting that the periodic payments received under the shared loss agreements were not notes, debentures or bonds, the Department also concluded that by specifically enumerating "notes, debentures, or bonds," Congress intended to limit "other such obligations" to mean obligations similar to  “notes, debentures and bonds”—namely, the "issuance of interest-bearing bonds or Treasury notes."  In contrast, the shared loss agreements were contractual obligations between the parties that required both parties to perform certain obligations and make certain payments. The Department concluded that the shared loss agreement payments were subject to Indiana FIT. Please contact Mark Caito at 317- 951-2434 with questions on Letter of Findings: 18-20170211.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.