Special assessment on banks, savings and loans finances thrift-deposit insurance fund.

The fiscal 1997 spending bill signed into law by President Clinton on Sept. 30, 1996 imposes a special assessment on Savings Association Insurance Fund (SAIF)-insured deposits of financial institutions as of Mar. 31, 1995. Banks as well as savings and loans may be assessed, albeit at a lesser rate. Enactment of these provisions caps a tumultuous two years of debate on how the thrift-deposit insurance fund should be recapitalized and whether banks should contribute to it.

Although the one-time assessment is expected to be costly to the industry, the statutory language makes clear that the payment will be deductible. The one-time assessment is allowed as a deduction in the tax year paid, thereby avoiding capital expenditure and other tax accounting issues. In addition, the statute makes clear that the special 10-year year loss carryback rules of Sec. 172(f) are inapplicable to the assessment. However, the statute does not prevent a three-year carryback of any loss resulting from deduction of the special assessment.

The Special Assessment

The heart of the new law is a one-time special assessment on thrift deposits to shore up the SAIF. As part of the "Deposit Insurance Funds Act of 1996," a special assessment will be imposed on SAIF deposits of each insured institution in accordance with regulations of the Federal Deposit Insurance Corporation (FDIC). The applicable rate will be the rate that the FDIC determines (after taking into account certain statutory adjustments) necessary to cause the SAIF to achieve a designated reserve ratio on the first business day of the first month beginning after the Sept. 30, 1996 date of enactment of the spending bill. For this purpose, the deposits involved are measured as of Mar. 31, 1995.

If the FDIC follows its own schedule, collection of the assessment will be via ACH direct debit on Nov. 27, 1996. The payment date of the assessment is determined by the FDIC, but can be no later than 60 days after the date of enactment.

Year of the Deduction

As witnessed by the discussions surrounding similar proposed legislation in 1995, without a special rule there would be a debate about the year (or years) to which the assessment applies. Congress avoided this controversy by providing that the special assessment is included as a deduction under Sec. 162 for ordinary and necessary business expenses in the tax year in which it is paid. This may create a book/tax difference, since the Financial Accounting Standards Board has stated that the assessment must be accrued for financial statement purposes in the third quarter of 1996.

Example (fiscal-year taxpayer): FS Corporation's tax year ends September 30. The new law was enacted on Sept. 30, 1996, the last day of FS's fiscal 1996 tax year. Assume the payment due under the new law is made to the FDIC on Nov. 27, 1996. The payment is deductible for tax purposes in the fiscal year ending Sept. 30, 1997, because the deduction is based on the tax year of payment. For financial statement purposes, the expense must be reported for the fiscal year ended Sept. 30, 1996.

Carryback of Tax Losses

A collateral tax issue raised by the new special assessment is whether it can be carried back under the special 10-year loss carryback rules for certain Federal liabilities provided in Sec. 172(f) or only under the general three-year loss carryback rules. The new law eliminates the availability of the special 10-year loss carryback rules for a loss generated by the special assessment, but does not restrict use of the general three-year loss carryback provisions.