Regional bank crisis FDIC assessments deductible, IRS says

Underlying rules

Section 461 and the underlying regulations provide that a liability is deductible under the accrual method of accounting in the taxable year in which all events have occurred, provided that the fact of the liability and the amount of the liability can be determined with reasonable accuracy (the all-events test) and economic performance occurred with respect to the liability. Taxpayers may adopt the recurring item exception to deduct a liability in the taxable year the all-events test is met, even if economic performance occurs in the subsequent taxable year. However, the recurring item exception is generally not applicable to other payment liabilities described in Treas. Reg. Sec. 1.461-4(g)(7).

Section 263(a) and the underlying regulations provide rules for amounts required to be capitalized, including certain amounts paid to acquire or create intangibles. For example, taxpayers must capitalize amounts paid to create or enhance a separate and distinct intangible asset, which includes a fund (or similar account) if the amounts in the fund may revert to the taxpayer. Further, taxpayers must capitalize amounts paid to another party to enter into financial interests, including an insurance contract with cash value. Taxpayers also must capitalize pre-paid expenses, including pre-paid insurance.

Section 162(r) limits the deductibility of FDIC premiums for banks with total consolidated assets between $10 and $50 billion and disallows the deduction entirely for banks with total assets of $50 billion or more. For purposes of Section 162(r), FDIC premium means assessments imposed under Section 7(b) of the Federal Deposit Insurance (FDI) Act.

IRS analysis

The IRS concluded that the limit under Section 162(r) does not apply to a deduction for the payment of the special assessment because Section 162(r) applies to assessments imposed under Section 7(b) of the Federal Deposit Insurance Act; and not Section 13(c)(4)(G) of the FDIA. Additionally, the memorandum determines that the special assessment amount is not required to be capitalized under Section 263(a) as a separate and distinct intangible asset, in part because there is no indication in the final rule that the special assessment is subject to reversion to an IDI. The memorandum also states that the special assessment does not create an insurance contract with a cash value, and is not a prepaid asset that requires capitalization under Section 263(a).

The memorandum analyzes the timing of the deduction of the special assessment payments. Citing United States v. General Dynamics Corp., 481 U.S. 239 (1987), the IRS concludes that the all events test was met on Nov. 29, 2023, when the final rule was issued, reasoning that there is no event that might occur between the issuance of the final rule and April 1, 2024, the effective date, that would change a taxpayer’s status as an depository institution liable for the assessment. Additionally, the amount assessed to each depository institution was based on estimated uninsured deposits reported for the quarter ended Dec. 31, 2022, which the IRS determined to be an estimate with reasonable accuracy, notwithstanding that such amounts were subject to adjustments. The IRS states that the special assessment payments are defined as “other payment liabilities” under Treas. Reg. Sec. 1.461-4(g)(7) because Treas. Reg. Sec. 1.461-4(g) does not specifically enumerate them in its list of payment liabilities. Payment by the depository institution to the FDIC qualifies as economic performance, and the recurring item exception is not applicable. Because of this the IRS determined that these special assessment payments are deductible in the taxable year in which payment is made.