Congressional Response P.L. 111-5

Apart from the letters from various Congressional members to the Treasury and the Inspector General, there seemed to be no official response from Congress to the Notice. Grassley and other members proposed various bills that would revoke the Notice, otherwise clarify §382, or limit the Service in some manner, but these bills did not make it past the committee’s approval. While the Notice was issued in the 110th session of Congress, it was not until the 111thsession convened that a formal response would be seen. Public Law 111-5 settled the issue, revoked the Notice, but still allowed taxpayers, who had relied on it during the interim, to continue to rely on it.

P.L. 111-5 §1261

SEC. 1261. CLARIFICATION OF REGULATIONS RELATED TO LIMITATIONS ON CERTAIN BUILT-IN LOSSES FOLLOWING AN OWNERSHIP CHANGE.

         (a) FINDINGS – Congress finds as follows:

(1) The delegation of authority to the Secretary of the Treasury under section 382(m) of the Internal Revenue Code of 1986 does not authorize the Secretary to provide exemptions or special rules that are restricted to particular industries or classes of taxpayers.

(2) Internal Revenue Service Notice 2008–83 is inconsistent with the congressional intent in enacting such section 382(m).

(3) The legal authority to prescribe Internal Revenue Service Notice 2008–83 is doubtful.

(4) However, as taxpayers should generally be able to rely on guidance issued by the Secretary of the Treasury legislation is necessary to clarify the force and effect of Internal Revenue Service Notice 2008–83 and restore the proper application under the Internal Revenue Code of 1986 of the limitation on built-in losses following an ownership change of a bank.

(b) DETERMINATION OF FORCE AND EFFECT OF INTERNAL REVENUE SERVICE NOTICE 2008–83 EXEMPTING BANKS FROM LIMITATION ONCERTAIN BUILT–IN LOSSES FOLLOWING OWNERSHIP CHANGE –

                   (1) IN GENERAL – Internal Revenue Service Notice 2008–83 –

(A) shall be deemed to have the force and effect of law with respect to any ownership change (as defined in section 382(g) of the Internal Revenue Code of 1986) occurring on or before January 16, 2009, and (B) shall have no force or effect with respect to any ownership change after such date.

(2) BINDING CONTRACTS – Notwithstanding paragraph (1), Internal Revenue Service Notice 2008–83 shall have the force and effect of law with respect to any ownership change (as so defined) which occurs after January 16, 2009, if such change –

(A) is pursuant to a written binding contract entered into on or before such date, or

(B) is pursuant to a written agreement entered into on or before such date and such agreement was described on or before such date in a public announcement or in a filing with the Securities and Exchange Commission required by reason of such ownership change. [i]

In this first subsection, Congress limited the Service’s authority in issuing Notices that exempt or otherwise provide special rules for specific industries or groups.  Notice 2008-83, not only went against the congressional intent for §382, but also was based on questionable authority. However, at the same time, Congress did not want to punish taxpayers who had relied on the Notice. In the next subsection, Congress invalidates the Notice, stating that the Notice has no force of law. However, Congress does treat the Notice as law for any acquisitions completed or in which the parties were already bound by contract. While Congress limited the power of the Internal Revenue Service, the limitation was very specific. The Service is prohibited from providing “exemptions or special rules that are restricted to particular industries or classes of taxpayers.” Congress did not limit any the Service’s powers, interpretive or otherwise, beyond making exemptions or special rules that are specific to certain group of taxpayers. In theory, the Service could still remove the limitations of §382, as long as it did not limit the benefit to banks or other groups. The question of how much power the Service can exert with a Notice remains open.

[i]. P.L. 111-5, 228-229.