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F
ederal
Re s e r v e Ba n k
DALLAS, TEXAS
of
D allas
75222
C i r c u l a r No.
Decem ber 2 2 ,
American Revolution Bicentennial
76-175
1976
BANK HOLDING COMPANIES
Tax R e l i e f f o r D i v e s t i t u r e s u n d e r t h e Bank H o l d i n g Company A ct
TO ALL BANK HOLDING COMPANIES
AND OTHERS CONCERNED IN THE
ELEVENTH FEDERAL RESERVE DISTRICT:
I n a l e t t e r t o t h e P r e s i d e n t s o f a l l F e d e r a l R e s e r v e B a n k s , d a t e d December
1 4 , 1 9 7 6 , t h e G e n e r a l C o u n s e l o f t h e B oard o f G o v e r n o rs o f t h e F e d e r a l R e s e r v e S ystem
h as p ro v id e d im p o rta n t in fo rm a tio n r e g a r d in g c e r t a i n ta x r e l i e f a v a i l a b l e u n d e r th e
Bank H o ld in g Company Tax A c t o f 1976 i n c o n n e c t i o n w i t h d i v e s t i t u r e s b y c o m p a n ie s t h a t
becam e s u b j e c t t o t h e Bank H o ld in g Company A c t a s a r e s u l t o f t h e 1970 Amendments.
Bank h o l d i n g c o m p a n ie s t h a t may b e e l i g i b l e f o r t a x r e l i e f f o r d i v e s t i t u r e s t h a t h a v e
a l r e a d y o c c u r r e d o r t h a t w i l l b e c o m p l e te d b e f o r e December 3 1 , 1 9 7 6 , m u st a p p l y t o t h e
G e n e r a l C o u n s e l o f t h e Board o f G o v e r n o rs p r i o r t o December 3 1 , 1 9 7 6 , f o r c e r t a i n
c e r t i f i c a t i o n s r e q u i r e d u n d e r t h e Bank H o l d i n g Company Tax A c t o f 1976.
F o l l o w i n g i s a n e x c e r p t fro m t h e G e n e r a l C o u n s e l ' s l e t t e r o f December 14 t o
t h e P r e s i d e n t s o f a l l F e d e r a l R e s e r v e B anks:
On O c t o b e r 2 , 1 9 76, C o n g r e s s e n a c t e d t h e Bank H o ld in g Company Tax A c t
o f 1976 ( S e c t i o n s 1 1 0 1 -1 1 0 3 a n d 6158 o f t h e I n t e r n a l R evenue Code) ("T a x A c t " ) ,
w h ic h p r o v i d e s c e r t a i n t a x r e l i e f f o r d i v e s t i t u r e s r e q u i r e d o f c o m p a n ie s t h a t
becam e s u b j e c t t o t h e Bank H o l d i n g Company A c t ("BHC A c t " ) a s a r e s u l t o f t h e 1970
Amendments. T h e s e c o m p a n ie s a r e g e n e r a l l y r e q u i r e d t o d i v e s t e i t h e r t h e i r i m p e r
m i s s i b l e n o n b a n k in g a s s e t s o r t h e i r c o n t r o l o f b a n k s p r i o r t o J a n u a r y 1 , 1980.
But f o r t h e Tax A c t , many s u c h d i v e s t i t u r e s w ould r e s u l t i n a d d i t i o n a l F e d e r a l
t a x e s f o r t h e d i v e s t i n g c o m p a n ie s o r t h e i r s h a r e h o l d e r s .
I n g e n e r a l , t h e Tax A c t p r o v i d e s two p o s s i b l e m e th o d s t h r o u g h w h ic h t a x
r e l i e f may b e o b t a i n e d by a ba n k h o l d i n g company and i t s i n d i v i d u a l s e c u r i t y
h o ld ers.
U n d e r o n e m e th o d , a b a n k h o l d i n g company may d i v e s t e i t h e r b a n k in g o r
n o n b a n k in g p r o p e r t y ( o r t h e s t o c k o f a new s u b s i d i a r y c o r p o r a t i o n fo rm e d t o h o l d
such p r o p e r ty ) th ro u g h th e d i s t r i b u t i o n (o r " s p i n o f f " ) o f such p r o p e r t y to i t s
s e c u r i t y h o l d e r s w i t h o u t c r e a t i n g t a x a b l e incom e o r c a u s i n g t h e r e c o g n i t i o n o f
g a in by th o s e s e c u r i t y h o ld e r s w ith r e s p e c t t o th e p r o p e r ty d i s t r i b u t e d .
In e f f e c t ,
t h e b a s i s o f s u c h p r o p e r t y f o r t a x p u r p o s e s i s s h i f t e d fro m t h e h o l d i n g company
t o t h e r e c i p i e n t s e c u r i t y h o l d e r s , who w i l l r e c o g n i z e g a i n , i f a n y , upon t h e i r
s a l e o r d i s p o s i t i o n o f such p r o p e r ty .
Such a d i s t r i b u t i o n may b e made i n e x
c h a n g e f o r c e r t a i n t y p e s o f s e c u r i t i e s o f t h e d i v e s t i n g company h e l d by t h e com
p a n y 's s e c u r i t y h o ld e r s .
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
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2 .
Under a second method of tax relief, a bank holding company may divest
either its banking or nonbanking property through a taxable sale or exchange and
may pay the tax incurred in installments over a ten-year period.
In addition to the tax relief available for divestitures compelled by
the 1970 Amendments to the BHC Act, the Tax Act affords an opportunity for bank
holding companies covered by the 1970 Amendments that have permanently grand
fathered activities to dispose voluntarily of either all of their grandfathered
holdings or all of their banking property and obtain the same tax advantages for
those dispositions that are applicable to forced dispositions.
As a prerequisite to obtaining any of these benefits, the Tax Act
requires the divesting company to obtain from the Board certain "certifications"
with respect to the company involved and the relationship of the divestiture to
the requirements of the BHC Act.
In essence, the purpose of these certifications
is to provide assurance, based upon the Board's knowledge of the purpose of the
BHC Act and its familiarity with specific circumstances, that the tax relief
provided will be justified in each situation.
The certifications that the Board must make in order to qualify a
divestiture for tax relief fall into two categories: A "prior certification,"
which must be maEde before a divestiture takes place, and a "final certification,"
which must be made after the holding company completes its divestiture.
In issuing
a "prior certification" with respect to a proposed divestiture of nonbanking prop
erty, the Board must certify that "the distribution of such prohibited property
is necessary or appropriate to effectuate section 4 of the Bank Holding Company
Act."
In issuing a "prior certification" with respect to a proposed divestiture of
banking property, the Board must certify:
(1) that such property is all or part
of that which causes the company to be a bank holding company, and (2) that "the
distribution is necessary or appropriate to effectuate the policies of the (BHC)
Act."
Before a company or its shareholders can take advantage of the Tax Act's
benefits, the Board must issue a "final certification" that the divesting company
has either
"disposed of all of the property the disposition of which is nec
essary or appropriate to effectuate section 4 of the Bank Holding Company Act,"
or "ceased to be a bank holding company."
In connection with the issuance of "prior" and "final" certifications,
the Board is also required to certify that the divesting company constitutes a
"qualified bank holding corporation," as defined in Sections 1103(a)(1), (2) and
(3) of the Tax Act, and to specify and itemize the property being disposed of.
In addition, the Board may be called upon to make certain other certifications
relating to a divestiture.
These include certifications with respect to whether
a distribution may be made on a non-pro rata basis under Section 1101(a)(3)(D) of
the Tax Act; and, if applicable, whether the divesting company has disposed of
all "grandfathered" property as required under Section 1103(g) of the Tax Act.
The provisions of the Tax Act become effective on October 1, 1977.
However, the Tax Act provides that in the event a company has already completed
a divestiture pursuant to the 1970 Amendments, or completes such a divestiture by
- 3 -
December 31, 1976, a subsequent certification by the Board shall be deemed to
satisfy the requirements relating to both "prior" and "final" certifications if
an application for such certification is made within 90 days of the enactment of
the Tax Act-- that is, no later than December 31, 1976. Thus, bank holding
companies that may be eligible for tax relief for divestitures that have already
occurred or that will be completed before December 31. 1976. should be aware of
the need to apply for the necessary certification prior to December 31, 1976.
The Board has delegated to the General Counsel the authority to issue
certifications under the Tax Act. All requests for certifications by companies
that must apply before the December 31, 1976 deadline should be sent in duplicate
directly to the General Counsel of the Board with a copy to the Federal Reserve
Bank of the Federal Reserve District in which the principal banking operations
of the holding company are conducted. The request should be in letter form
specifying the certifications requested, and should set forth (1) the facts upon
which the applicant's eligibility for tax relief is based; (2) the property that
has been divested, or will be divested by December 31, 1976; and (3) the method
of divestiture.
While timely applications setting forth this information will
be deemed to satisfy the statutory requirement for filing prior to December 31,
1976, applicants should understand that additional information may be required
to enable the Board to issue the certifications requested.
The December 31, 1976 deadline for applying for certifications is applicable
only to companies that will have completed divestitures by that date.
In the near
future more detailed procedures for applications for certifications by other companies
eligible for tax relief under the Tax Act will be made available.
However, bank
holding companies planning divestitures early in 1977 are advised to file letter
applications promptly without awaiting the promulgation of further procedural re
quirements.
Companies that conduct their principal banking operations in the Eleventh
Federal Reserve District and that must apply for certifications before the December 31,
1976 deadline should send two copies of the application directly to the General Counsel
of the Board of Governors and one copy to the Regulations Department, Federal Reserve
Bank of Dallas, Station K, Dallas, TX 75222.
Questions regarding this matter
may be directed to our Regulations Depart
ment.
Very truly yours,
Robert H. Boykin
F i r s t V ic e P r e s id e n t
@FedFRASER