TaxNewsFlash-United States

November 1, 2007
No. 2007-480

Tax Court Concludes Bank’s Average Adjusted Basis of Tax-Exempt Obligations Does Not Include Those Purchased by Its Wholly Owned Investment Company

The Tax Court today issued an opinion concluding that the calculation of a bank’s average adjusted basis of tax-exempt obligations under sections 265(b)(2)(A) and 291(e)(1)(B)(ii)(I) does not include the tax-exempt obligations purchased by its wholly owned investment company. In reaching this decision, the Tax Court rejected the IRS’s position set forth in Rev. Rul. 90-44. PSB Holdings, Inc. v. Commissioner, 129 T.C. No. 15 (November 1, 2007).

For an electronic version of the 27-page opinion: PSB Holdings

Summary

The taxpayer is a holding company of an affiliated group of corporations that files consolidated federal income tax returns. The group includes the taxpayer’s wholly owned subsidiary (Bank) and Bank’s wholly owned investment subsidiary (Investments).

At issue was whether Bank had to include the tax-exempt obligations purchased and owned by Investments in the calculation of Bank’s average adjusted bases of tax-exempt obligations under sections 265(b)(2)(A) and 291(e)(1)(B)(ii)(I). The taxpayer filed a petition with the Tax Court concerning the IRS’s deficiency determinations of approximately $34,000, $39,000, $42,000, and $32,000 in its 1999, 2000, 2001, and 2002 federal income taxes, respectively, of its affiliated group.

The Tax Court agreed with the taxpayer and sustained the taxpayer’s reporting of tax-exempt obligations on the income tax returns. In reaching this determination, the Tax Court declined to accept the position asserted by the IRS in Rev. Rul. 90-44 in which the IRS stated that in certain circumstances, it could require that the tax-exempt obligations held by a subsidiary be taken into account in calculating that of a parent bank.

To print a copy of this TaxNewsFlash article, go to: File>Print>Preferences or Properties>Landscape.

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY KPMG TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

The KPMG logo and name are trademarks of KPMG International.

KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever.

The information contained in TaxNewsFlash-United States is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

Direct comments, including requests for subscriptions, to US-KPMGWNT@kpmg.com. For more information, contact KPMG’s Federal Tax Legislative and Regulatory Services Group at + 1 202.533.4366, 2001 M Street NW, Washington, DC 20036-3310.

To unsubscribe from TaxNewsFlash-United States, reply to this message and type ‘TaxNewsFlash Unsubscribe' in the subject line, then click on the SEND button.

KPMG Online Privacy Statement and Disclaimer