WASHINGTON - Treasury Department officials are scrambling to quell fears that money paid to capitalize the Savings Association Insurance Fund will not be tax deductible.
Questions from key lawmakers about the deductibility of the 85 basis- point fee alarmed industry executives last week, setting off a series of calls to administration officials. Losing the tax writeoff could add about $2 billion to the thrift industry's tab.
The bailout plan under consideration in Congress would rebuild the thrift fund through a one-time fee on the industry's deposits. The fee is expected to raise $6.1 billion, roughly a third of which institutions are expecting to recoup as a tax deduction.
Without the writeoff, thrifts could withdraw support of the rescue plan, said Paul A. Schosberg, president of America's Community Bankers. "It is the glue that holds this solution together," he said.
Treasury officials were quick to reassure the industry.
"It's our intention and expectation that it will be deductible," said John D. Hawke Jr., under secretary of the Treasury for domestic finance.
Mr. Schosberg said he is confident the Treasury Department will deliver. "Nobody has ever waffled about it," he said.
House Banking Committee Chairman Jim Leach added fuel to the fire Friday.
"The unresolved nature of these tax issues leaves a cloud of uncertainty over the prospect of early BIF-SAIF resolution," Rep. Leach said. "If a credible agreement ... cannot be reached in the next three to four weeks with House Ways and Means and Senate Finance committees, the Congress may be forced to put off action on SAIF recapitalization this year."
Rep. Leach noted there are other, unrelated concerns about how to handle the tax questions raised by thrifts' bad debt reserves.
In a statement, Rep. Leach added that he hopes "galactic" legislation encompassing Glass-Steagall repeal, regulatory reform, and a fix for the thrift fund can be enacted this year. "While I remain guardedly optimistic, it is clearly premature to assume that a full resolution is imminent."
The question over the deductibility of the 85 basis point fee is being spurred by the Supreme Court's 1992 decision in Indopco v. Commissioner. That case pitted the Internal Revenue Service against Indopco, formerly known as National Starch and Chemical Corp., which manufactures adhesives, starches, and speciality chemicals. The company wanted to deduct the cost of investment advice in connection with an acquisition. But the IRS said no, claiming expenses producing long-term benefits cannot be deducted.
The IRS relied on the precedent in 1993 when it ruled that fees paid to exit the thrift fund and enter the Bank Insurance Fund were not deductible. It said entry into the bank fund provides long-term benefits - the bank would pay lower insurance premiums, would have all its deposits insured by the same fund, and would be governed by only one regulator.
Congressional staff members, industry lobbyists, and several tax lawyers are worried the IRS will apply similar logic to the thrift fund recapitalization fee.
But Cynthia Beerbower, deputy assistant secretary of the Treasury for tax policy, said a major difference exists between the exit/entry fees and the recapitalization fee. The one-time hit is a required business expense, she said. A thrift can't refuse to pay it, whereas a bank could simply have left its deposits in the thrift fund.
The one-time assessment is no different than the insurance premiums banks and thrifts now deduct from their income for tax purposes, she said.
Also, Ms. Beerbower said, the recapitalization does not ensure premiums will drop. Rather, it only guarantees that the fund will be capitalized in 1996. The Federal Deposit Insurance Corp. may have to keep the premiums high if several major thrifts fail next year, she said.
As a required business expense with no guaranteed future benefit, the one-time fee would be deductible, she said.