WASHINGTON -- In a victory for thrifts planning to sell shares for the first time, the Internal Revenue Service apparently has decided not to hold them liable for additional taxes when they use a popular new stock-conversion technique.

Late Thursday, the IRS phoned about a half-dozen lawyers representing thrifts with pending deals to tell them it would rule in early October that no additional taxes are due from mutual thrifts that sell minority stakes to the public.

"The cloud that was hanging over these transactions has lifted," said Eric Luse, a partner in the Washington-based law firm of Luse Lehman Pomerenk & Schick. He has quarterbacked many such conversions.

Management Keeps Control

The technique, called a mutual holding company conversion, has been permitted since 1991. It is not as popular as a standard mutual-to-stock conversion -- which is tax-free -- but it has increasingly attracted thrifts because it allows management to retain control after the transaction.

In the conversions, ownership of a depositor-owned thrift is split. The smaller piece is broker into shares and sold to the public. The larger piece, providing majority control for the thrift's management, is retained by depositors.

The IRS said last Thursday that pending resolution of a technical issue, it would issue private-letter rulings allowing mutual holding company conversions the same tax-free treatment as standard conversions.

Complicated Tax Question

The new OTS rules spelling out the structure thrifts must use for the conversions took effect Sept. 20.

The complicated tax question revolved around a component of the key tax shelter for savings and loans, the bad debt reserve, explained Derek A. Bloom, a senior associate at Elias Matz.

Unlike standard conversions, most mutual holding company conversions do not technically qualify as reorganizations, which are tax-free and preserve the bad debt reserves and the related accounting methods used by the former mutual institution.

The bad debt reserve represents the total income earned over the years on which the thrift was not required to pay taxes. Because a thrift transfers its assets to a subsidiary in a mutual holding company conversion, the IRS raised the possibility of whether thrifts should pay taxes on the reserves.UpdateMutual holding companyconversions Conversion assets (billions) Number1991 $0.15 11992 4.00 121993 1.16 4to datePending 0.73 5*Excludes two conversions for whichassets were unavailableSource: SNL Securities

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.