Treasury Opposes Tax Break For Loans Before Chargeoff

WASHINGTON - The Treasury Department said it opposes giving banks a tax break on nonperforming loans that, if granted, would save the industry up to $2.5 billion a year.

In a reported required by the Tax Reform Act of 1986, the Treasury supported preserving a tax-code provision that requires banks to pay taxes on loans with interest payments 90 days or more past due.

Bankers sought a change in the tax code to bring it into line with regulators' treatment of nonperforming loans - they are considered nonaccruing when 90 days delinquent. Bankers also say the tax code is unfair in that it requires payment when income is not being received.

$83 Billion in Loans

The Treasury contended that loans are taxable until proven uncollectible, when banks charge off the debt.

Federal Deposit Insurance Corp. data indicate that commercial banks alone are paying up to $2.5 billion a year in taxes on interest not collected on $83 billion in loans that regulators have branded as noncurrent.

The Treasury's report, released Tuesday, responded to a provision of the 1986 tax law that requested an investigation of the rules for taxing bad debts.

"We just want the IRS to make the rules consistent with the way the regulators handle it," said James E. O'Conner, tax counsel for the National Council of Community Bankers.

IRS Proposal Was Favorable

Though banks and thrifts lost this round, they won a major victory in May when the Internal Revenue Service proposed they be allowed to deduct charged-off loans from income, independently of any action by regulators.

Henry C. Ruempler, director of the American Bankers Association's tax and accounting office, said banks will continue to oppose the Treasury's position.

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