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Bank of America Transaction

Bank of America Transaction. Jenny Ard Kurt Bennion Ruston Bown. Bank of America in 2001. Has 143,000 employees, 4,251 banking centers, 13,133 ATM locations, and 34 international offices Is one of the largest companies in the world (31 st in terms of market cap)

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Bank of America Transaction

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  1. Bank of America Transaction Jenny Ard Kurt Bennion Ruston Bown

  2. Bank of America in 2001 • Has 143,000 employees, 4,251 banking centers, 13,133 ATM locations, and 34 international offices • Is one of the largest companies in the world (31st in terms of market cap) • Pioneered the use of debit cards • Is the world’s largest small and middle-market lender

  3. IRS Section 351 • States that “No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange in stock in such corporation, and immediately upon exchange such person or persons are in control of the corporation.” • So, as long as the property is transferred for stock, no gain or loss is recognized

  4. Sept. 2000 Jan 2002 Q4 2001 Bank of America began researching the legality of setting up the Strategic Solutions subsidiary Bank of America Announced the transaction to the public Sept. 2001 • Strategic Solutions • reclassified the $3.2B of • Loans as held for sale and • wrote down the assets by 1/3 • value ($384M tax benefit) • 2. Bank of America sold • shares of subsidiary • common stock and realized • loss on sale ($34M tax • Benefit) • Total Tax Benefit: $418M Bank of America Subsidiary: Strategic Solutions, Inc. $3.2B of assets tax free Preferred and Common stock Bank of America set up and completed the transaction Bank of America Transaction

  5. September 2000 • The bank began researching the legality of the transaction • Bank of America has been incredibly secretive about how it has accomplished the legal performance of this transaction

  6. September 2001 • Bank of America transferred $3.2M of assets to Strategic Solutions tax free (Section 351) • The newly formed subsidiary was set up to specialize in the collection of bad debts • Assets were not written down, but accounted for at the original tax basis • Bank of America received shares of common and preferred stock in the transfer • The preferred stock had a basis equal to the market value of the assets • The common stock had a basis equal to the tax value of the assets

  7. Q4 2001 • Strategic Solutions reclassified the loans and wrote down the assets by 1/3 • The write down saved $384 M in taxes ($3.2B X 1/3 X 36%) • Bank of America sold its shares of common stock to a third party • The company realized a loss on the sale and saved approximately $34 M in taxes • The company must have had in the past or expected in the future capital gains to offset the capital losses in the sale of the stock

  8. Total Tax Savings • Q4 Tax Savings = $418 M • Write down of loans = $384 M • Sale of stock = $34 M • This effectively lowered Bank of America’s tax rate from 36% to 17%

  9. January 2002 • Bank of America announced the transaction to the public • The public still does not know many of the details that surrounded the transaction

  10. Non-tax Implications • Bank of America was able to eliminate some of its bad debt to improve its financial standing • It created a core competency for collecting bad debt

  11. IRS Reaction • IRS Notice 2002-18…commonly known as the “Bank of America notice” • “It is expected that the regulations will defer or otherwise limit utilization of the loss on the stock in such transactions and other transactions that facilitate the group’s utilization of a single loss more than once. Such regulations will apply to dispositions of stock (or another asset that reflects the basis of stock) occurring on or after March 7, 2002.”

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