IRS Chief Counsel - Bank’s foreclosed real estate not property acquired for resale under section 263A(b)(2) 

Background

AM2013-001 [PDF 57 KB] (dated February 22, 2013, release date March 1, 2013) examines the following situation:

• The bank, in the ordinary course of its lending business, lends money that allows borrowers to purchase real property from third parties.
• The loans are secured by the property.
• The bank sells many of these loans, but it also holds a substantial portfolio of the mortgages.
• When a borrower defaults on a mortgage loan, the bank begins foreclosure proceedings to take title to and possession of the property.
• In some instances, a defaulting borrower may voluntarily transfer title to the real property to the bank, in exchange for cancellation of the remaining debt (a deed-in-lieu of foreclosure).
• Property acquired by the bank through foreclosure proceedings or by deed-in-lieu of foreclosure is referred to by the bank as “other real estate owned” (OREO).
• The bank then seeks to sell this property in “as-is” condition, and does not make improvements to the property prior to the sale.
• Under government regulations, the bank is required to dispose of the property within certain time frames and to return any excess realized to the borrower.
• The bank is generally restricted from acquiring property to resell for profit.
• The bank treats OREO as property primarily for sale to customers in the ordinary course of its trade or business under section 1221(a)(1).

AM2013-001

The Chief Counsel memo looks to the regulations under section 263A, which provide a special rule for banks and others that originate (and generally sell) loans. Under these regulations, the origination of loans is not considered the acquisition of property for resale—notwithstanding the frequency with which the taxpayer sells the loans it originates or the percentage of its originated loans that it sells.

As a result of the special rule in Reg. section 1.263A-1(b)(13), the bank’s activity of originating loans is not considered the acquisition of property for resale within the meaning of section 263A(b)(2)(A). Thus, the bank’s acquisition and sale of the property securing the loan do not convert the bank into a reseller if the foreclosure or deed-in-lieu of foreclosure and subsequent sale of the OREO are properly viewed as an extension of bank’s loan origination activity.

Effectively, the Chief Counsel memorandum indicates the view that section 263A does not apply to OREO in the fact pattern described.