Frequently Asked Questions
Who is eligible for the Insolvent Bank Tax Exemption?
Applies to banks or trust companies where a substantial portion of business is receiving deposits and making loans, and the bank has ceased business due to insolvency or bankruptcy.
How does the Insolvent Bank Tax Exemption work?
Exempts insolvent banks and trust companies from the assessment or collection of federal taxes if such payment would diminish assets necessary for the full payment of depositors.
What law authorizes the Insolvent Bank Tax Exemption?
The Insolvent Bank Tax Exemption is authorized under IRC §7507 of the Internal Revenue Code (Title 26, United States Code).
Statutory Text — IRC §7507
Source: Internal Revenue Code, Title 26, United States Code
§ 7507. Exemption of insolvent banks from tax(a) Assets in generalWhenever and after any bank or trust company, a substantial portion of the business of which consists of receiving deposits and making loans and discounts, has ceased to do business by reason of insolvency or bankruptcy, no tax shall be assessed or collected, or paid into the Treasury of the United States, on account of such bank or trust company, which shall diminish the assets thereof necessary for the full payment of all its depositors; and such tax shall be abated from such national banks as are found by the Comptroller of the Currency to be insolvent; and the Secretary, when the facts shall appear to him, is authorized to remit so much of the said tax against any such insolvent banks and trust companies organized under State law as shall be found to affect the claims of their depositors.
(b) Segregated assets; earningsWhenever any bank or trust company, a substantial portion of the business of which consists of receiving deposits and making loans and discounts, has been released or discharged from its liability to its depositors for any part of their claims against it, and such depositors have accepted, in lieu thereof, a lien upon subsequent earnings of such bank or trust company, or claims against assets segregated by such bank or trust company or against assets transferred from it to an individual or corporate trustee or agent, no tax shall be assessed or collected, or paid into the Treasury of the United States, on account of such bank or trust company, such individual or corporate trustee or such agent, which shall diminish the assets thereof which are available for the payment of such depositor claims and which are necessary for the full payment thereof. The term “agent”, as used in this subsection, shall be deemed to include a corporation acting as a liquidating agent.
(c) Refund; reassessment; statutes of limitation(1) Any such tax collected shall be deemed to be erroneously collected, and shall be refunded subject to all provisions and limitations of law, so far as applicable, relating to the refunding of taxes.
(2) Any tax, the assessment, collection, or payment of which is barred under subsection (a), or any such tax which has been abated or remitted shall be assessed or reassessed whenever it shall appear that payment of the tax will not diminish the assets as aforesaid.
(3) Any tax, the assessment, collection, or payment of which is barred under subsection (b), or any such tax which has been refunded shall be assessed or reassessed after full payment of such claims of depositors to the extent of the remaining assets segregated or transferred as described in subsection (b).
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