Issuance of Debt Securities in Connection with the Formation of Bank Holding Companies

The many benefits of the use of holding companies for the ownership of banks include their use as efficient vehicles to service debt. Congress has enacted a bank holding company debt securities exception to the antibailout rules of Internal Revenue Code (IRC) Section 304. Review of a typical acquisition illustrates how IRC Sections 351 and 304 control the tax consequences to the shareholders in the formation of a bank holding company. IRC Section 304(b)(3)(C) provides the rule that debt securities are not "property" and may be received tax free if certain other conditions are met. In Letter Ruling 8714068, the Internal Revenue Service ruled that IRC Section 304(c)(2)(B) is not applicable in determining whether control has been acquired within the meaning of IRC Section 304(b)(3)(C) and that the debt securities exemption applies in creeping control situations. The letter ruling raises new questions that Congress needs to answer quickly.