Shared-Loss Payments Received from the FDIC Are Subject to Washington B&O Tax

Shared-loss payments received from the Federal Deposit Insurance Corporation (FDIC) are taxable in Washington State under the business and occupation (B&O) tax, according to a determination issued by the Washington State Department of Revenue (DOR).

The DOR’s Administrative Appeals Division (now referred to as the Administrative Review and Hearings Division) took this position in Determination No. 14-0329, which was released on March 31, 2016.

If your organization receives these kinds of payments from the FDIC and hasn’t paid Washington State B&O tax on them, work with your tax professional to understand your exposure.


In an FDIC loss-sharing agreement, a bank agrees to purchase assets and liabilities of a defunct bank. The FDIC agrees to absorb a significant portion of the loss on a specified pool of assets from the failing bank, with the acquiring bank liable for the remaining portion.

Determination No. 14-0329 addressed the taxability of shared-loss payments received by the acquiring bank from the FDIC for B&O tax purposes. The Administrative Appeals Division rejected multiple arguments from the taxpayer and concluded that the receipt of these payments is subject to B&O tax.

The Administrative Appeals Division’s reasoning included:

  • The payments aren’t exempt from B&O tax as a “casual or isolated” sale.
  • The payments represent taxable income because they constitute actual consideration received as a direct result of engaging in the business of providing financial and banking services. (The payments aren’t a mere accounting entry.)
  • The payments don’t represent a nontaxable return of principal because the loans are the obligation of the actual borrowers, not the FDIC.
  • The payments aren’t gains from trading activities (which could be offset by trading losses) because they aren’t derived from the sale of stocks, bonds, or securities, for example.
  • The payments aren’t nontaxable insurance proceeds.  

The taxpayer argued that if the payments did represent a taxable receipt, they would be attributed outside of Washington. The Administrative Appeals Division rejected this argument, analyzing the position under Washington Administrative Code (WAC) 458-20-14601, which controls the apportionment of banks for periods before June 1, 2010. The Administrative Appeals Division held that, for sourcing purposes “FDIC payments should be assigned to the location where Taxpayer services the loans of the Defunct Banks.” In other words, if the taxpayer—in this case, the acquiring bank—receives payments from the FDIC to a location in Washington State, would be required to pay Washington B&O tax on the receipt of those payments.

The Administrative Appeals Division further reasoned that the language in WAC 458-20-19404 for periods after June 1, 2010, is substantially the same; consequently, the same analysis applies. (Note, however, that the attribution of receipts from services not otherwise specifically apportioned in Rule 19404 was recently amended, effective January 1, 2016.)


The tax impact of the Administrative Appeals Division’s positions may be significant for both tax reporting purposes and financial statement purposes. According to this determination, these shared-loss receipts may be classified as “service and other activities” for B&O tax purposes, which imposes a tax rate of 1.5 percent.

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