The Savings and Loan Crisis and Double Dipping

This paper will discuss federal tax policy as it affected the savings and loan crisis during the late 1980s and early 1990s. Specifically, the paper will examine the problem of "double dipping," whereby savings and loan institutions were allowed to deduct losses which were reimbursed, tax free, by the Federal Savings and Loan Insurance Corporation ("FSLIC"). The first part of the paper will discuss the origins of the crisis and provide an overview of the tax treatment of the losses. The second part of the paper will examine in more detail the special provisions of the Economic Recovery Tax Act of 1981. The third part of the paper will discuss some of the legislative responses to double dipping since the 1981 Act. The fourth part of the paper will examine the issue of the retroactivity of the subsequent legislative actions in the area.

The crisis in the savings and loan industry had its origins during the inflationary economy of the 1970s. Up through that period, thrifts acquired most of their income from fixed rate, long-term home mortgages which had been set at relatively low interest rates; these institutions were required by law to invest most of their assets in low-yield home mortgages. As the inflation rate remained high over a long period of time, however, thrifts began paying more in interest on their deposit liabilities than they could earn from their investments in fixed rate home mortgages. While

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its value; and (5) the asset must be employed in or contribute to the production of additional income for the transferee. FDIC and FSLIC assistance met all of these criteria. The assistance payments were intended to improve the recipient's capital structure; they were not compensation for any services; they were bargained for, since assistance must be negotiated; the amounts transferred do have value to the recipient commensurate with its value; finally, the assistance payments will be employed in or contribute to the production of additional income. However, treating assistance as capital contributions negates the purpose and effect of Section 597(a). Even if Section 597(a) was only intended to clarify the existing law, the question remains as to why the entire section was repealed by the 1986 Tax Reform Act. It has been suggested that Congress was originally unclear as to the character of assistance payments under the law prior to 1981; Section 597(a) was added to ensure that these payments were not taxable. The fact that the section was later repealed may indicate, then, that Congress later intended to revoke the tax-exempt status. In 1988, the service reversed its previous holding concerning certain FDIC assistance

Category: Government - T