DATE:	March 10, 2005
MEMORANDUM TO:	Stephen M. Beard
	Deputy Assistant Inspector General for Audits
FROM:	Mitchell L. Glassman, Director
	Division of Resolutions and Receiverships
SUBJECT:	Response to Draft Report Entitled
	The FDIC’s Process for Writing Off Assets
	(Assignment Number 2004-045)

This memorandum is in response to the draft audit report entitled, The FDIC’s Process for Writing Off Assets (Assignment No. 2004-045). This audit focused on a sample of 24 write-off cases with a book value of $95 million from a universe of 435 cases comprising $292 million in book value.

OIG Audit Recommendation:   The draft audit report recommended that the Director, DRR, take the following actions:

1. Revise FDIC Circular 5400.1, Reporting for Discharge of Indebtedness (IRS Forms 1099), and the supporting manuals to better conform with IRS regulations requiring the issuance of Forms 1099-C.

DRR Response:   DRR agrees with the recommendation to revise FDIC Circular 5400.1 Reporting for Discharge of Indebtedness (IRS Forms 1099). It will be revised by a team comprised of DRR Accounting, Legal, DRR Operations (Closing Team Procedures) and DRR Asset Management. A draft of the revised Circular is expected by June 30, 2005.

2. Issue Forms 1099-C for those write-off cases identified in the report and provided to DRR that had not been reported to the IRS.

DRR Response:   DRR partially concurs with this recommendation as outlined in A – C below.

1. DRR agrees with the recommendation with regard to international loans and corporate bankruptcies, and has issued a 1099-C on each of the four international loans and two of the three corporate bankruptcies mentioned in the audit report. Once the [REDACTED] issue (to be discussed further on the next page) has been resolved, DRR will consider this matter to be closed.

[REDACTED MATERIAL]

2. DRR disagrees with respect to case [REDACTED] Name: 4652 Charge Offs, characterized as active charge-offs causing a taxable event with a 1099-C reportable by the receivership. These represent either Type 45 “Other Assets” or Type 70, “Charge Offs” and were booked as a control total and clearly identified as such for tracking purposes. The entries to record the asset as a control total on the receiver’s books do not change the status of the loan at failure. The taxable event for the individual loans included in the control total occurred before bank failure, and it is not DRR’s policy to send 1099-Cs when the taxable event occurred prior to bank failure. DRR’s research on the former bank’s Charged-Off Control Total concluded there was not enough information to formally pursue.
3. DRR disagrees with respect to the recommended 1099-C issuance for the following cases:

   [REDACTED MATERIAL]

   These assets were clearly identified as “non-assets” meaning no debtor existed and further research was in need to determine the ultimate disposition of the assets. Therefore, there is not a debtor to which to forward a 1099-C.

   In the case of [REDACTED] during our investigation of this transaction (post closing), it was determined that the two “Other Assets” revealed that those related to [REDACTED] and his wholly owned companies were in dispute [see Section 7.a.(7)(b) of Circular 5400.1 dated May 1, 2001], and ultimately it was determined by Legal that, after offsets and reconciliations, there existed no debt due and no debt forgiven. On the second asset, a Legal review of the documents determined that a joint venture relationship existed, not a loan relationship, and the bank never had an expectation of repayment of a debt. Neither of these matters, in our opinion, required the issuance of a 1099-C after the assets were written-off. Based on these facts and the certainty that it was the failed institution that initially charged-off these debts prior to closing, DRR did not issue a 1099-C.

3. Review all write-offs for 2003 and 2004, and issue Forms 1099-C, if appropriate.

DRR Response:   DRR agrees with the recommendation and will conduct a review of all write-offs for 2003 and 2004 to ensure compliance with FDIC Circular 5400.1. This review will be completed by June 30, 2005.