The IRS National Office has concluded in a generic legal advice memorandum (GLAM 2013-001) that "other real estate owned" (OREO) by a bank through foreclosure is not property acquired for resale within the meaning of Section 263A(b)(2) if the bank originated the loan. Therefore, the costs incurred while holding the property for sale are not required to capitalized under the uniform capitalization (UNICAP) rules of Section 263A.
The GLAM was released on March 1, 2013, and directly contrasts with the position the IRS has taken in exam. A recent field attorney advice (FAA 20123201F) from the Large Business & International Division concluded that Section 263A does apply to OREO property acquired through foreclosure.
Under Section 263A, resellers are generally required to capitalize the acquisition costs and certain indirect costs that can be allocated to property acquired for resale. Banks have typically taken the position that though held for sale, the OREO is not property "acquired" for resale. This is because banks are not in the business of acquiring real property for resale. They are in the business of making loans backed by the real property, and they acquire real property only when the loan is in default.
Treas. Reg. Sec. 1.263A-1(b)(13) provides that the origination of loans is not considered the acquisition of property for resale. The GLAM therefore concludes that the acquisition and sale of the property for which a loan is secured does not convert a bank into a reseller if the foreclosure and subsequent sale of the OREO are properly viewed as an extension of a bank's loan origination activity.
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