[Federal Register Volume 60, Number 245 (Thursday, December 21, 1995)]
[Rules and Regulations]
[Pages 66091-66105]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-30827]
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DEPARTMENT OF THE TREASURY
26 CFR Parts 1, 301 and 602
[TD 8641]
RIN 1545-AN71
Treatment of Acquisition of Certain Financial Institutions;
Certain Tax Consequences of Federal Financial Assistance to Financial
Institutions
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations relating to Federal
financial assistance, as defined in section 597(c) of the Internal
Revenue Code, that is received by a financially troubled bank or thrift
institution, and to acquisitions of financially troubled bank or thrift
institutions in which Federal financial assistance is provided. This
document also contains final regulations under section 7507. These
regulations provide guidance concerning the proper tax treatment of
various transactions involving the receipt of Federal financial
assistance.
DATES: These regulations are effective December 21, 1995.
For dates of applicability, see the ``Sec. 1.597-7 Effective date''
section under the SUPPLEMENTARY INFORMATION portion of the preamble and
the effective date provisions (Sec. 1.597-7) of this document.
FOR FURTHER INFORMATION CONTACT: Steven M. Flanagan at 202-622-7790,
Vicki J. Hyche at 202-622-7530, William D. Alexander at 202-622-7710,
or Steven R. Glickstein at 202-622-4439 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information contained in these final regulations
have been reviewed and approved by the Office of Management and Budget
in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under
control number 1545-1300. Responses to these collections of information
are required to track deferred income and its subsequent recapture,
elect to disaffiliate earlier than would otherwise be permitted, elect
to apply the provisions of the regulation retroactively, and report
uncollected income tax.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless the collection of
information displays a valid control number.
The estimated annual burden per respondent/recordkeeper varies from
1 hour to 11 hours, depending on individual circumstances, with an
estimated average of 4.4 hours.
Comments concerning the accuracy of this burden estimate and
suggestions for reducing this burden should be sent to the Internal
Revenue Service, Attn: IRS Reports Clearance Officer T:FP, Washington,
DC 20224, and to the Office of Management and Budget, Attn: Desk
Officer for the Department of the Treasury, Office of Information and
Regulatory Affairs, Washington, DC 20503.
Books or records relating to these collections of information must
be retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.
Background
This document contains final regulations under section 597, as
amended by section 1401 of the Financial Institutions Reform, Recovery,
and Enforcement Act of 1989 (Public Law 101-73) (FIRREA). The
regulations provide guidance for banks and domestic building and loan
associations (Institutions) and their affiliates in connection with
receipt of Federal financial assistance (FFA), as defined in section
597(c).
Section 597(a) delegates to the Secretary of the Treasury authority
to prescribe regulations concerning ``any transaction in which Federal
financial assistance is provided.'' These regulations are issued under
the authority of section 597(a).
This document also amends the regulations under section 7507 to
reflect the treatment of FFA under FIRREA.
The IRS published proposed regulations under sections 597 and 7507
on April 22, 1992 (57 FR 14794, FI-46-89, 1992-1 C.B. 1037).
Public Comments and the Final Regulations
The IRS received comments on the proposed regulations, and a public
hearing was held on July 17, 1992. After consideration of the comments
and the statements made at the hearing, the proposed regulations are
adopted as revised by this Treasury decision. The principal comments
and revisions are discussed below.
Section 1.597-2 Taxation of FFA
Section 1.597-2 contains rules concerning accounting for FFA as
income. The final regulations retain the proposed rule that, generally,
FFA is income to the failed Institution when it is received or accrued
in accordance with the Institution's method of accounting. Section
1.597-2(c) contains rules permitting certain Institutions to defer the
inclusion of FFA.
Deferral formula without Continuing Equity. Under the proposed
regulations, unresolved Institutions without Continuing Equity were
permitted to defer inclusion of FFA in excess of amounts determined
under a formula. The proposed formula required current inclusion equal
to the sum of liabilities less aggregate adjusted basis at the
[[Page 66092]]
beginning of the assistance year (representing losses already
recognized), plus loss in the current year (disregarding FFA). The
proposed formula generally allowed the Institution the benefit of any
prior losses of its owners' equity, but offset any losses of creditors'
capital by the inclusion of FFA. However, with respect to losses during
the year FFA is received, the proposed formula did not distinguish
between losses of owners' equity and losses of creditors' capital and,
therefore, offset losses of owners' equity by inclusion of FFA. The
formula (together with related recapture rules) in the final
regulations has been changed to reflect that the owners' equity is the
first capital lost and, in a transaction without Continuing Equity, is
not offset by inclusion of FFA.
Deferral formula with Continuing Equity. The proposed regulations
allowed deferral under different conditions where Continuing Equity is
present. In that case, the Institution must include currently, in
addition to the normal formula amount, income equal to all net
operating loss carryovers available to it. Also, an Institution with
Continuing Equity must recapture deferred FFA at least as quickly as
pro rata over a maximum of six years, regardless of whether it
recognizes all of its built-in losses during that time.
Commentators suggested that the proposed regulations unfairly
limited deferral for Institutions with Continuing Equity and
recommended the same deferral formula apply in all cases. They
criticized the Continuing Equity concept because it focused on the
identity of the Institution's shareholders after the assistance
transaction.
Under the definition of Continuing Equity in the proposed
regulations, an Institution generally would have Continuing Equity if
five percent or more of its stock at the end of a taxable year was
owned by shareholders who owned stock before the Institution was placed
in receivership by a supervisory agency (Agency) or first received FFA.
The five percent reference was misleading because, under Sec. 1.597-5,
a 50 percent change in ownership generally results in a deemed Taxable
Transfer (now defined in Sec. 1.597-5(a)(1)) in which the failed
Institution is treated as a New Entity. The deferral rules do not apply
after a deemed Taxable Transfer. The final regulations thus clarify
that Continuing Equity exists only if the Institution is not (i) a
Bridge Bank, (ii) in Agency receivership, or (iii) treated as a New
Entity. The modification to the definition of Continuing Equity is not
intended as a substantive change. The Continuing Equity deferral
provisions apply only to the limited number of ``open bank''
resolutions not subject to the deemed Taxable Transfer rules. (As
discussed below, the Taxable Transfer definitions have also been
modified to clarify that most ``open bank'' assisted transactions are
treated as Taxable Transfers.)
The final regulations do not eliminate the special treatment of
Institutions with Continuing Equity. The regulations provide deferral
rules to ameliorate a timing mismatch between FFA income and related
losses. Deferral is not designed to allow built-in losses to offset
operating income instead of FFA or to permit the permanent elimination
of any subsidy provided by Agency. The requirement that Institutions
with Continuing Equity recapture their deferred FFA within six years is
a reasonable safeguard against indefinite deferral of FFA income. The
results under these rules are comparable in effect to those applicable
to acquirors in Taxable Transfers.
The final regulations do, however, modify the Continuing Equity
formula, which, in the proposed regulations, counted some losses twice.
Recognized losses represented in the first prong of the formula
(liabilities minus asset bases) may comprise part of the third prong
(net operating losses available to the Institution or its consolidated
group). The final regulations correct this double counting of losses.
Transfers of money and property to Agency. The proposed regulations
contained rules for taxing FFA if money or property is also transferred
to Agency. These rules, together with rules for the treatment of FFA
received pursuant to a Loss Guarantee, have been clarified,
reorganized, and restated in Sec. 1.597-2(d).
The proposed regulations provided an offset or deduction for
payments by an Institution to Agency to the extent of previously
received FFA. The rule as proposed provided limited relief for payments
made to Agency by a New Entity or Acquiring, because they receive
little or no FFA. However, an assisted acquisition can result in income
to a New Entity or Acquiring in the form of built-in gain. Under
section 597(c) and Sec. 1.597-3(b), an instrument issued to Agency by a
New Entity or Acquiring is, in effect, disregarded. If a New Entity or
Acquiring issues its instrument to Agency in connection with the
acquisition of an Institution, the value of the instrument is not
included in the purchase price. Consequently, a New Entity or Acquiring
may have a basis shortfall in the assets acquired (or deemed acquired)
from the failed Institution. The final regulations provide a New Entity
or Acquiring a purchase price adjustment upon any transfer to Agency
(e.g., in satisfaction of the disregarded instrument).
In response to comments, the final regulations also specifically
provide for repayments to Agency by Institution affiliates. Moreover,
the final regulations provide that if Agency sells an Institution's
instrument to a third party, the sales price is treated as a repayment
to Agency by the issuer. Furthermore, the instrument is treated as
having been newly issued by the issuer to the holder at that time. The
IRS and Treasury believe that this is an appropriate time for the
issuer to offset FFA or increase its basis, because the sales price
reasonably fixes the value of the instrument, and any subsequent cost
associated with the instrument should be accounted for in accordance
with the nature of the instrument.
Section 1.597-4(g) Elective Disaffiliation
The proposed regulations would allow a consolidated group to elect
(after the regulations became final) to exclude an Institution in
receivership from its group. The election potentially requires the
inclusion of a ``toll charge'' in the income of those members owning
the common stock of the Institution (the member shareholders). The
amount of the toll charge is the excess of the disaffiliated
Institution's liabilities over the adjusted basis of its assets. The
toll charge is intended to reflect the amount that would be included in
income if Agency were to provide the entire amount of FFA necessary to
restore the Institution's solvency at the time of the event permitting
disaffiliation. Commentators suggested that the final regulations
should include the toll charge in the income of the disaffiliated
Institution (rather than its member shareholders), provide the group
with a ``toll charge deduction,'' and clarify the ability of the member
shareholders to take a worthless stock deduction.
Toll charge. Commentators suggested that the final regulations
include the toll charge in the income of the failed Institution rather
than its member shareholders. According to the commentators, including
the toll charge in the income of the member shareholders may result in
disadvantageous state tax consequences in those states where banking
corporations are not permitted to file consolidated returns with
nonbanking corporations. Under the proposed regulations, a bank holding
corporation (the disaffiliated Institution's shareholder) would have to
include in income the toll charge without the
[[Page 66093]]
benefit of the Institution's offsetting losses.
The IRS and Treasury agree that the toll charge is more
appropriately included in the income of the Institution (i.e., the
entity that is reimbursed by Agency for its loss), because the toll
charge represents accelerated FFA income. Thus, the final regulations
provide that the Institution, rather than its member shareholders,
takes the toll charge into income.
Toll charge deduction. Under the proposed regulations, the
Institution does not recognize built-in losses on disaffiliation. One
commentator suggested the final regulations provide for a ``toll charge
deduction'' for the excess of the Institution's adjusted basis over its
liabilities. According to the commentator, such a deduction is
appropriate because the Institution incurred economic loss while it was
a member of the consolidated group, before the Institution was placed
in receivership by Agency.
The commentator's recommendation is not adopted in the final
regulations because a toll charge deduction would accelerate
recognition of losses in advance of realization. Such a deduction is
particularly inappropriate because federal banking laws now permit
placing solvent institutions in receivership. In such cases, it is
uncertain whether the loss represented by such a deduction will ever be
realized.
Worthless stock deduction. Under the proposed regulations, if an
election to disaffiliate is made, the members of the consolidated group
are treated as having disposed of their stock in the Institution. One
commentator suggested that the final regulations clarify that, upon
disaffiliation, the Institution's stock is worthless.
The final regulations address the commentator's concerns by
providing that, as a consequence of the election, the members of the
consolidated group treat their stock in the Institution as worthless if
the Institution is factually insolvent on the date the Institution is
placed in receivership (or on the date the consolidated group is deemed
to make the election to disaffiliate). This rule preempts otherwise
applicable tests for worthlessness under section 165 and Sec. 1.1502-
19. Any worthless stock deduction is subject to the limitations of the
loss disallowance regulations (Secs. 1.337(d)-1 and 1.1502-20).
Consistency rule. Under the proposed regulations, a consolidated
group could elect to disaffiliate a subsidiary Institution only if the
Institution was its first subsidiary placed in Agency receivership
after the enactment of FIRREA. The election made for the first
subsidiary bound all future subsidiaries placed in Agency receivership.
To address the concern that the scope of the proposed consistency rule
was too broad, the final regulations modify the consistency rule to
require, generally, that a consolidated group must elect consistently
only for subsidiary Institutions placed in Agency receivership within
five years of each other.
Section 1.597-5 Taxable Transfers
Section 597 applies to FFA and transactions in connection with
which FFA is provided. The proposed regulations generally define a
Taxable Transfer as a transfer of deposit liabilities or stock while an
Institution is under Agency Control. However, IRS and Treasury now
understand that it is possible for Agency to resolve an Institution
under its control without providing assistance, or to provide
assistance without placing an Institution under its control. In light
of this information, the final regulations refine the definition of a
Taxable Transfer.
Under the final regulations, Taxable Transfers include the transfer
of any deposit liability in connection with which FFA is provided or
the transfer of any asset for which Agency has an obligation (e.g.,
assets covered by Loss Guarantees). Certain transfers of stock cause a
Taxable Transfer if FFA is provided in connection with the transfer, if
the Institution is a Bridge Bank or if the Institution has a balance in
its deferred FFA account. The phrase ``in connection with'' should be
interpreted broadly. If any party to a transaction receives FFA, all
parties and all related transactions are within the scope of these
regulations. To provide certainty regarding tax treatment for
purchasers of stock of subsidiaries of Institutions under Agency
Control, the final regulations treat all transactions in which such a
subsidiary leaves its group as Taxable Transfers.
Section 1.597-6 Limitation on Collection of Income Tax
Limitation where tax is borne by Agency. The proposed regulations
provided that income tax attributable to the receipt of FFA or gain on
a Taxable Transfer would not be collected from an Institution without
Continuing Equity if Agency would bear the burden of the tax.
Commentators suggested that the limitation on noncollection in cases of
Continuing Equity is inappropriate because it requires Agency to gross-
up any assistance paid to cover the tax thereon.
The final regulations retain the limitation on noncollection in
cases of Continuing Equity. The IRS and Treasury believe that the
limitation is appropriate for transactions in which Agency assists an
Institution while allowing old shareholders to retain their ownership.
Noncollection should not inure to the benefit of the Institution's old
shareholders, who would have use of the Institution's losses while
escaping responsibility for the tax on related FFA income. The
congressional purpose in FIRREA to eliminate any tax subsidy for
assisted transactions requires that the IRS not waive its rights as a
creditor in cases where all other creditors and equity holders retain
their rights.
Transferee liability. The proposed regulations limited the
collection of a failed Institution's income taxes from a transferee in
a Taxable Transfer (i.e., a New Entity or Acquiring). This rule would
not apply if (similar to the Continuing Equity rule discussed above
under the heading ``Deferral formula with Continuing Equity'') there is
a five percent overlap in the ownership of the transferor Institution
and the New Entity or Acquiring.
Commentators suggested that the final regulations should not
include the five percent overlap exception because the exception
appears to punish former owners of Institutions, Institutions have
difficulty tracking ownership, and the exception contains no limits on
aggregation.
Because good faith purchasers of assets for value generally do not
have transferee liability, the final regulations clarify that Acquiring
(the purchaser of Institution's assets in an actual Taxable Transfer)
is not subject to such liability in any case. This rule applies even if
shareholders of Acquiring were shareholders of the selling Institution.
The final regulations do not, however, except a New Entity (the
resulting corporation in a deemed Taxable Transfer) from collection if
the Institution's previous equity interests remain outstanding in the
New Entity, or are reacquired or exchanged for consideration. As in
those cases in which a Taxable Transfer does not occur, the IRS should
remain a creditor if all other creditors retain their interests and the
Institution's previous equity interests had retained value. However, by
focusing on whether previous equity interests retain value, the final
regulations eliminate the need to track or aggregate ownership and do
not penalize any particular potential acquirors.
[[Page 66094]]
Section 1.597-7 Effective Date
As proposed, these final regulations generally apply to taxable
years ending on or after April 22, 1992. However, the provisions of
these regulations do not apply to FFA received or accrued for taxable
years ending after April 22, 1992, in connection with an Agency
assisted acquisition that occurs before April 22, 1992. Taxpayers not
subject to these regulations must comply with an interpretation of the
statute that is reasonable in light of the legislative history and
applicable administrative pronouncements. For this purpose, the rules
contained in Notice 89-102 (1989-2 C.B. 436) apply to the extent
provided in the Notice.
An irrevocable election is available to apply the regulations to
taxable years prior to the general effective date. However, the
election cannot be made if the Institution's statute of limitations has
expired or a section 338 election was available but not made for the
Institution. In addition, consistent treatment is required in ``open
bank'' resolutions that would result under the regulations in deemed
Taxable Transfers before April 22, 1992.
The proposed regulations required an electing taxpayer to extend
the statute of limitations for all items for three years from the date
of filing the election. The final regulations adopt a commentator's
suggestion that the taxpayer extend the statute of limitations only for
items affected by application of the regulations.
An Institution or consolidated group makes the election on its
first annual income tax return filed on or after March 15, 1996.
However, to make the affirmative election to disaffiliate under
Sec. 1.597-4(g)(5) for an Institution placed in Agency receivership in
a taxable year ending before April 22, 1992, a consolidated group must
send the affected Institution the required statement advising it of the
elective disaffiliation on or before May 31, 1996. In that case, the
consolidated group is deemed to have elected retroactive application of
these regulations but must nevertheless attach the required statement
to its first annual income tax return filed on or after March 15, 1996.
The final regulations provide that taxpayers may rely on the
provisions of the proposed regulations to the extent they acted in
reliance on the proposed regulations prior to December 21, 1995. Such
reliance must be reasonable and transactions with respect to which such
taxpayers rely must be consistent with the overriding policies of
section 597, as expressed in the legislative history, as well as the
overriding policies of the proposed regulations.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in EO 12866. Therefore, a
regulatory assessment is not required. It is hereby certified that
these regulations do not have a significant economic impact on a
substantial number of small entities. This certification is based on
the fact that these regulations will generally only apply to certain
financially troubled financial institutions and the consolidated
groups, if any, to which they belong. Therefore, a Regulatory
Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C.
chapter 6) is not required. Pursuant to section 7805(f) of the Internal
Revenue Code, the notice of proposed rulemaking preceding these
regulations was submitted to the Chief Counsel for Advocacy of the
Small Business Administration for comment on its impact on small
business.
Drafting Information
The principal author of these regulations is Steven M. Flanagan,
Office of the Assistant Chief Counsel (Corporate), IRS. However, other
personnel from the IRS and Treasury Department participated in their
development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 301
Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income
taxes, Penalties, Reporting and recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR parts 1, 301 and 602 are amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority for part 1 is amended by adding the
following citation:
Authority: 26 U.S.C. 7805 * * *
Sections 1.597-1 through 1.597-7 also issued under 26 U.S.C. 597
and 1502.
Par. 2. Sections 1.597-1 through 1.597-7 are added to read as
follows:
Sec. 1.597-1 Definitions.
For purposes of the regulations under section 597--
(a) Unless the context otherwise requires, the terms consolidated
group, member and subsidiary have the meanings provided in Sec. 1.1502-
1; and
(b) The following terms have the meanings provided below--
Acquiring. The term Acquiring means a corporation that is a
transferee in a Taxable Transfer, other than a deemed transferee in a
Taxable Transfer described in Sec. 1.597-5(b).
Agency. The term Agency means the Resolution Trust Corporation, the
Federal Deposit Insurance Corporation, any similar instrumentality of
the United States government, and any predecessor or successor of the
foregoing (including the Federal Savings and Loan Insurance
Corporation).
Agency Control. An Institution or entity is under Agency Control if
Agency is conservator or receiver of the Institution or entity, or if
Agency has the right to appoint any of the Institution's or entity's
directors.
Agency Obligation. The term Agency Obligation means a debt
instrument that Agency issues to an Institution or to a direct or
indirect owner of an Institution.
Bridge Bank. The term Bridge Bank means an Institution that is
organized by Agency to hold assets and liabilities of another
Institution and that continues the operation of the other Institution's
business pending its acquisition or liquidation, and that is any of the
following--
(1) A national bank chartered by the Comptroller of the Currency
under section 11(n) of the Federal Deposit Insurance Act (12 U.S.C.
1821(n)) or section 21A(b)(10)(A) of the Federal Home Loan Bank Act (12
U.S.C. 1441a(b)(10)(A)) or any successor sections;
(2) A Federal savings association chartered by the Director of the
Office of Thrift Supervision under section 21A(b)(10)(A) of the Federal
Home Loan Bank Act (12 U.S.C. 1441a(b)(10)(A)) or any successor
section; or
(3) A similar Institution chartered under any other statutory
provisions.
Consolidated Subsidiary. The term Consolidated Subsidiary means a
member of the consolidated group of which an Institution is a member
that bears the same relationship to the Institution that the members of
a consolidated group bear to their common parent under section
1504(a)(1).
Continuing Equity. An Institution has Continuing Equity for any
taxable year if, on the last day of the taxable year, the
[[Page 66095]]
Institution is not (1) a Bridge Bank, (2) in Agency receivership, or
(3) treated as a New Entity.
Controlled Entity. The term Controlled Entity means an entity under
Agency Control.
Federal Financial Assistance (FFA). The term Federal Financial
Assistance (FFA), as defined by section 597(c), means any money or
property provided by Agency to an Institution or to a direct or
indirect owner of stock in an Institution under section 406(f) of the
National Housing Act (12 U.S.C. 1729(f)), section 21A(b)(4) of the
Federal Home Loan Bank Act (12 U.S.C. 1441a(b)(4)), section 11(f) or
13(c) of the Federal Deposit Insurance Act (12 U.S.C. 1821(f),
1823(c)), or under any similar provision of law. Any such money or
property is FFA, regardless of whether the Institution or any of its
affiliates issues Agency a note or other obligation, stock, warrants,
or other rights to acquire stock in connection with Agency's provision
of the money or property. FFA includes Net Worth Assistance, Loss
Guarantee payments, yield maintenance payments, cost to carry or cost
of funds reimbursement payments, expense reimbursement or indemnity
payments, and interest (including original issue discount) on an Agency
Obligation.
Institution. The term Institution means an entity that is, or
immediately before being placed under Agency Control was, a bank or
domestic building and loan association within the meaning of section
597 (including a Bridge Bank). Except as otherwise provided in the
regulations under section 597, the term Institution includes a New
Entity or Acquiring that is a bank or domestic building and loan
association within the meaning of section 597.
Loss Guarantee. The term Loss Guarantee means an agreement pursuant
to which Agency or a Controlled Entity guarantees or agrees to pay an
Institution a specified amount upon the disposition or charge-off (in
whole or in part) of specific assets, an agreement pursuant to which an
Institution has a right to put assets to Agency or a Controlled Entity
at a specified price, or a similar arrangement.
Net Worth Assistance. The term Net Worth Assistance means money or
property (including an Agency Obligation to the extent it has a fixed
principal amount) that Agency provides as an integral part of a Taxable
Transfer, other than FFA that accrues after the date of the Taxable
Transfer. For example, Net Worth Assistance does not include Loss
Guarantee payments, yield maintenance payments, cost to carry or cost
of funds reimbursement payments, or expense reimbursement or indemnity
payments. An Agency Obligation is considered to have a fixed principal
amount notwithstanding an agreement providing for its adjustment after
issuance to reflect a more accurate determination of the condition of
the Institution at the time of the acquisition.
New Entity. The term New Entity means the new corporation that is
treated as purchasing all of the assets of an Old Entity in a Taxable
Transfer described in Sec. 1.597-5(b).
Old Entity. The term Old Entity means the Institution or
Consolidated Subsidiary that is treated as selling all of its assets in
a Taxable Transfer described in Sec. 1.597-5(b).
Residual Entity. The term Residual Entity means the entity that
remains after an Institution transfers deposit liabilities to a Bridge
Bank.
Taxable Transfer. The term Taxable Transfer has the meaning
provided in Sec. 1.597-5(a)(1).
Sec. 1.597-2 Taxation of Federal Financial Assistance.
(a) Inclusion in income--(1) In general. Except as otherwise
provided in the regulations under section 597, all FFA is includible as
ordinary income to the recipient at the time the FFA is received or
accrued in accordance with the recipient's method of accounting. The
amount of FFA received or accrued is the amount of any money, the fair
market value of any property (other than an Agency Obligation), and the
issue price of any Agency Obligation (determined under Sec. 1.597-
3(c)(2)). An Institution (and not the nominal recipient) is treated as
receiving directly any FFA that Agency provides in a taxable year to a
direct or indirect shareholder of the Institution, to the extent money
or property is transferred to the Institution pursuant to an agreement
with Agency.
(2) Cross references. See paragraph (c) of this section for rules
regarding the timing of inclusion of certain FFA. See paragraph (d) of
this section for additional rules regarding the treatment of FFA
received in connection with transfers of money or property to Agency or
a Controlled Entity, or paid pursuant to a Loss Guarantee. See
Sec. 1.597-5(c)(1) for additional rules regarding the inclusion of Net
Worth Assistance in the income of an Institution.
(b) Basis of property that is FFA. If FFA consists of property, the
Institution's basis in the property equals the fair market value of the
property (other than an Agency Obligation) or the issue price of the
Agency Obligation, as determined under Sec. 1.597-3(c)(2).
(c) Timing of inclusion of certain FFA--(1) Scope. This paragraph
(c) limits the amount of FFA an Institution must include in income
currently under certain circumstances and provides rules for the
deferred inclusion in income of amounts in excess of those limits. This
paragraph (c) does not apply to a New Entity or Acquiring.
(2) Amount currently included in income by an Institution without
Continuing Equity. The amount of FFA an Institution without Continuing
Equity must include in income in a taxable year under paragraph (a)(1)
of this section is limited to the sum of--
(i) The excess at the beginning of the taxable year of the
Institution's liabilities over the adjusted bases of the Institution's
assets; and
(ii) The amount by which the excess for the taxable year of the
Institution's deductions allowed by chapter 1 of the Internal Revenue
Code (other than net operating and capital loss carryovers) over its
gross income (determined without regard to FFA); is greater than the
excess at the beginning of the taxable year of the adjusted bases of
the Institution's assets over the Institution's liabilities.
(3) Amount currently included in income by an Institution with
Continuing Equity. The amount of FFA an Institution with Continuing
Equity must include in income in a taxable year under paragraph (a)(1)
of this section is limited to the sum of--
(i) The excess at the beginning of the taxable year of the
Institution's liabilities over the adjusted bases of the Institution's
assets;
(ii) The greater of--
(A) The excess for the taxable year of the Institution's deductions
allowed by chapter 1 of the Internal Revenue Code (other than net
operating and capital loss carryovers) over its gross income
(determined without regard to FFA); or
(B) The excess for the taxable year of the deductions allowed by
chapter 1 of the Internal Revenue Code (other than net operating and
capital loss carryovers) of the consolidated group of which the
Institution is a member on the last day of the Institution's taxable
year over the group's gross income (determined without regard to FFA);
and
(iii) The excess of the amount of any net operating loss carryover
of the Institution (or in the case of a carryover from a consolidated
return year of the Institution's current consolidated group, the net
operating loss carryover of the group) to the taxable year over the
[[Page 66096]]
amount described in paragraph (c)(3)(i) of this section.
(4) Deferred FFA--(i) Maintenance of account. An Institution must
establish a deferred FFA account commencing in the first taxable year
in which it receives FFA that is not currently included in income under
paragraph (c)(2) or (c)(3) of this section, and must maintain that
account in accordance with the requirements of this paragraph (c)(4).
The Institution must add the amount of any FFA that is not currently
included in income under paragraph (c)(2) or (c)(3) of this section to
its deferred FFA account. The Institution must decrease the balance of
its deferred FFA account by the amount of deferred FFA included in
income under paragraphs (c)(4)(ii), (iv) and (v) of this section. (See
also paragraph (d)(5)(i)(B) of this section for other adjustments that
decrease the deferred FFA account.) If, under paragraph (c)(3) of this
section, FFA is not currently included in income in a taxable year, the
Institution thereafter must maintain its deferred FFA account on a FIFO
(first in, first out) basis (e.g., for purposes of the first sentence
of paragraph (c)(4)(iv) of this section).
(ii) Deferred FFA recapture. In any taxable year in which an
Institution has a balance in its deferred FFA account, it must include
in income an amount equal to the lesser of the amount described in
paragraph (c)(4)(iii) of this section or the balance in its deferred
FFA account.
(iii) Annual recapture amount--(A) Institutions without Continuing
Equity--(1) In general. In the case of an Institution without
Continuing Equity, the amount described in this paragraph (c)(4)(iii)
is the amount by which--
(i) The excess for the taxable year of the Institution's deductions
allowed by chapter 1 of the Internal Revenue Code (other than net
operating and capital loss carryovers) over its gross income (taking
into account FFA included in income under paragraph (c)(2) of this
section); is greater than
(ii) The Institution's remaining equity as of the beginning of the
taxable year.
(2) Remaining equity. The Institution's remaining equity is--
(i) The amount at the beginning of the taxable year in which the
deferred FFA account was established equal to the adjusted bases of the
Institution's assets minus the Institution's liabilities (which amount
may be positive or negative); plus
(ii) The Institution's taxable income (computed without regard to
any carryover from any other year) in any subsequent taxable year or
years; minus
(iii) The excess in any subsequent taxable year or years of the
Institution's deductions allowed by chapter 1 of the Internal Revenue
Code (other than net operating and capital loss carryovers) over its
gross income.
(B) Institutions with Continuing Equity. In the case of an
Institution with Continuing Equity, the amount described in this
paragraph (c)(4)(iii) is the amount by which the Institution's
deductions allowed by chapter 1 of the Internal Revenue Code (other
than net operating and capital loss carryovers) exceed its gross income
(taking into account FFA included in income under paragraph (c)(3) of
this section).
(iv) Additional deferred FFA recapture by an Institution with
Continuing Equity. To the extent that, as of the end of a taxable year,
the cumulative amount of FFA deferred under paragraph (c)(3) of this
section that an Institution with Continuing Equity has recaptured under
this paragraph (c)(4) is less than the cumulative amount of FFA
deferred under paragraph (c)(3) of this section that the Institution
would have recaptured if that FFA had been included in income ratably
over the six taxable years immediately following the taxable year of
deferral, the Institution must include that difference in income for
the taxable year. An Institution with Continuing Equity must include in
income the balance of its deferred FFA account in the taxable year in
which it liquidates, ceases to do business, transfers (other than to a
Bridge Bank) substantially all of its assets and liabilities, or is
deemed to transfer all of its assets under Sec. 1.597-5(b).
(v) Optional accelerated recapture of deferred FFA. An Institution
that has a deferred FFA account may include in income the balance of
its deferred FFA account on its timely filed (including extensions)
original income tax return for any taxable year that it is not under
Agency Control. The balance of its deferred FFA account is income on
the last day of that year.
(5) Exceptions to limitations on use of losses. In computing an
Institution's taxable income or alternative minimum taxable income for
a taxable year, sections 56(d)(1), 382 and 383 and Secs. 1.1502-15,
1.1502-21 and 1.1502-22 do not limit the use of the attributes of the
Institution to the extent, if any, that the inclusion of FFA (including
recaptured FFA) in income results in taxable income or alternative
minimum taxable income (determined without regard to this paragraph
(c)(5)) for the taxable year. This paragraph (c)(5) does not apply to
any limitation under section 382 or 383 or Sec. 1.1502-15, 1.1502-21 or
1.1502-22 that arose in connection with or prior to a corporation
becoming a Consolidated Subsidiary of the Institution.
(6) Operating rules--(i) Bad debt reserves. For purposes of
paragraphs (c)(2), (c)(3) and (c)(4) of this section, the adjusted
bases of an Institution's assets are reduced by the amount of the
Institution's reserves for bad debts under section 585 or 593, other
than supplemental reserves under section 593.
(ii) Aggregation of Consolidated Subsidiaries. For purposes of this
paragraph (c), an Institution is treated as a single entity that
includes the income, expenses, assets, liabilities, and attributes of
its Consolidated Subsidiaries, with appropriate adjustments to prevent
duplication.
(iii) Alternative minimum tax. To compute the alternative minimum
taxable income attributable to FFA of an Institution for any taxable
year under section 55, the rules of this section, and related rules,
are applied by using alternative minimum tax basis, deductions, and all
other items required to be taken into account. All other alternative
minimum tax provisions continue to apply.
(7) Earnings and profits. FFA that is not currently included in
income under this paragraph (c) is included in earnings and profits for
all purposes of the Internal Revenue Code to the extent and at the time
it is included in income under this paragraph (c).
(d) Transfers of money or property to Agency, and property subject
to a Loss Guarantee--(1) Transfers of property to Agency. The transfer
of property to Agency or a Controlled Entity is a taxable sale or
exchange in which the Institution is treated as realizing an amount
equal to--
(i) The property's fair market value; or
(ii) For property subject to a Loss Guarantee, the greater of the
property's fair market value or the guaranteed value or price at which
the property can be put at the time of transfer.
(2) FFA with respect to property covered by a Loss Guarantee other
than on transfer to Agency. (i) FFA provided pursuant to a Loss
Guarantee with respect to covered property is included in the amount
realized with respect to the property to the extent the total amount
realized does not exceed the greater of--
(A) The property's fair market value; or
(B) The guaranteed value or price at which the property can be put
at the time of transfer.
(ii) For the purposes of this paragraph (d)(2), references to an
amount realized include amounts obtained in whole or partial
satisfaction of loans, amounts
[[Page 66097]]
obtained by virtue of charging off or marking to market covered
property, and other amounts similarly related to property, whether or
not disposed of.
(3) Treatment of FFA received in exchange for property. FFA
included in the amount realized for property under this paragraph (d)
is not includible in income under paragraph (a)(1) of this section. The
amount realized is treated in the same manner as if realized from a
person other than Agency or a Controlled Entity. For example, gain
attributable to FFA received with respect to a capital asset retains
its character as capital gain. Similarly, FFA received with respect to
property that has been charged off for income tax purposes is treated
as a recovery to the extent of the amount previously charged off. Any
FFA provided in excess of the amount realized under this paragraph (d)
is includible in income under paragraph (a)(1) of this section.
(4) Adjustment to FFA--(i) In general. If an Institution pays or
transfers money or property to Agency or a Controlled Entity, the
amount of money and fair market value of the property is an adjustment
to its FFA to the extent the amount paid and transferred exceeds the
amount of money and fair market value of property Agency or a
Controlled Entity provides in exchange.
(ii) Deposit insurance. This paragraph (d)(4) does not apply to
amounts paid to Agency with respect to deposit insurance.
(iii) Treatment of an interest held by Agency or a Controlled
Entity--(A) In general. For purposes of this paragraph (d), an interest
described in Sec. 1.597-3(b) is not treated as property when
transferred by the issuer to Agency or a Controlled Entity nor when
acquired from Agency or a Controlled Entity by the issuer.
(B) Dispositions to persons other than issuer. On the date Agency
or a Controlled Entity transfers an interest described in Sec. 1.597-
3(b) to a holder other than the issuer, Agency or a Controlled Entity,
the issuer is treated for purposes of this paragraph (d)(4) as having
transferred to Agency an amount of money equal to the sum of the amount
of money and the fair market value of property that was paid by the new
holder as consideration for the interest.
(iv) Consolidated groups. For purposes of this paragraph (d), an
9Institution will be treated as having made any transfer to Agency or a
Controlled Entity that was made by any other member of its consolidated
group. The consolidated group must make appropriate investment basis
adjustments to the extent the member transferring money or other
property is not the member that received FFA.
(5) Manner of making adjustments to FFA--(i) Reduction of FFA and
deferred FFA. An Institution adjusts its FFA under paragraph (d)(4) of
this section by reducing in the following order and in an aggregate
amount not greater than the adjustment--
(A) The amount of any FFA that is otherwise includible in income
for the taxable year (before application of paragraph (c) of this
section); and
(B) The balance (but not below zero) in the deferred FFA account,
if any, maintained under paragraph (c)(4) of this section.
(ii) Deduction of excess amounts. If the amount of the adjustment
exceeds the sum of the amounts described in paragraph (d)(5) (i) of
this section, the Institution may deduct the excess to the extent the
deduction does not exceed the amount of FFA included in income for
prior taxable years reduced by the amount of deductions allowable under
this paragraph (d)(5)(ii) in prior taxable years.
(iii) Additional adjustments. Any adjustment to FFA in excess of
the sum of the amounts described in paragraphs (d)(5)(i) and (ii) of
this section is treated--
(A) By an Institution other than a New Entity or Acquiring, as a
deduction of the amount in excess of FFA received that is required to
be transferred to Agency under section 11(g) of the Federal Deposit
Insurance Act (12 U.S.C. 1821(g)); or
(B) By a New Entity or Acquiring, as an adjustment to the purchase
price paid in the Taxable Transfer (see Sec. 1.338(b)-3T).
(e) Examples. The following examples illustrate the provisions of
this section:
Example 1. Timing of inclusion of FFA in income. (i) Institution
M, a calendar year taxpayer without Continuing Equity because it is
in Agency receivership, is not a member of a consolidated group and
has not been acquired in a Taxable Transfer. On January 1, 1997, M
has assets with a total adjusted basis of $100 million and total
liabilities of $120 million. M's deductions do not exceed its gross
income (determined without regard to FFA) for 1997. Agency provides
$30 million of FFA to M in 1997. The amount of this FFA that M must
include in income in 1997 is limited by Sec. 1.597-2(c)(2) to $20
million, the amount by which M's liabilities ($120 million) exceed
the total adjusted basis of its assets ($100 million) at the
beginning of the taxable year. Pursuant to Sec. 1.597-2(c)(4)(i), M
must establish a deferred FFA account for the remaining $10 million.
(ii) If Agency instead lends M the $30 million, M's indebtedness
to Agency is disregarded and the results are the same as in
paragraph (i) of this Example 1. Section 597(c); Secs. 1.597-1(b)
(defining FFA) and 1.597-3(b).
Example 2. Transfer of property to Agency. (i) Institution M, a
calendar year taxpayer without Continuing Equity because it is in
Agency receivership, is not a member of a consolidated group and has
not been acquired in a Taxable Transfer. At the beginning of 1998,
M's remaining equity is $0 and M has a deferred FFA account of $10
million. Agency does not provide any FFA to M in 1998. During the
year, M transfers property not covered by a Loss Guarantee to Agency
and does not receive any consideration. The property has an adjusted
basis of $5 million and a fair market value of $1 million at the
time of the transfer. M has no other taxable income or loss in 1998.
(ii) Under Sec. 1.597-2(d)(1), M is treated as selling the
property for $1 million, its fair market value, thus recognizing a
$4 million loss ($5 million-$1 million). In addition, because M did
not receive any consideration from Agency, under Sec. 1.597-2(d)(4)
M has an adjustment to FFA of $1 million, the amount by which the
fair market value of the transferred property ($1 million) exceeds
the consideration M received from Agency ($0). Because no FFA is
provided to M in 1998, this adjustment reduces the balance of M's
deferred FFA account to $9 million ($10 million-$1 million). Section
1.597-2(d)(5)(i)(B). Because M's $4 million loss causes M's
deductions to exceed its gross income by $4 million in 1998 and M
has no remaining equity, under Sec. 1.597-2(c)(4)(iii)(A) M must
include $4 million of deferred FFA in income, and must decrease the
remaining $9 million balance of its deferred FFA account by the same
amount, leaving a balance of $5 million.
Example 3. Loss Guarantee. Institution Q, a calendar year
taxpayer, sells an asset covered by a Loss Guarantee to an unrelated
third party for $4,000. Q's adjusted basis in the asset at the time
of sale and the asset's guaranteed value are both $10,000. Pursuant
to the Loss Guarantee, Agency pays Q $6,000 ($10,000-$4,000). Q's
amount realized from the sale of the asset is $10,000 ($4,000 from
the third party and $6,000 from Agency). Section 1.597-2(d)(2). Q
realizes no gain or loss on the sale ($10,000-$10,000 = $0), and
therefore includes none of the $6,000 of FFA it receives pursuant to
the Loss Guarantee in income. Section 1.597-2(d)(3).
Sec. 1.597-3 Other rules.
(a) Ownership of assets. For all income tax purposes, an
Institution is treated as the owner of all assets covered by a Loss
Guarantee, yield maintenance agreement, or cost to carry or cost of
funds reimbursement agreement, regardless of whether Agency (or a
Controlled Entity) otherwise would be treated as the owner under
general principles of income taxation.
(b) Debt and equity interests received by Agency. Debt instruments,
stock, warrants, or other rights to acquire stock of an Institution (or
any of its affiliates) that Agency or a Controlled Entity
[[Page 66098]]
receives in connection with a transaction in which FFA is provided are
not treated as debt, stock or other equity interests of or in the
issuer for any purpose of the Internal Revenue Code while held by
Agency or a Controlled Entity. On the date Agency or a Controlled
Entity transfers an interest described in this paragraph (b) to a
holder other than Agency or a Controlled Entity, the interest is
treated as having been newly issued by the issuer to the holder with an
issue price equal to the sum of the amount of money and the fair market
value of property paid by the new holder in exchange for the interest.
(c) Agency Obligations--(1) In general. Except as otherwise
provided in this paragraph (c), the original issue discount rules of
sections 1271 et seq. apply to Agency Obligations.
(2) Issue price of Agency Obligations provided as Net Worth
Assistance. The issue price of an Agency Obligation that is provided as
Net Worth Assistance and that bears interest at either a single fixed
rate or a qualified floating rate (and provides for no contingent
payments) is the lesser of the sum of the present values of all
payments due under the obligation, discounted at a rate equal to the
applicable Federal rate (within the meaning of section 1274(d) (1) and
(3)) in effect for the date of issuance, or the stated principal amount
of the obligation. The issue price of an Agency Obligation that bears a
qualified floating rate of interest (within the meaning of Sec. 1.1275-
5(b)) is determined by treating the obligation as bearing a fixed rate
of interest equal to the rate in effect on the date of issuance under
the obligation.
(3) Adjustments to principal amount. Except as provided in
Sec. 1.597-5(d)(2)(iv), this paragraph (c)(3) applies if Agency
modifies or exchanges an Agency Obligation provided as Net Worth
Assistance (or a successor obligation). The issue price of the modified
or new Agency Obligation is determined under paragraphs (c) (1) and (2)
of this section. If the issue price is greater than the adjusted issue
price of the existing Agency Obligation, the difference is treated as
FFA. If the issue price is less than the adjusted issue price of the
existing Agency Obligation, the difference is treated as an adjustment
to FFA under Sec. 1.597-2(d)(4).
(d) Successors. To the extent necessary to effectuate the purposes
of the regulations under section 597, an entity's treatment under the
regulations applies to its successor. A successor includes a transferee
in a transaction to which section 381(a) applies or a Bridge Bank to
which another Bridge Bank transfers deposit liabilities.
(e) Loss disallowance. For purposes of Sec. 1.1502-20, FFA and the
amount described in Sec. 1.597-4(g)(3) are treated as an extraordinary
gain disposition within the meaning of Sec. 1.1502-20(c)(2)(i) and a
Taxable Transfer is treated as an applicable asset acquisition under
section 1060(c) within the meaning of Sec. 1.1502-20(c)(2)(i)(A)(4).
(f) Losses and deductions with respect to covered assets. Prior to
the disposition of an asset covered by a Loss Guarantee, the asset
cannot be charged off, marked to a market value, depreciated,
amortized, or otherwise treated in a manner that supposes an actual or
possible diminution of value below the greater of the asset's highest
guaranteed value or the highest price at which the asset can be put.
(g) Anti-abuse rule. The regulations under section 597 must be
applied in a manner consistent with the purposes of section 597.
Accordingly, if, in structuring or engaging in any transaction, a
principal purpose is to achieve a tax result that is inconsistent with
the purposes of section 597 and the regulations thereunder, the
Commissioner can make appropriate adjustments to income, deductions and
other items that would be consistent with those purposes.
Sec. 1.597-4 Bridge Banks and Agency Control.
(a) Scope. This section provides rules that apply to a Bridge Bank
or other Institution under Agency Control and to transactions in which
an Institution transfers deposit liabilities (whether or not the
Institution also transfers assets) to a Bridge Bank.
(b) Status as taxpayer. A Bridge Bank or other Institution under
Agency Control is a corporation within the meaning of section
7701(a)(3) for all purposes of the Internal Revenue Code and is subject
to all Internal Revenue Code provisions that generally apply to
corporations, including those relating to methods of accounting and to
requirements for filing returns, even if Agency owns stock of the
Institution.
(c) No section 382 ownership change. The imposition of Agency
Control, the cancellation of Institution stock by Agency, a transaction
in which an Institution transfers deposit liabilities to a Bridge Bank,
and an election under paragraph (g) of this section are disregarded in
determining whether an ownership change has occurred within the meaning
of section 382(g).
(d) Transfers to Bridge Banks--(1) In general. Except as otherwise
provided in paragraph (g) of this section, the rules of this paragraph
(d) apply to transfers to Bridge Banks. In general, a Bridge Bank and
its associated Residual Entity are together treated as the successor
entity to the transferring Institution. If an Institution transfers
deposit liabilities to a Bridge Bank (whether or not it also transfers
assets), the Institution recognizes no gain or loss on the transfer and
the Bridge Bank succeeds to the transferring Institution's basis in any
transferred assets. The associated Residual Entity retains its basis in
any assets it continues to hold. Immediately after the transfer, the
Bridge Bank succeeds to and takes into account the transferring
Institution's items described in section 381(c) (subject to the
conditions and limitations specified in section 381(c)), taxpayer
identification number (``TIN''), deferred FFA account, and account
receivable for future FFA as described in paragraph (g)(4)(ii) of this
section. The Bridge Bank also succeeds to and continues the
transferring Institution's taxable year.
(2) Transfers to a Bridge Bank from multiple Institutions. If two
or more Institutions transfer deposit liabilities to the same Bridge
Bank, the rules in paragraph (d)(1) of this section are modified to the
extent provided in this paragraph (d)(2). The Bridge Bank succeeds to
the TIN and continues the taxable year of the Institution that
transfers the largest amount of deposits. The taxable years of the
other transferring Institutions close at the time of the transfer. If
all the transferor Institutions are members of the same consolidated
group, the Bridge Bank's carryback of losses to the Institution that
transfers the largest amount of deposits is not limited by section
381(b)(3). The limitations of section 381(b)(3) do apply to the Bridge
Bank's carrybacks of losses to all other transferor Institutions. If
the transferor Institutions are not all members of the same
consolidated group, the limitations of section 381(b)(3) apply with
respect to all transferor Institutions. See paragraph (g)(6)(ii) of
this section for additional rules that apply if two or more
Institutions that are not members of the same consolidated group
transfer deposit liabilities to the same Bridge Bank.
(e) Treatment of Bridge Bank and Residual Entity as a single
entity. A Bridge Bank and its associated Residual Entity or Entities
are treated as a single entity for income tax purposes and must file a
single combined income tax return. The Bridge Bank is responsible for
filing all income tax returns and statements for this single entity and
is
[[Page 66099]]
the agent of each associated Residual Entity to the same extent as if
the Bridge Bank were the common parent of a consolidated group
including the Residual Entity. The term Institution includes a Residual
Entity that files a combined return with its associated Bridge Bank.
(f) Rules applicable to members of consolidated groups--(1) Status
as members. Unless an election is made under paragraph (g) of this
section, Agency Control of an Institution does not terminate the
Institution's membership in a consolidated group. Stock of a subsidiary
that is canceled by Agency is treated as held by the members of the
consolidated group that held the stock prior to its cancellation. If an
Institution is a member of a consolidated group immediately before it
transfers deposit liabilities to a Bridge Bank, the Bridge Bank
succeeds to the Institution's status as the common parent or, unless an
election is made under paragraph (g) of this section, as a subsidiary
of the group. If a Bridge Bank succeeds to an Institution's status as a
subsidiary, its stock is treated as held by the shareholders of the
transferring Institution, and the stock basis or excess loss account of
the Institution carries over to the Bridge Bank. A Bridge Bank is
treated as owning stock owned by its associated Residual Entities,
including for purposes of determining membership in an affiliated
group.
(2) No 30-day election to be excluded from consolidated group.
Neither an Institution nor any of its Consolidated Subsidiaries may be
excluded from a consolidated group for a taxable year under
Sec. 1.1502-76(b)(5)(ii), as contained in 26 CFR part 1 edition revised
April 1, 1994, if the Institution is under Agency Control at any time
during the year.
(3) Coordination with consolidated return regulations. The
provisions of the regulations under section 597 take precedence over
conflicting provisions in the regulations under section 1502.
(g) Elective disaffiliation--(1) In general. A consolidated group
of which an Institution is a subsidiary may elect irrevocably not to
include the Institution in its affiliated group if the Institution is
placed in Agency receivership (whether or not assets or deposit
liabilities of the Institution are transferred to a Bridge Bank). See
paragraph (g)(6) of this section for circumstances under which a
consolidated group is deemed to make this election.
(2) Consequences of election. If the election under this paragraph
(g) is made with respect to an Institution, the following consequences
occur immediately before the subsidiary Institution to which the
election applies is placed in Agency receivership (or, in the case of a
deemed election under paragraph (g)(6) of this section, immediately
before the consolidated group is deemed to make the election) and in
the following order--
(i) All adjustments of the Institution and its Consolidated
Subsidiaries under section 481 are accelerated;
(ii) Deferred intercompany gains and losses with respect to the
Institution and its Consolidated Subsidiaries are taken into account
and the Institution and its Consolidated Subsidiaries take into account
any other items required under the regulations under section 1502 for
members that become nonmembers within the meaning of Sec. 1.1502-
32(d)(4);
(iii) The taxable year of the Institution and its Consolidated
Subsidiaries closes and the Institution includes the amount described
in paragraph (g)(3) of this section in income as ordinary income as its
last item for that taxable year;
(iv) The members of the consolidated group owning the common stock
of the Institution include in income any excess loss account with
respect to the Institution's stock under Sec. 1.1502-19 and any other
items required under the regulations under section 1502 for members
that own stock of corporations that become nonmembers within the
meaning of Sec. 1.1502-32(d)(4); and
(v) If the Institution's liabilities exceed the aggregate fair
market value of its assets on the date the Institution is placed in
Agency receivership (or, in the case of a deemed election under
paragraph (g)(6) of this section, on the date the consolidated group is
deemed to make the election), the members of the consolidated group
treat their stock in the Institution as worthless. (See Secs. 1.337(d)-
1 and 1.1502-20 for potential limitations on the group's worthless
stock deduction.) In all other cases, the consolidated group will be
treated as owning stock of a nonmember corporation until such stock is
disposed of or becomes worthless under rules otherwise applicable.
(3) Toll charge. The amount described in this paragraph (g)(3) is
the excess of the Institution's liabilities over the adjusted bases of
its assets immediately before the Institution is placed in Agency
receivership (or, in the case of a deemed election under paragraph
(g)(6) of this section, immediately before the consolidated group is
deemed to make the election). In computing this amount, the adjusted
bases of an Institution's assets are reduced by the amount of the
Institution's reserves for bad debts under section 585 or 593, other
than supplemental reserves under section 593. For purposes of this
paragraph (g)(3), an Institution is treated as a single entity that
includes the assets and liabilities of its Consolidated Subsidiaries,
with appropriate adjustments to prevent duplication. The amount
described in this paragraph (g)(3) for alternative minimum tax purposes
is determined using alternative minimum tax basis, deductions, and all
other items required to be taken into account. In computing the
increase in the group's taxable income or alternative minimum taxable
income, sections 56(d)(1), 382 and 383 and Secs. 1.1502-15, 1.1502-21
and 1.1502-22 do not limit the use of the attributes of the Institution
and its Consolidated Subsidiaries to the extent, if any, that the
inclusion of the amount described in this paragraph (g)(3) in income
would result in the group having taxable income or alternative minimum
taxable income (determined without regard to this sentence) for the
taxable year. The preceding sentence does not apply to any limitation
under section 382 or 383 or Secs. 1.1502-15, 1.1502-21, or 1.1502-22
that arose in connection with or prior to a corporation becoming a
Consolidated Subsidiary of the Institution.
(4) Treatment of Institutions after disaffiliation--(i) In general.
If the election under this paragraph (g) is made with respect to an
Institution, immediately after the Institution is placed in Agency
receivership (or, in the case of a deemed election under paragraph
(g)(6) of this section, immediately after the consolidated group is
deemed to make the election), the Institution and each of its
Consolidated Subsidiaries are treated for income tax purposes as new
corporations that are not members of the electing group's affiliated
group. Each new corporation retains the TIN of the corresponding
disaffiliated corporation and is treated as having received the assets
and liabilities of the corresponding disaffiliated corporation in a
transaction to which section 351 applies (and in which no gain was
recognized under section 357(c) or otherwise). Thus, the new
corporation has no net operating or capital loss carryforwards. An
election under this paragraph (g) does not terminate the single entity
treatment of a Bridge Bank and its Residual Entities provided in
paragraph (e) of this section.
(ii) FFA. A new Institution is treated as having a non- interest
bearing, nontransferable account receivable for future FFA with a basis
equal to the amount described in paragraph (g)(3) of this section. If a
disaffiliated Institution has a deferred FFA account at the time
[[Page 66100]]
of its disaffiliation, the corresponding new Institution succeeds to
and takes into account that deferred FFA account.
(iii) Filing of consolidated returns. If a disaffiliated
Institution has Consolidated Subsidiaries at the time of its
disaffiliation, the corresponding new Institution is required to file a
consolidated income tax return with the subsidiaries in accordance with
the regulations under section 1502.
(iv) Status as Institution. If an Institution is disaffiliated
under this paragraph (g), the resulting new corporation is treated as
an Institution for purposes of the regulations under section 597
regardless of whether it is a bank or domestic building and loan
association within the meaning of section 597.
(v) Loss carrybacks. To the extent a carryback of losses would
result in a refund being paid to a fiduciary under section 6402(i), an
Institution or Consolidated Subsidiary with respect to which an
election under this paragraph (g) (other than under paragraph
(g)(6)(ii) of this section) applies is allowed to carry back losses as
if the Institution or Consolidated Subsidiary had continued to be a
member of the consolidated group that made the election.
(5) Affirmative election--(i) Original Institution--(A) Manner of
making election. Except as otherwise provided in paragraph (g)(6) of
this section, a consolidated group makes the election provided by this
paragraph (g) by sending a written statement by certified mail to the
affected Institution on or before the later of 120 days after its
placement in Agency receivership or May 31, 1996. The statement must
contain the following legend at the top of the page: ``THIS IS AN
ELECTION UNDER Sec. 1.597-4(g) TO EXCLUDE THE BELOW-REFERENCED
INSTITUTION AND CONSOLIDATED SUBSIDIARIES FROM THE AFFILIATED GROUP,''
and must include the names and taxpayer identification numbers of the
common parent and of the Institution and Consolidated Subsidiaries to
which the election applies, and the date on which the Institution was
placed in Agency receivership. The consolidated group must send a
similar statement to all subsidiary Institutions placed in Agency
receivership during the consistency period described in paragraph
(g)(5)(ii) of this section. (Failure to satisfy the requirement in the
preceding sentence, however, does not invalidate the election with
respect to any subsidiary Institution placed in Agency receivership
during the consistency period described in paragraph (g)(5)(ii) of this
section.) The consolidated group must include a copy of any election
statement and accompanying certified mail receipt as part of its first
income tax return filed after the due date under this paragraph (g)(5)
for such statement. A statement must be attached to this return
indicating that the individual who signed the election was authorized
to do so on behalf of the consolidated group. Agency cannot make this
election under the authority of section 6402(i) or otherwise.
(B) Consistency limitation on affirmative elections. A consolidated
group may make an affirmative election under this paragraph (g)(5) with
respect to a subsidiary Institution placed in Agency receivership only
if the group made, or is deemed to have made, the election under this
paragraph (g) with respect to every subsidiary Institution of the group
placed in Agency receivership on or after May 10, 1989 and within five
years preceding the date the subject Institution was placed in Agency
receivership.
(ii) Effect on Institutions placed in receivership simultaneously
or subsequently. An election under this paragraph (g), other than under
paragraph (g)(6)(ii) of this section, applies to the Institution with
respect to which the election is made or deemed made (the original
Institution) and each subsidiary Institution of the group placed in
Agency receivership or deconsolidated in contemplation of Agency
Control or the receipt of FFA simultaneously with the original
Institution or within five years thereafter.
(6) Deemed Election--(i) Deconsolidations in contemplation. If one
or more members of a consolidated group deconsolidate (within the
meaning of Sec. 1.1502-19(c)(1)(ii)(B)) a subsidiary Institution in
contemplation of Agency Control or the receipt of FFA, the consolidated
group is deemed to make the election described in this paragraph (g)
with respect to the Institution on the date the deconsolidation occurs.
A subsidiary Institution is conclusively presumed to have been
deconsolidated in contemplation of Agency Control or the receipt of FFA
if either event occurs within six months after the deconsolidation.
(ii) Transfers to a Bridge Bank from multiple groups. On the day an
Institution's transfer of deposit liabilities to a Bridge Bank results
in the Bridge Bank holding deposit liabilities from both a subsidiary
Institution and an Institution not included in the subsidiary
Institution's consolidated group, each consolidated group of which a
transferring Institution or the Bridge Bank is a subsidiary is deemed
to make the election described in this paragraph (g) with respect to
its subsidiary Institution. If deposit liabilities of another
Institution that is a subsidiary member of any consolidated group
subsequently are transferred to the Bridge Bank, the consolidated group
of which the Institution is a subsidiary is deemed to make the election
described in this paragraph (g) with respect to that Institution at the
time of the subsequent transfer.
(h) Examples. The following examples illustrate the provisions of
this section:
Facts. Corporation X, the common parent of a consolidated group,
owns all the stock (with a basis of $4 million) of Institution M, an
insolvent Institution with no Consolidated Subsidiaries. At the
close of business on April 30, 1996, M has $4 million of deposit
liabilities, $1 million of other liabilities, and assets with an
adjusted basis of $4 million and a fair market value of $3 million.
Example 1. Effect of receivership on consolidation. On May 1,
1996, Agency places M in receivership and begins liquidating M. X
does not make an election under Sec. 1.597-4(g). M remains a member
of the X consolidated group after May 1, 1996. Section 1.597-
4(f)(1).
Example 2. Effect of Bridge Bank on consolidation--(i)
Additional facts. On May 1, 1996, Agency places M in receivership
and causes M to transfer all of its assets and deposit liabilities
to Bridge Bank MB.
(ii) Consequences without an election to disaffiliate. M
recognizes no gain or loss from the transfer and MB succeeds to M's
basis in the transferred assets, M's items described in section
381(c) (subject to the conditions and limitations specified in
section 381(c)) and TIN. Section 1.597-4(d)(1). (If M had a deferred
FFA account, MB would also succeed to that account. Section 1.597-
4(d)(1).) MB continues M's taxable year and succeeds to M's status
as a member of the X consolidated group after May 1, 1996. Section
1.597-4 (d)(1) and (f). MB and M are treated as a single entity for
income tax purposes. Section 1.597-4(e).
(iii) Consequences with an election to disaffiliate. If, on July
1, 1996, X makes an election under Sec. 1.597-4(g) with respect to
M, the following consequences are treated as occurring immediately
before M was placed in Agency receivership. M must include $1
million ($5 million of liabilities--$4 million of adjusted basis) in
income as of May 1, 1996. Section 1.597-4(g) (2) and (3). M is then
treated as a new corporation that is not a member of the X
consolidated group and that has assets (including a $1 million
account receivable for future FFA) with a basis of $5 million and $5
million of liabilities received from disaffiliated corporation M in
a section 351 transaction. New corporation M retains the TIN of
disaffiliated corporation M. Section 1.597-4(g)(4). Immediately
after the disaffiliation, new corporation M is treated as
transferring its assets and deposit liabilities to Bridge Bank MB.
New corporation M recognizes no gain or loss from the transfer and
MB succeeds to M's TIN and taxable year.
[[Page 66101]]
Section 1.597-4(d)(1). Bridge Bank MB is treated as a single entity
that includes M and has $5 million of liabilities, an account
receivable for future FFA with a basis of $1 million, and other
assets with a basis of $4 million. Section 1.597-4(d)(1).
Sec. 1.597-5 Taxable Transfers.
(a) Taxable Transfers--(1) Defined. The term Taxable Transfer
means--
(i) A transaction in which an entity transfers to a transferee
other than a Bridge Bank--
(A) Any deposit liability (whether or not the Institution also
transfers assets), if FFA is provided in connection with the
transaction; or
(B) Any asset for which Agency or a Controlled Entity has any
financial obligation (e.g., pursuant to a Loss Guarantee or Agency
Obligation); or
(ii) A deemed transfer of assets described in paragraph (b) of this
section.
(2) Scope. This section provides rules governing Taxable Transfers.
Rules applicable to both actual and deemed asset acquisitions are
provided in paragraphs (c) and (d) of this section. Special rules
applicable only to deemed asset acquisitions are provided in paragraph
(e) of this section.
(b) Deemed asset acquisitions upon stock purchase--(1) In general.
In a deemed transfer of assets under this paragraph (b), an Institution
(including a Bridge Bank or a Residual Entity) or a Consolidated
Subsidiary of the Institution (the Old Entity) is treated as selling
all of its assets in a single transaction and is treated as a new
corporation (the New Entity) that purchases all of the Old Entity's
assets at the close of the day immediately preceding the occurrence of
an event described in paragraph (b)(2) of this section. However, such
an event results in a deemed transfer of assets under this paragraph
(b) only if it occurs--
(i) In connection with a transaction in which FFA is provided;
(ii) While the Old Entity is a Bridge Bank;
(iii) While the Old Entity has a positive balance in a deferred FFA
account (see Sec. 1.597-2(c)(4)(v) regarding the optional accelerated
recapture of deferred FFA); or
(iv) With respect to a Consolidated Subsidiary, while the
Institution of which it is a Consolidated Subsidiary is under Agency
Control.
(2) Events. A deemed transfer of assets under this paragraph (b)
results if the Old Entity--
(i) Becomes a non-member within the meaning of Sec. 1.1502-32(d)(4)
of its consolidated group (other than pursuant to an election under
Sec. 1.597-4(g));
(ii) Becomes a member of an affiliated group of which it was not
previously a member (other than pursuant to an election under
Sec. 1.597-4(g)); or
(iii) Issues stock such that the stock that was outstanding before
the imposition of Agency Control or the occurrence of any transaction
in connection with the provision of FFA represents 50 percent or less
of the vote or value of its outstanding stock (disregarding stock
described in section 1504(a)(4) and stock owned by Agency or a
Controlled Entity).
(3) Bridge Banks and Residual Entities. If a Bridge Bank is treated
as selling all of its assets to a New Entity under this paragraph (b),
each associated Residual Entity is treated as simultaneously selling
its assets to a New Entity in a Taxable Transfer described in this
paragraph (b).
(c) Treatment of transferor--(1) FFA in connection with a Taxable
Transfer. A transferor in a Taxable Transfer is treated as having
directly received immediately before a Taxable Transfer any Net Worth
Assistance that Agency provides to the New Entity or Acquiring in
connection with the transfer. (See Sec. 1.597-2 (a) and (c) for rules
regarding the inclusion of FFA in income and Sec. 1.597-2(a)(1) for
related rules regarding FFA provided to shareholders.) The Net Worth
Assistance is treated as an asset of the transferor that is sold to the
New Entity or Acquiring in the Taxable Transfer.
(2) Amount realized in a Taxable Transfer. In a Taxable Transfer
described in paragraph (a)(1)(i) of this section, the amount realized
is determined under section 1001(b) by reference to the consideration
paid for the assets. In a Taxable Transfer described in paragraph
(a)(1)(ii) of this section, the amount realized is the sum of the
grossed-up basis of the stock acquired in connection with the Taxable
Transfer (excluding stock acquired from the Old or New Entity), plus
the amount of liabilities assumed or taken subject to in the deemed
transfer, plus other relevant items. The grossed-up basis of the
acquired stock equals the acquirors' basis in the acquired stock
divided by the percentage of the Old Entity's stock (by value)
attributable to the acquired stock.
(3) Allocation of amount realized--(i) In general. The amount
realized under paragraph (c)(2) of this section is allocated among the
assets transferred in the Taxable Transfer in the same manner as
amounts are allocated among assets under Sec. 1.338(b)-2T (b), (c)(1)
and (2).
(ii) Modifications to general rule. This paragraph (c)(3)(ii)
modifies certain of the allocation rules of paragraph (c)(3)(i) of this
section. Agency Obligations and assets covered by Loss Guarantees in
the hands of the New Entity or Acquiring are treated as Class II
assets. Stock of a Consolidated Subsidiary is treated as a Class II
asset to the extent the fair market value of the Consolidated
Subsidiary's Class I and Class II assets exceeds the amount of its
liabilities. The fair market value of an Agency Obligation is deemed to
equal its adjusted issue price immediately before the Taxable Transfer.
The fair market value of an asset covered by a Loss Guarantee
immediately after the Taxable Transfer is deemed to be not less than
the greater of the asset's highest guaranteed value or the highest
price at which the asset can be put.
(d) Treatment of a New Entity and Acquiring--(1) Purchase price.
The purchase price for assets acquired in a Taxable Transfer described
in paragraph (a)(1)(i) of this section is the cost of the assets
acquired. See Sec. 1.1060-1T(c)(1). The purchase price for assets
acquired in a Taxable Transfer described in paragraph (a)(1)(ii) of
this section is the sum of the grossed-up basis of the stock acquired
in connection with the Taxable Transfer (excluding stock acquired from
the Old or New Entity), plus the amount of liabilities assumed or taken
subject to in the deemed transfer, plus other relevant items. The
grossed-up basis of the acquired stock equals the acquirors' basis in
the acquired stock divided by the percentage of the Old Entity's stock
(by value) attributable to the acquired stock. FFA provided in
connection with a Taxable Transfer is not included in the New Entity's
or Acquiring's purchase price for the acquired assets. Any Net Worth
Assistance so provided is treated as an asset of the transferor sold to
the New Entity or Acquiring in the Taxable Transfer.
(2) Allocation of basis--(i) In general. Except as otherwise
provided in this paragraph (d)(2), the purchase price determined under
paragraph (d)(1) of this section is allocated among the assets
transferred in the Taxable Transfer in the same manner as amounts are
allocated among assets under Sec. 1.338(b)-2T(b), (c) (1) and (2).
(ii) Modifications to general rule. The allocation rules contained
in paragraph (c)(3)(ii) of this section apply to the allocation of
basis among assets acquired in a Taxable Transfer. No basis is
allocable to Agency's agreement to provide Loss Guarantees, yield
maintenance payments, cost to carry or cost of funds reimbursement
payments, or expense reimbursement or indemnity payments. A New
Entity's basis in assets it receives from its shareholders is
[[Page 66102]]
determined under general principles of income taxation and is not
governed by this paragraph (d).
(iii) Allowance and recapture of additional basis in certain cases.
If the fair market value of the Class I and Class II assets acquired in
a Taxable Transfer is greater than the New Entity's or Acquiring's
purchase price for the acquired assets, the basis of the Class I and
Class II assets equals their fair market value. The amount by which the
fair market value of the Class I and Class II assets exceeds the
purchase price is included ratably as ordinary income by the New Entity
or Acquiring over a period of six taxable years beginning in the year
of the Taxable Transfer. The New Entity or Acquiring must include as
ordinary income the entire amount remaining to be recaptured under the
preceding sentence in the taxable year in which an event occurs that
would accelerate inclusion of an adjustment under section 481.
(iv) Certain post-transfer adjustments--(A) Agency Obligations. If
an adjustment to the principal amount of an Agency Obligation or cash
payment to reflect a more accurate determination of the condition of
the Institution at the time of the Taxable Transfer is made before the
earlier of the date the New Entity or Acquiring files its first post-
transfer income tax return or the due date of that return (including
extensions), the New Entity or Acquiring must adjust its basis in its
acquired assets to reflect the adjustment. In making adjustments to the
New Entity's or Acquiring's basis in its acquired assets, paragraph
(c)(3)(ii) of this section is applied by treating an adjustment to the
principal amount of an Agency Obligation pursuant to the first sentence
of this paragraph (d)(2)(iv)(A) as occurring immediately before the
Taxable Transfer. (See Sec. 1.597-3(c)(3) for rules regarding other
adjustments to the principal amount of an Agency Obligation.)
(B) Assets covered by a Loss Guarantee. If, immediately after a
Taxable Transfer, an asset is not covered by a Loss Guarantee but the
New Entity or Acquiring has the right to designate specific assets that
will be covered by a Loss Guarantee, the New Entity or Acquiring must
treat any asset so designated as having been subject to the Loss
Guarantee at the time of the Taxable Transfer. The New Entity or
Acquiring must adjust its basis in the covered assets and in its other
acquired assets to reflect the designation in the manner provided by
paragraph (d)(2) of this section. The New Entity or Acquiring must make
appropriate adjustments in subsequent taxable years if the designation
is made after the New Entity or Acquiring files its first post-transfer
income tax return or the due date of that return (including extensions)
has passed.
(e) Special rules applicable to Taxable Transfers that are deemed
asset acquisitions--(1) Taxpayer identification numbers. Except as
provided in paragraph (e)(3) of this section, a New Entity succeeds to
the TIN of the transferor in a deemed sale under paragraph (b) of this
section.
(2) Consolidated Subsidiaries--(i) In general. A Consolidated
Subsidiary that is treated as selling its assets in a Taxable Transfer
under paragraph (b) of this section is treated as engaging immediately
thereafter in a complete liquidation to which section 332 applies. The
consolidated group of which the Consolidated Subsidiary is a member
does not take into account gain or loss on the sale, exchange, or
cancellation of stock of the Consolidated Subsidiary in connection with
the Taxable Transfer.
(ii) Certain minority shareholders. Shareholders of the
Consolidated Subsidiary that are not members of the consolidated group
that includes the Institution do not recognize gain or loss with
respect to shares of Consolidated Subsidiary stock retained by the
shareholder. The shareholder's basis for that stock is not affected by
the Taxable Transfer.
(3) Bridge Banks and Residual Entities--(i) In general. A Bridge
Bank or Residual Entity's sale of assets to a New Entity under
paragraph (b) of this section is treated as made by a single entity
under Sec. 1.597-4(e). The New Entity deemed to acquire the assets of a
Residual Entity under paragraph (b) of this section is not treated as a
single entity with the Bridge Bank (or with the New Entity acquiring
the Bridge Bank's assets) and must obtain a new TIN.
(ii) Treatment of consolidated groups. At the time of a Taxable
Transfer described in paragraph (a)(1)(ii) of this section, treatment
of a Bridge Bank as a subsidiary member of a consolidated group under
Sec. 1.597-4(f)(1) ceases. However, the New Entity deemed to acquire
the assets of a Residual Entity is a member of the selling consolidated
group after the deemed sale. The group's basis or excess loss account
in the stock of the New Entity that is deemed to acquire the assets of
the Residual Entity is the group's basis or excess loss account in the
stock of the Bridge Bank immediately before the deemed sale, as
adjusted for the results of the sale.
(4) Certain returns. If an Old Entity without Continuing Equity is
not a subsidiary of a consolidated group at the time of the Taxable
Transfer, the controlling Agency must file all income tax returns for
the Old Entity for periods ending on or prior to the date of the deemed
sale described in paragraph (b) of this section that are not filed as
of that date.
(5) Basis limited to fair market value. If all of the stock of the
corporation is not acquired on the date of the Taxable Transfer, the
Commissioner may make appropriate adjustments under paragraphs (c) and
(d) of this section to the extent using a grossed-up basis of the stock
of a corporation results in an aggregate amount realized for, or basis
in, the assets other than the aggregate fair market value of the
assets.
(f) Examples. The following examples illustrate the provisions of
this section:
Example 1. Branch sale resulting in Taxable Transfer. (i)
Institution M is a calendar year taxpayer in Agency receivership. M
is not a member of a consolidated group. On January 1, 1997, M has
$200 million of liabilities (including deposit liabilities) and
assets with an adjusted basis of $100 million. M has no income or
loss for 1997 and, except as described below, receives no FFA. On
September 30, 1997, Agency causes M to transfer six branches (with
assets having an adjusted basis of $1 million) together with $120
million of deposit liabilities to N. In connection with the
transfer, Agency provides $121 million in cash to N.
(ii) The transaction is a Taxable Transfer in which M receives
$121 million of Net Worth Assistance. Section 1.597-5(a)(1). (M is
treated as directly receiving the $121 million of Net Worth
Assistance immediately before the Taxable Transfer. Section 1.597-
5(c)(1).) M transfers branches having a basis of $1 million and is
treated as transferring $121 million in cash (the Net Worth
Assistance) to N in exchange for N's assumption of $120 million of
liabilities. Thus, M realizes a loss of $2 million on the transfer.
The amount of the FFA M must include in its income in 1997 is
limited by Sec. 1.597-2(c) to $102 million, which is the sum of the
$100 million excess of M's liabilities ($200 million) over the total
adjusted basis of its assets ($100 million) at the beginning of
1997, plus the $2 million excess for the taxable year, which results
from the Taxable Transfer, of M's deductions (other than carryovers)
over its gross income other than FFA. M must establish a deferred
FFA account for the remaining $19 million of FFA. Section 1.597-
2(c)(4).
(iii) N, as Acquiring, must allocate its $120 million purchase
price for the assets acquired from M among those assets. Cash is a
Class I asset. The branch assets are in Classes III and IV. N's
adjusted basis in the cash is its amount, i.e., $121 million.
Section 1.597-5(d)(2). Because this amount exceeds N's purchase
price for all of the acquired assets by $1 million, N allocates no
basis to the other acquired assets and, under Sec. 1.597-5(d)(2),
must recapture the $1 million excess at an annual rate of $166,667
in the six consecutive taxable years beginning with
[[Page 66103]]
1997 (subject to acceleration for certain events).
Example 2. Stock issuance by Bridge Bank causing Taxable
Transfer. (i) On April 1, 1996, Institution P is placed in
receivership and caused to transfer assets and liabilities to Bridge
Bank PB. On August 31, 1996, the assets of PB consist of $20 million
in cash, loans outstanding with an adjusted basis of $50 million and
a fair market value of $40 million, and other non-financial assets
(primarily branch assets and equipment) with an adjusted basis of $5
million. PB has deposit liabilities of $95 million and other
liabilities of $5 million. P, the Residual Entity, holds real estate
with an adjusted basis of $10 million and claims in litigation
having a zero basis. P retains no deposit liabilities and has no
other liabilities (except its liability to Agency for having caused
its deposit liabilities to be satisfied).
(ii) On September 1, 1996, Agency causes PB to issue 100 percent
of its common stock for $2 million cash to X. On the same day,
Agency issues a $25 million note to PB. The note bears a fixed rate
of interest in excess of the applicable federal rate in effect for
September 1, 1996. Agency provides Loss Guarantees guaranteeing PB a
value of $50 million for PB's loans outstanding.
(iii) The stock issuance is a Taxable Transfer in which PB is
treated as selling all of its assets to a new corporation, New PB.
Section 1.597-5(b)(1). PB is treated as directly receiving $25
million of Net Worth Assistance (the issue price of the Agency
Obligation) immediately before the Taxable Transfer. Section 1.597-
3(c)(2); Sec. 1.597- 5(c)(1). The amount of FFA PB must include in
income is determined under Sec. 1.597-2(a) and (c). PB in turn is
deemed to transfer the note to New PB in the Taxable Transfer,
together with $20 million of cash, all its loans outstanding (with a
basis of $50 million) and its other non-financial assets (with a
basis of $5 million). The amount realized by PB from the sale is
$100 million, the amount of PB's liabilities deemed to be assumed by
New PB. This amount realized equals PB's basis in its assets and
thus, PB realizes no gain or loss on the transfer to New PB.
(iv) Residual Entity P also is treated as selling all its assets
(consisting of real estate and claims in litigation) for $0 (the
amount of consideration received by P) to a new corporation (New P)
in a Taxable Transfer. Section 1.597-5(b)(3). (P's only liability is
to Agency and a liability to Agency is not treated as a debt under
Sec. 1.597-3(b).) Thus, P realizes a $10 million loss on the
transfer to New P. The combined return filed by PB and P for 1996
will reflect a total loss on the Taxable Transfer of $10 million ($0
for PB and $10 million for P). Section 1.597-5(e)(3). That return
also will reflect FFA income from the Net Worth Assistance,
determined under Sec. 1.597-2 (a) and (c).
(v) New PB is treated as having acquired the assets it acquired
from PB for $100 million, the amount of liabilities assumed. In
allocating basis among these assets, New PB treats the Agency note
and the loans outstanding (which are covered by Loss Guarantees) as
Class II assets. For the purpose of allocating basis, the fair
market value of the Agency note is deemed to equal its adjusted
issue price immediately before the transfer, $25 million. The fair
market value of the loans is deemed not to be less than the
guaranteed value of $50 million.
(vi) New P is treated as having acquired its assets for no
consideration. Thus its basis in its assets immediately after the
transfer is zero. New PB and New P are not treated as a single
entity. Section 1.597-5(e)(3).
Example 3. Taxable Transfer of previously disaffiliated
Institution. (i) Corporation X, the common parent of a consolidated
group, owns all the stock of Institution M, an insolvent Institution
with no Consolidated Subsidiaries. On April 30, 1996, M has $4
million of deposit liabilities, $1 million of other liabilities, and
assets with an adjusted basis of $4 million and a fair market value
of $3 million. On May 1, 1996, Agency places M in receivership. X
elects under Sec. 1.597-4(g) to disaffiliate M. Accordingly, as of
May 1, 1996, new corporation M is not a member of the X consolidated
group. On May 1, 1996, Agency causes M to transfer all of its assets
and liabilities to Bridge Bank MB. Under Sec. 1.597-4(e), MB and M
are thereafter treated as a single entity which has $5 million of
liabilities, an account receivable for future FFA with a basis of $1
million, and other assets with a basis of $4 million. Section 1.597-
4(g)(4).
(ii) During May 1996, MB earns $25,000 of interest income and
accrues $20,000 of interest expense on depositor accounts and there
is no net change in deposits other than the additional $20,000 of
interest expense accrued on depositor accounts. MB pays $5,000 of
wage expenses and has no other items of income or expense.
(iii) On June 1, 1996, Agency causes MB to issue 100 percent of
its stock to corporation Y. In connection with the stock issuance,
Agency provides an Agency Obligation for $2 million and no other
FFA.
(iv) The stock issuance results in a Taxable Transfer. Section
1.597-5(b). MB is treated as receiving the Agency Obligation
immediately prior to the Taxable Transfer. Section 1.597-5(c)(1). MB
has $1 million of basis in its account receivable for FFA. This
receivable is treated as satisfied, offsetting $1 million of the $2
million of FFA provided by Agency in connection with the Taxable
Transfer. The status of the remaining $1 million of FFA as
includible income is determined as of the end of the taxable year
under Sec. 1.597-2(c). However, under Sec. 1.597-2(b), MB obtains a
$2 million basis in the Agency Obligation received as FFA.
(v) Under Sec. 1.597-5(c)(2), in the Taxable Transfer, Old
Entity MB is treated as selling, to New Entity MB, all of Old Entity
MB's assets, having a basis of $6,020,000 (the original $4 million
of asset basis as of April 30, 1996, plus $20,000 net cash from May
1996 activities, plus $2 million in the Agency Obligation received
as FFA), for $5,020,000, the amount of Old Entity MB's liabilities
assumed by New Entity MB pursuant to the Taxable Transfer.
Therefore, Old Entity MB recognizes, in the aggregate, a loss of $1
million from the Taxable Transfer.
(vi) Because this $1 million loss causes Old Entity MB's
deductions to exceed its gross income (determined without regard to
FFA) by $1 million, Old Entity MB must include in its income the $1
million of FFA not offset by the FFA receivable. Section 1.597-2(c).
(As of May 1, 1996, Old Entity MB's liabilities ($5,000,000) did not
exceed MB's $5 million adjusted basis of its assets. For the taxable
year, MB's deductions of $1,025,000 ($1,000,000 loss from the
Taxable Transfer, $20,000 interest expense and $5,000 of wage
expense) exceeded its gross income (disregarding FFA) of $25,000
(interest income) by $1,000,000. Thus, under Sec. 1.597-2(c), MB
includes in income the entire $1,000,000 of FFA not offset by the
FFA receivable.)
(vii) Therefore, Old Entity MB's taxable income for the taxable
year ending on the date of the Taxable Transfer is $0.
(viii) Residual Entity M is also deemed to engage in a deemed
sale of its assets to New Entity M under Sec. 1.597-5(b)(3), but
there are no tax consequences as M has no assets or liabilities at
the time of the deemed sale.
(ix) Under Sec. 1.597-5(d)(1), New Entity MB is treated as
purchasing Old Entity MB's assets for $5,020,000, the amount of New
Entity MB's liabilities. Of this, $2,000,000 is allocated to the $2
million Agency Obligation, and $3,020,000 is allocated to the other
assets New Entity MB is treated as purchasing in the Taxable
Transfer.
Example 4. Loss Sharing. Institution N acquires assets and
assumes liabilities of another Institution in a Taxable Transfer.
Among the assets transferred are three parcels of real estate. In
the hands of the transferring Institution, these assets had book
values of $100,000 each. In connection with the Taxable Transfer,
Agency agrees to reimburse Institution N for 80 percent of any loss
(based on the original book value) realized on the disposition or
charge-off of the three properties. This arrangement constitutes a
Loss Guarantee. Thus, in allocating basis, Institution N treats the
three parcels as Class II assets. By virtue of the arrangement with
the Agency, Institution N is assured that the parcels will not be
worth less to it than $80,000 each, because even if the properties
are worthless, Agency will reimburse 80 percent of the loss.
Although Institution could obtain payments under the Loss Guarantee
if the properties are worth more, it is not guaranteed that it will
realize more than $80,000. Accordingly, $80,000 is the highest
guaranteed value of the three parcels. Institution N will allocate
basis to the Class II assets up to their fair market value. For this
purpose, the fair market value of the three parcels is not less than
$80,000 each. Section 1.597-5(d)(2)(ii); Sec. 1.597-5(c)(3)(ii).
Sec. 1.597-6 Limitation on collection of income tax.
(a) Limitation on collection where tax is borne by Agency. If an
Institution without Continuing Equity (or any of its Consolidated
Subsidiaries) is liable for income tax that is attributable to the
inclusion in income of FFA or gain from a Taxable Transfer, the tax
will not be collected if it would be borne by Agency. The final
determination of whether the tax would be borne by
[[Page 66104]]
Agency is within the sole discretion of the Commissioner. In
determining whether tax would be borne by Agency, the Commissioner will
disregard indemnity, tax-sharing, or similar obligations of Agency, an
Institution, or its Consolidated Subsidiaries. Collection of the
several income tax liability under Sec. 1.1502-6 from members of an
Institution's consolidated group other than the Institution or its
Consolidated Subsidiaries is not affected by this section. Income tax
will continue to be subject to collection except as specifically
limited in this section. This section does not apply to taxes other
than income taxes.
(b) Amount of tax attributable to FFA or gain on a Taxable
Transfer. For purposes of paragraph (a) of this section, the amount of
income tax in a taxable year attributable to the inclusion of FFA or
gain from a Taxable Transfer in the income of an Institution (or a
Consolidated Subsidiary) is the excess of the actual income tax
liability of the Institution (or the consolidated group in which the
Institution is a member); over the income tax liability of the
Institution (or the consolidated group in which the Institution is a
member) determined without regard to FFA or gain or loss on the Taxable
Transfer.
(c) Reporting of uncollected tax. A taxpayer must specify on the
front page of Form 1120 (U.S. Corporate Income Tax Return), to the left
of the space provided for ``Total Tax,'' the amount of income tax for
the taxable year that is potentially not subject to collection under
this section. If an Institution is a subsidiary member of a
consolidated group, the amount specified as not subject to collection
is zero.
(d) Assessments of tax to offset refunds. Income tax that is not
collected under this section will be assessed and, thus, used to offset
any claim for refund made by or on behalf of the Institution, the
Consolidated Subsidiary or any other corporation with several liability
for the tax.
(e) Collection of taxes from Acquiring or a New Entity--(1)
Acquiring. No income tax liability (including the several liability for
taxes under Sec. 1.1502-6) of a transferor in a Taxable Transfer will
be collected from Acquiring.
(2) New Entity. Income tax liability (including the several
liability for taxes under Sec. 1.1502-6) of a transferor in a Taxable
Transfer will be collected from a New Entity only if stock that was
outstanding in the Old Entity remains outstanding as stock in the New
Entity or is reacquired or exchanged for consideration.
(f) Effect on section 7507. This section supersedes the application
of section 7507, and the regulations thereunder, for the assessment and
collection of income tax attributable to FFA.
Sec. 1.597-7 Effective date.
(a) FIRREA effective date. Section 597, as amended by section 1401
of the Financial Institutions Reform, Recovery, and Enforcement Act of
1989 (FIRREA), Public Law 101-73, is generally effective for any FFA
received or accrued by an Institution on or after May 10, 1989, and for
any transaction in connection with which such FFA is provided, unless
the FFA is provided in connection with an acquisition occurring prior
to May 10, 1989. See Sec. 1.597-8 for rules regarding FFA received or
accrued on or after May 10, 1989, that relates to an acquisition that
occurred before May 10, 1989.
(b) Effective date of regulations. Except as otherwise provided in
this section, Secs. 1.597-1 through 1.597-6 apply to taxable years
ending on or after April 22, 1992. However, the provisions of
Secs. 1.597-1 through 1.597-6 do not apply to FFA received or accrued
for taxable years ending on or after April 22, 1992, in connection with
an Agency assisted acquisition within the meaning of Notice 89-102
(1989-2 C.B. 436; see Sec. 601.601(d)(2)) (which does not include a
transfer to a Bridge Bank), that occurs before April 22, 1992.
Taxpayers not subject to Secs. 1.597-1 through 1.597-6 must comply with
an interpretation of the statute that is reasonable in light of the
legislative history and applicable administrative pronouncements. For
this purpose, the rules contained in Notice 89-102 apply to the extent
provided in the Notice.
(c) Elective application to prior years and transactions--(1) In
general. Except as limited in this paragraph (c), an election is
available to apply Secs. 1.597-1 through 1.597-6 to taxable years prior
to the general effective date of these regulations. A consolidated
group may elect to apply Secs. 1.597-1 through 1.597-6 for all members
of the group in all taxable years to which section 597, as amended by
FIRREA, applies. The common parent makes the election for the group. An
entity that is not a member of a consolidated group may elect to apply
Secs. 1.597-1 through 1.597-6 to all taxable years to which section
597, as amended by FIRREA, applies for which it is not a member of a
consolidated group. The election is irrevocable.
(2) Election unavailable in certain cases--(i) Statute of
limitations closed. The election cannot be made if the period for
assessment and collection of tax has expired under the rules of section
6501 for any taxable year in which Secs. 1.597-1 through 1.597-6 would
affect the determination of the electing entity's or group's income,
deductions, gain, loss, basis, or other items.
(ii) No section 338 election under Notice 89-102. The election
cannot be made with respect to an Institution if, under Notice 89-102,
it was a Target with respect to which a qualified stock purchase was
made, a timely election under section 338 was not made, and on April
22, 1992, a timely election under section 338 could not be made.
(iii) Inconsistent treatment of Institution that would be New
Entity. If, under Sec. 1.597-5(b), an Institution would become a New
Entity before April 22, 1992, the election cannot be made with respect
to that Institution unless elections are made by all relevant persons
such that Secs. 1.597-1 through 1.597-6 apply both before and after the
deemed sale under Sec. 1.597-5. However, this requirement does not
apply if, under Secs. 1.597-1 through 1.597-6, the Institution would
not have Continuing Equity prior to the deemed sale.
(3) Expense reimbursements. Notice 89-102, 1989-2 C.B. 436,
provides that reimbursements paid or accrued pursuant to an expense
reimbursement or indemnity arrangement are not included in income but
the taxpayer may not deduct, or otherwise take into account, the item
of cost or expense to which the reimbursement or indemnity payment
relates. With respect to an Agency assisted acquisition within the
meaning of Notice 89-102 that occurs before April 22, 1992, a taxpayer
that elects to apply these regulations retroactively under this
paragraph (c) may continue to account for these items under the rules
of Notice 89-102.
(4) Procedural rules--(i) Manner of making election. An Institution
or consolidated group makes the election provided by this paragraph (c)
by attaching a written statement to, and including it as a part of, the
taxpayer's or consolidated group's first annual income tax return filed
on or after March 15, 1996. The statement must contain the following
legend at the top of the page: ``THIS IS AN ELECTION UNDER Sec. 1.597-
7(c),'' and must contain the name, address and employer identification
number of the taxpayer or common parent making the election. The
statement must include a declaration that ``TAXPAYER AGREES TO EXTEND
THE STATUTE OF LIMITATIONS ON ASSESSMENT FOR THREE YEARS FROM THE DATE
OF THE FILING OF THIS ELECTION UNDER Sec. 1.597-7(c), IF THE
[[Page 66105]]
LIMITATIONS PERIOD WOULD EXPIRE EARLIER WITHOUT SUCH EXTENSION, FOR ANY
ITEMS AFFECTED IN ANY TAXABLE YEAR BY THE FILING OF THIS ELECTION,''
and a declaration that either ``AMENDED RETURNS WILL BE FILED FOR ALL
TAXABLE YEARS AFFECTED BY THE FILING OF THIS ELECTION WITHIN 180 DAYS
OF MAKING THIS STATEMENT, UNLESS SUCH REQUIREMENT IS WAIVED IN WRITING
BY THE DISTRICT DIRECTOR OR HIS DELEGATE'' or ``ALL RETURNS PREVIOUSLY
FILED ARE CONSISTENT WITH THE PROVISIONS OF Secs. 1.597-1 THROUGH
1.597-6,'' and be signed by an individual who is authorized to make the
election under this paragraph (c) on behalf of the taxpayer. An
election with respect to a consolidated group must be made by the
common parent of the group, not Agency, and applies to all members of
the group.
(ii) Effect of elective disaffiliation. To make the affirmative
election described in Sec. 1.597-4(g)(5) for an Institution placed in
Agency receivership in a taxable year ending before April 22, 1992, the
consolidated group must send the affected Institution the statement
described in Sec. 1.597-4(g)(5) on or before May 31, 1996.
Notwithstanding the requirements of paragraph (c)(4)(i) of this
section, a consolidated group sending such a statement is deemed to
make the election described in, and to agree to the conditions
contained in, this paragraph (c). The consolidated group must
nevertheless attach the statement described in paragraph (c)(4)(i) of
this section to its first annual income tax return filed on or after
March 15, 1996.
(d) Reliance on prior guidance--(1) Notice 89-102. Taxpayers may
rely on Notice 89-102, 1989-2 C.B. 436, to the extent they acted in
reliance on that Notice prior to April 22, 1992. Such reliance must be
reasonable and transactions with respect to which taxpayers rely must
be consistent with the overriding policies of section 597, as expressed
in the legislative history.
(2) Notice FI-46-89--(i) In general. Notice FI-46-89 was published
in the Federal Register on April 23, 1992 (57 FR 14804). Taxpayers may
rely on the provisions of Secs. 1.597-1 through 1.597-6 of that notice
to the extent they acted in reliance on those provisions prior to
December 21, 1995. Such reliance must be reasonable and transactions
with respect to which taxpayers rely must be consistent with the
overriding policies of section 597, as expressed in the legislative
history, as well as the overriding policies of notice FI-46-89.
(ii) Taxable Transfers. Any taxpayer described in this paragraph
(d) that, under notice FI-46-89, would be a New Entity or Acquiring
with respect to a Taxable Transfer on or after April 22, 1992, and
before December 21, 1995, may apply the rules of that notice with
respect to such transaction.
PART 301--PROCEDURE AND ADMINISTRATION
Par. 3. The authority citation for part 301 is amended by adding
entries in numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 301.7507-1 also issued under 26 U.S.C. 597.
Section 301.7507-9 also issued under 26 U.S.C. 597. * * *
Par. 4. Section 301.7507-1 is amended by adding paragraph (b)(4) to
read as follows:
Sec. 301.7507-1 Banks and trust companies covered.
* * * * *
(b) * * *
(4) The term ceased to do business means the bank no longer accepts
deposits or makes loans and discounts, and is winding up its affairs
and is in the process of liquidating its assets to pay depositors. A
bank will not be considered to have ceased to do business on account of
a transaction in which the bank--
(i) Transfers assets and liabilities to a Bridge Bank in a transfer
described in Sec. 1.597-4 of this chapter;
(ii) Transfers assets and liabilities to any person in a
transaction to which section 381(a) applies or in which the transferee
receives property with a transferred basis;
(iii) Transfers assets or liabilities to any person in a
transaction in which Federal Financial Assistance (as defined in
section 597) is provided to any party to the transaction, unless all
the Federal Financial Assistance is deposit insurance under
Sec. 301.7507-9(d); or
(iv) Transfers assets or liabilities to any person in a transaction
similar to any transaction described in paragraphs (b)(4) (i) through
(iii) of this section. This paragraph (b)(4) applies to taxable years
ending on or after April 22, 1992.
Par. 5. Section 301.7507-9 is amended by adding a sentence to the
end of paragraph (d) to read as follows:
Sec. 301.7507-9 Termination of immunity.
* * * * *
(d) * * * For taxable years ending on or after April 22, 1992,
deposit insurance does not include Federal Financial Assistance (as
defined in section 597) and other payments described in section 597(a)
prior to its amendment by the Financial Institutions Reform, Recovery,
and Enforcement Act of 1989 and, therefore, such payments must be taken
into account to determine whether a bank's assets are sufficient to
meet claims of depositors.
* * * * *
PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
Par. 6. The authority citation for part 602 continues to read as
follows:
Authority: 26 U.S.C. 7805.
Par. 7. In Sec. 602.101, paragraph (c) is amended by adding entries
in numerical order to the table to read as follows:
Sec. 602.101 OMB Control numbers.
* * * * *
(c) * * *
------------------------------------------------------------------------
Current OMB
CFR part or section where identified and described control No.
------------------------------------------------------------------------
* * * * *
1.597-2.................................................... 1545-1300
1.597-4.................................................... 1545-1300
1.597-6.................................................... 1545-1300
1.597-7.................................................... 1545-1300
* * * * *
------------------------------------------------------------------------
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved: December 4, 1995.
Cynthia G. Beerbower,
Assistant Secretary of the Treasury
[FR Doc. 95-30827 Filed 12-20-95; 8:45 am]
BILLING CODE 4830-01-U