Treatment of Acquisition of Certain Financial Institutions; Certain Tax Consequences of Federal Financial Assistance to Financial Institutions

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.

-----------------------------------------------------------------------

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