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pdfFederal Register, Volume 80 Issue 97 (Wednesday, May 20, 2015)
Page 1 of 39
[Federal Register Volume 80, Number 97 (Wednesday, May 20, 2015)]
[Proposed Rules]
[Pages 28872-28890]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-12230]
=======================================================================
----------------------------------------------------------------------DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-140991-09]
RIN 1545-BJ08
Guidance Regarding the Treatment of Transactions in Which Federal
Financial Assistance Is Provided
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
----------------------------------------------------------------------SUMMARY: This document contains proposed regulations under section 597
of the Internal Revenue Code (the ``Code''). The proposed regulations,
which will apply to banks and domestic building and loan associations
(and related parties) that receive Federal financial assistance
(``FFA''), will modify and clarify the treatment of transactions in
which FFA is provided to such institutions. This document also invites
comments from the public and requests for a public hearing regarding
these proposed regulations.
DATES: Written or electronic comments and requests for a public hearing
must be received by August 18, 2015.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-140991-09), room
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand-delivered Monday through
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG140991-09), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue NW., Washington, DC, or sent electronically via the Federal
eRulemaking Portal at http://www.regulations.gov/ (IRS REG-140991-09).
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Russell G. Jones, (202) 317-5357, or Ken Cohen, (202) 317-5367;
concerning the submission of comments or to request a public hearing,
Oluwafunmilayo (Funmi) P. Taylor, (202) 317-6901 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
[[Page 28873]]
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Paperwork Reduction Act
The collection of information contained in this notice of proposed
rulemaking has been submitted to the Office of Management and Budget
for review in accordance with the Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)). Comments on the collection of information should be
sent to the Office of Management and Budget, Attn: Desk Officer for the
Department of Treasury, Office of Information and Regulatory Affairs,
Washington, DC 20224. Comments on the collection of information should
be received by July 20, 2015.
The Treasury Department and the IRS previously issued a
comprehensive set of regulations providing guidance to banks and
domestic building and loan associations (and related parties) that
receive FFA. These regulations (see TD 8641) were previously approved
under control number 1545-1300.
The collections of information in this proposed regulation are in
Sec. Sec. 1.597-2(c)(4), 1.597-4(g)(5), 1.597-6(c), and 1.597-7(c)(3).
The collections of information in these regulations are necessary for
the proper performance of the function of the IRS by providing relevant
information concerning the deferred FFA account and the amount of
income tax potentially not subject to collection. The collections also
inform the IRS and certain financial institutions that certain
elections in these regulations have been made. The likely recordkeepers
will be banks and domestic building and loan associations (and related
parties) that receive FFA.
The estimated burden is as follows:
Estimated total annual reporting and/or recordkeeping burden: 2,200
hours.
Estimated average annual burden per respondent: 4.4 hours.
Estimated number of respondents: 500.
Estimated annual frequency of responses: Once.
Comments concerning the accuracy of this burden estimate and
suggestions for reducing this burden should be directed to the Office
of Management and Budget, Attn: Desk Officer for the Department of
Treasury, Office of Information and Regulatory Affairs, Washington DC
20503, with copies to the Internal Revenue Service, Attn: IRS Reports
Clearance Officer, SE:W:CAR:MP:T:T:SP, Washington, DC 20224. Any such
comments should be submitted not later than July 20, 2015. Comments are
specifically requested concerning:
Whether the proposed collection of information is necessary for
the proper performance of the Internal Revenue Service, including
whether the information will have practical utility;
The accuracy of the estimated burden associated with the proposed
collection of information;
How the quality, utility, and clarity of the information to be
collected may be enhanced;
How the burden of complying with the proposed collection of
information may be minimized, including through the application of
automated collection techniques or other forms of information
technology; and
Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of service to provide information.
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 assigned by the Office of
Management and Budget.
Books or records relating to a collection 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 section 6103.
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Background
Overview of Legislative History and Current Regulations
Section 597 was enacted as part of the Economic Recovery Tax Act of
1981 (Pub. L. 97-34, 95 Stat 172 (1981)) in response to the emerging
savings and loan crisis. As originally enacted, section 597 provided
that money or other property provided to a domestic building and loan
association by the Federal Savings and Loan Insurance Corporation
(``FSLIC'') was excluded from the recipient's gross income, and that
such recipient was not required to make a downward adjustment to the
basis of its assets.
The Technical and Miscellaneous Revenue Act of 1988 (Pub. L. 100647, 102 Stat 3342 (1988)) modified section 597 by requiring taxpayers
to reduce certain tax attributes by one-half of the amount of financial
assistance received from the FSLIC or the Federal Deposit Insurance
Corporation (``FDIC''). Yet troubled financial institutions still could
receive half of such financial assistance without any corresponding
reduction in tax attributes. These rules thus continued to allow the
FSLIC and the FDIC to arrange acquisitions of troubled financial
institutions by healthy financial institutions at a tax-subsidized
cost. Notice 89-102 (1989-2 CB 436).
Section 1401 of the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (Pub. L. 101-73, 103 Stat 183 (1989))
(``FIRREA'') further amended section 597 to provide that FFA generally
is treated as taxable income. Congress believed that the tax subsidy
provided to troubled financial institutions was an inefficient way to
provide assistance to such institutions. See H.R. Rep. No. 101-54, pt.
2, at 25 (1989). Moreover, Congress believed that a tax subsidy no
longer was necessary because the provisions of FIRREA that deem FFA to
be included in the troubled financial institution's income at the time
the institution's assets are sold or transferred generally would cause
the FFA inclusion to be offset by the institution's losses. Id. at 27.
In 1995, the Treasury Department and the IRS issued a comprehensive
set of regulations (the ``current regulations'') providing guidance for
banks and domestic building and loan associations (``Institutions'')
and their affiliates for transactions occurring in connection with the
receipt of FFA. See TD 8641 (1996-1 CB 103). For these purposes, the
term ``Institution'' includes not only a troubled financial
institution, but also a financial institution that acquires the
troubled institution's assets and liabilities in a transaction
facilitated by ``Agency'' (the Resolution Trust Corporation, the FDIC,
any similar instrumentality of the U.S. government, and any predecessor
or successor of the foregoing (including the FSLIC)).
The current regulations reflect certain principles derived from the
legislative history of FIRREA. First, FFA generally is treated as
ordinary income of the troubled Institution that is being compensated
for its losses through the provision of assistance. Second, an
Institution should not get the tax benefit of losses for which it has
been compensated with FFA. Third, the timing of the inclusion of FFA
should, where feasible, match the recognition of the Institution's
losses. Finally, the income tax consequences of the receipt of FFA as
part of a transaction in which a healthy Institution acquires a
troubled Institution should not depend on the form of the acquisition
(for example, the income tax consequences should not differ depending
on whether the stock or the assets of a troubled Institution are
acquired).
Definitions
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As provided in section 597(c) and current Sec. 1.597-1(b), ``FFA''
means any money or property provided by Agency to an Institution or to
a direct or indirect owner of stock in an Institution under
[[Page 28874]]
section 406(f) of the National Housing Act (12 U.S.C. 1729(f), prior to
its repeal by Pub. L. 101-73), section 21A(b)(4) of the Federal Home
Loan Bank Act (12 U.S.C. 1441a(b)(4), prior to its repeal by Pub. L.
111-203, 124 Stat 1376 (2010)), section 11(f) or 13(c) of the Federal
Deposit Insurance Act (12 U.S.C. 1821(f), 1823(c)), or any similar
provision of law.
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. An ``Agency
Obligation'' is a debt instrument that Agency issues to an Institution
or to a direct or indirect owner thereof.
FFA includes ``Loss Guarantee'' payments, ``Net Worth Assistance,''
and certain other types of payments. A ``Loss Guarantee'' is an
agreement pursuant to which Agency (or an entity under ``Agency
Control'') 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 to an entity under ``Agency
Control'') at a specified price, or a similar arrangement. 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.
``Net Worth Assistance'' is money or property that Agency provides as
an integral part of certain actual or deemed transfers of assets or
deposit liabilities, other than FFA that accrues after the date of the
transfer (Net Worth Assistance thus does not include Loss Guarantee
payments).
Other terms are defined in current Sec. Sec. 1.597-1(b) or 1.5975(a)(1). ``Taxable Transfers'' generally include (i) transfers of
deposit liabilities (if FFA is provided) or of any asset for which
Agency or an entity under Agency Control has any financial obligation
(for example, pursuant to a Loss Guarantee), and (ii) certain deemed
asset transfers. ``Acquiring'' refers to a corporation that is a
transferee of the assets and liabilities of a troubled Institution in a
Taxable Transfer (other than a deemed transferee in a Taxable Transfer
described in current Sec. 1.597-5(b)). A ``New Entity'' is the new
corporation that is treated as purchasing all the assets of a troubled
Institution in a Taxable Transfer described in Sec. 1.597-5(b)). A
``Consolidated Subsidiary'' is 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). For additional terms not
otherwise defined herein, see generally Sec. 1.597-1(b).
Inclusion of FFA in Income
Under the current regulations, FFA generally 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.
Section 1.597-2(a)(1). There are three exceptions to this general rule,
however. First, if Net Worth Assistance is provided to Acquiring or a
New Entity, the troubled Institution is treated as having directly
received such FFA immediately before the transfer, and the Net Worth
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Assistance is treated as an asset that is sold in the Taxable Transfer.
Section 1.597-5(c)(1). The inclusion of Net Worth Assistance in the
troubled Institution's income generally will be offset by the
Institution's net operating losses and other losses. Second, Sec.
1.597-2(c) limits the amount of FFA an Institution currently must
include in income under certain circumstances (for example, if the
Institution has insufficient net operating losses and other losses to
offset the inclusion of Net Worth Assistance in income) and provides
rules for the deferred inclusion in income of amounts in excess of
those limits. This provision results in matching the inclusion of FFA
in income with the recognition of an Institution's built-in losses.
Third, under Sec. 1.597-2(d)(2), certain amounts received pursuant to
a Loss Guarantee are included in the amount realized by Acquiring with
respect to an asset subject to the Loss Guarantee rather than being
included directly in gross income.
The typical Agency-assisted transaction involves the sale by Agency
(in its capacity as receiver) of the troubled Institution's assets and
the provision of FFA to Acquiring, which agrees to assume the troubled
Institution's deposit liabilities. If, instead, an Agency-assisted
transaction were structured as a stock purchase, the current
regulations would treat the transaction as an asset transfer under
certain circumstances. A deemed asset transfer occurs if a transaction
structured as a transfer of Institution or Consolidated Subsidiary
stock causes an Institution or its Consolidated Subsidiary to enter or
leave a consolidated group (other than pursuant to an election under
Sec. 1.597-4(g)), or if the Institution or its Consolidated Subsidiary
issues sufficient stock to cause an ownership change of at least 50
percent (see Sec. 1.597-5(b)). The foregoing rules are intended to
treat an Agency-assisted acquisition of a troubled Institution as a
taxable asset acquisition regardless of how the acquisition is
structured. The treatment of certain stock transfers as asset transfers
also fosters the matching of FFA income with a troubled Institution's
losses by triggering the Institution's built-in losses.
If an Agency-assisted transaction involves an actual asset
transfer, the amount realized by the transferor Institution is
determined under section 1001(b) by reference to the consideration paid
by Acquiring. If the transaction involves a deemed asset transfer
instead, the amount realized is the grossed-up basis in the acquired
stock plus the amount of liabilities assumed (plus certain other
items). Section 1.597-5(c)(2).
Section 1.597-5(d)(2)(i) of the current regulations provides that
the purchase price for assets acquired in a Taxable Transfer generally
is allocated among the assets in the same manner as amounts are
allocated among assets under Sec. 1.338-6(b), (c)(1), and (c)(2). This
means that the purchase price first is allocated to the Class I assets;
then, to the extent the purchase price exceeds the value of the Class I
assets, the remaining purchase price is allocated among the Class II
assets in proportion to their fair market value. Any remaining purchase
price after allocation to the Class II assets is then allocated in a
similar method among the Class III, IV, V, VI, and VII assets seriatim.
The current regulations modify certain aspects of the section 338
allocation rules. Section 1.597-5(c)(3)(ii) treats an asset subject to
a Loss Guarantee as a Class II asset with a fair market value that
cannot be less than its highest guaranteed value or the highest price
at which it can be put. Further, Sec. 1.597-5(d)(2)(iii) provides that
if the fair market value of the Class I and Class II assets acquired in
a Taxable Transfer is greater than Acquiring's or a New Entity's
purchase price for the acquired assets, then the basis of the Class I
and Class II assets equals their fair market value (which, in the case
of an asset subject to a Loss Guarantee, cannot be less than its
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highest guaranteed value or the highest price at which it can be put).
The amount by which the assets' fair market value exceeds the purchase
price is included ratably as ordinary income by Acquiring or a New
Entity over a six-year period beginning in the year of the Taxable
Transfer.
[[Page 28875]]
In certain situations, Agency may organize a ``Bridge Bank'' to
hold the deposit liabilities and assets of a troubled Institution and
continue its operations pending its acquisition or liquidation. In
general, a Bridge Bank and its associated ``Residual Entity'' (the
entity that remains after the troubled Institution transfers its
deposit liabilities to the Bridge Bank) are treated as a single entity
for income tax purposes and are treated together as the successor to
the troubled Institution. Thus, for example, the transferring
Institution recognizes no gain or loss on the transfer of deposit
liabilities to a Bridge Bank, and the Bridge Bank succeeds to the
transferring Institution's basis in any transferred assets, its other
tax attributes, its Taxpayer Identification Number (``TIN''), its
taxable year, and its status as a member of a consolidated group. The
Bridge Bank also is responsible for filing all income tax returns and
statements for this single entity and is the agent for the Residual
Entity (which effectively is treated as a division of the Bridge Bank).
Section 1.597-4(d) and (e).
To ensure that FFA is included in the income of the transferor
Institution or its consolidated group, current Sec. 1.597-4(f)
provides that the Institution remains a member of its consolidated
group regardless of its placement under Agency Control or the transfer
of its deposit liabilities to a Bridge Bank, unless an election is made
under Sec. 1.597-4(g) to disaffiliate the Institution. Under Sec.
1.597-4(g), a consolidated group may elect to exclude from the group a
subsidiary member that is an Institution in Agency receivership. The
election is irrevocable and requires the inclusion of a ``toll charge''
in the group's income (the toll charge is intended to reflect the
amount the group would include 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). Section Sec. 1.5974(g)(6) further imposes a deemed election (subject to the toll charge)
if members of a consolidated group deconsolidate a subsidiary
Institution in contemplation of Agency Control or the receipt of FFA.
After any affirmative or deemed election to disaffiliate, an
Institution generally is treated as a new unaffiliated corporation that
received its assets and liabilities in a section 351 transaction (and
thus has no net operating or capital loss carryforwards) and that holds
an account receivable for future FFA with a basis equal to the toll
charge (to offset the inclusion of future FFA). Section 1.5974(g)(4)(i). The regulations under section 597 take precedence over any
conflicting provisions in the regulations under section 1502. Section
1.597-4(f)(3).
Explanation of Provisions
The Treasury Department and the IRS received many comments
suggesting that changes be made to the current regulations under
section 597. These proposed regulations address many of these comments
as well as additional concerns not raised in comments. Not all comments
resulted in proposed modifications to the regulations. For example, as
discussed in sections 9, 10, and 11 of this preamble, the proposed
regulations generally have not been modified to match non-tax
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accounting treatment. This preamble describes the proposed changes and
also addresses certain areas in which commenters requested changes but
no changes are proposed.
These regulations propose to modify and clarify the treatment of
certain transactions in which FFA is provided to Institutions (and
related persons). The proposed regulations remove all references to
``highest guaranteed value'' and provide guidance relating to the
determination of assets' fair market value. In addition, the proposed
regulations provide guidance regarding the transfer of property to
Agency by a non-consolidated affiliate of an Institution, the ownership
of assets subject to a Loss Guarantee (``Covered Assets''), and the
determination of Acquiring's purchase price when it has an option to
purchase additional assets. The proposed regulations also make changes
to facilitate e-filing, remove the reference to former Sec. 1.150276(b)(5)(ii) (which allowed a subsidiary that was a consolidated group
member for 30 days or less during the group's taxable year to elect not
to be included as a group member for that year), make a non-substantive
change to the terminology used in Sec. 1.597-5(b)(1) and (2) to
clarify that the events resulting in a deemed acquisition of assets
must occur to an Institution or a Consolidated Subsidiary of an
Institution, and make a non-substantive change to the definition of
Consolidated Subsidiary. In addition, there are numerous nonsubstantive changes that pervade all sections of the current
regulations. Thus, the proposed regulations amend and restate all of
Sec. Sec. 1.597-1 through 1.597-7 in order to make the reading of the
regulations more user-friendly. The proposed regulations make no
changes to Sec. 1.597-8.
1. Removal of References to Highest Guaranteed Value
It is common practice for Agency to provide a Loss Guarantee that
does not provide for payment of a specific amount with respect to a
Covered Asset, but that instead provides for reimbursement to an
Institution for a percentage of its losses on Covered Assets, with the
reimbursement percentage changing if a certain threshold of losses is
met (a ``Loss Share Agreement''). For example, assume that a guaranteed
party has a pool of loans with an unpaid principal balance of $90
million and owns real estate with a book value of $10 million, and that
Agency enters into a Loss Share Agreement whereby Agency will reimburse
the guaranteed party zero percent of the first $20 million of losses
(the ``first loss tranche'') on the Covered Assets (the pool of loans
and the real estate) and 80 percent of any additional losses (the
``second loss tranche'') on the Covered Assets. Losses generally are
determined by reference to the unpaid principal balance of a loan or
the book value of an asset, not by reference to tax basis.
The Treasury Department and the IRS have received comments and
inquiries from taxpayer groups asking how to calculate a Covered
Asset's ``highest guaranteed value'' under a Loss Share Agreement. This
term, which appears in Sec. Sec. 1.597-3(f), 1.597-5(c)(3)(ii), and
1.597-5(f) (Example 4) of the current regulations, is not presently
defined, and the Treasury Department and the IRS understand that there
may be uncertainty in determining how to calculate highest guaranteed
value in the absence of guidance. Moreover, commenters have observed
that reliance on certain measures of highest guaranteed value may cause
basis to be allocated to assets in amounts that exceed the total
principal collections and Agency reimbursements that Acquiring
reasonably can expect to receive.
To alleviate confusion and possible distortions created by use of
the term ``highest guaranteed value,'' and because of the clarification
of the meaning of ``fair market value'' (as discussed in the paragraphs
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that follow), the Treasury Department and the IRS have removed all
references to ``highest guaranteed value'' from the regulations.
2. Determination of Fair Market Value of Covered Assets
Taxpayers have asked whether potential Agency payments pursuant to
a Loss Guarantee are included in determining the fair market value of a
Covered Asset. Legislative history
[[Page 28876]]
provides that Congress intended ``that basis be allocated to the
specified assets (or pool of assets) in an amount equal to their fair
market value as adjusted to reflect the capital loss guarantee and
income maintenance agreements applicable to those assets.'' H.R. Rep.
No. 101-54, pt. 2, at 28 (1989) (emphasis added). Accordingly, the
proposed regulations provide that, in determining the fair market value
of a Covered Asset, potential Loss Guarantee payments from Agency are
included.
More specifically, the fair market value of a Covered Asset equals
its ``Expected Value''--the sum of (i) the amount a third party would
pay for the asset absent the existence of a Loss Guarantee (the
``Third-Party Price'' or ``TPP''), and (ii) the amount Agency would pay
if the asset actually were sold for the Third-Party Price. If the
amount Agency agrees to reimburse the guaranteed party is determined by
a Loss Share Agreement, then for purposes of calculating the Expected
Value, the amount that Agency would pay is determined by multiplying
the loss (as determined under the terms of the Loss Share Agreement)
that would be realized if the asset were disposed of at the Third-Party
Price by the ``Average Reimbursement Rate'' (or ``ARR''). In turn, the
Average Reimbursement Rate is the percentage of losses under a Loss
Share Agreement that would be reimbursed if every Covered Asset were
disposed of for the Third-Party Price at the time of the Taxable
Transfer. In effect, the ARR converts a multiple-tranche reimbursement
into a single rate that covers all losses.
For example, assume that a guaranteed party has a pool of loans
with an unpaid principal balance of $90 million and owns real estate
with a book value of $10 million, and that Agency enters into a Loss
Share Agreement whereby Agency will reimburse the guaranteed party zero
percent of the first $20 million of losses on the pool of loans and the
real estate and 80 percent of any additional losses on these Covered
Assets. Further assume that the Third-Party Price is $46 million for
the pool of loans and $4 million for the real estate. If all of these
assets were disposed of for the $50 million Third-Party Price, the
guaranteed party would have a total realized loss of $50 million ($100
million - $50 million), and Agency would reimburse the guaranteed party
a total of $24 million (($20 million realized loss x 0%) + ($30 million
realized loss x 80%)). Therefore, the Average Reimbursement Rate would
equal 48 percent ($24 million reimbursement/$50 million realized loss).
The Expected Value of the pool of loans thus would equal $67.12 million
($46 million TPP plus $21.12 million from Agency ($44 million realized
loss x 48% ARR)), and the Expected Value of the real estate would equal
$6.88 million ($4 million TPP plus $2.88 million from Agency ($6
million realized loss x 48% ARR)).
The Treasury Department and the IRS believe this definition of a
Covered Asset's fair market value furthers Congress's intent and
correctly represents the true economic value of a Covered Asset.
Whether an Institution receives an amount on the disposition of an
asset entirely from either the purchaser or from Agency, or whether the
Institution instead receives a portion of the amount from the purchaser
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and the remainder from Agency, the asset is worth the same amount from
the Institution's perspective. To simplify the administration of these
regulations, however, the Average Reimbursement Rate is determined at
the time of the Taxable Transfer and is not adjusted for any changes in
Third-Party Price over the life of any asset subject to a Loss Share
Agreement or the prior disposition of any asset subject to a Loss Share
Agreement.
For purposes of the foregoing example, the pool of loans has been
treated as if it were a single asset. However, in applying the proposed
regulations, the fair market value, Third-Party Price, and Expected
Value of each loan within a pool must be determined separately. The
Treasury Department and the IRS request comments as to whether an
Institution that holds assets subject to a Loss Guarantee should be
permitted or required to ``pool'' those assets for valuation purposes
rather than value each asset separately. The Treasury Department and
the IRS also request comments about how such a pooling approach should
be implemented and about valuation and other issues that may arise from
pooling assets.
3. Transfers of Property to Agency by a Non-Consolidated Affiliate of
an Institution
Under current Sec. 1.597-2(c)(4), an Institution must establish
and maintain a deferred FFA account if any FFA received by the
Institution is not currently included in its income. In general terms,
a deferred FFA account is necessary if an Institution has insufficient
net operating losses and other losses to fully offset an FFA inclusion.
For example, assume that, at the beginning of the taxable year,
Institution A has assets with a value of $750 and a basis of $800
(written down from $1,000) and liabilities of $1,000. A has a $200 net
operating loss from writing down its assets. Further assume that Agency
provides $250 of Net Worth Assistance to Institution B in connection
with B's acquisition of A's assets and liabilities. Under these
circumstances, A would currently include $200 of the Net Worth
Assistance in income, and A would establish a deferred FFA account for
the remaining $50. As A recognizes built-in losses upon the sale of its
assets, a corresponding amount of the $50 of deferred FFA (which would
be offset by these losses) would be taken into account. See Sec.
1.597-2(c)(2).
Under current Sec. 1.597-2(d)(4)(i), if an Institution transfers
money or property to Agency, the amount of money and the fair market
value of the property will decrease the balance in its deferred FFA
account to the extent the amount transferred exceeds the amount Agency
provides in the exchange. For purposes of the foregoing rules, an
Institution is treated under Sec. 1.597-2(d)(4)(iv) as having made any
transfer to Agency that was made by any other member of its
consolidated group, and appropriate investment basis adjustments must
be made. However, there is no corresponding provision for transfers
made by a person other than the Institution if the Institution is not a
member of a consolidated group.
For example, assume that Corporation X (an includible corporation
within the meaning of section 1504(b)) owns all of the outstanding
stock of an Institution, but X and the Institution do not join in
filing a consolidated return. Further assume that Agency provides $10
million of FFA to the Institution in 2015 in exchange for a debt
instrument of X (which, under Sec. 1.597-3(b), is not treated as debt
for any purposes of the Code while held by Agency); that the
Institution has a deferred FFA account of $5 million at the beginning
of 2016; and that, during 2016, X makes a $1 million payment on the
debt instrument to Agency. Because X and the Institution do not join in
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filing a consolidated return, the Institution would not be able to
reduce its FFA account to reflect X's payment. Moreover, because the
debt instrument is not treated as debt while held by Agency, X would
not be allowed a deduction for any portion of the payment to Agency.
The proposed regulations expand Sec. 1.597-2(d)(4)(iv) by
providing that an Institution is treated as having made any transfer to
Agency that was made by any other member of its affiliated group,
regardless of whether a consolidated return is filed. Because the
affiliate is transferring property to Agency to
[[Page 28877]]
reimburse Agency for FFA provided to the Institution, the Treasury
Department and the IRS believe it is appropriate that the recipient of
the FFA (in this case, the Institution) take such transfer into account
in determining adjustments to its deferred FFA account, regardless of
whether a consolidated return is filed. Economically, the reason for
the transfer by the Institution's affiliate is the same. Appropriate
adjustments must be made to reflect the affiliate's payment with
respect to the Institution's FFA account.
4. Covered Assets Not Owned by an Institution
Section 1.597-3(a) of the current regulations provides that, for
all Federal income tax purposes, an Institution is treated as the owner
of all Covered Assets, regardless of whether Agency otherwise would be
treated as the owner under general principles of income taxation. The
Treasury Department and the IRS have become aware of certain instances
in which Agency has provided Loss Guarantees to an Institution for
assets held by a subsidiary of the Institution that is not a member of
the Institution's consolidated group (for example, a real estate
investment trust (``REIT'')).
The intent behind Sec. 1.597-3(a) of the current regulations was
to prevent Agency from being considered the owner of Covered Assets
even though Agency might have significant indicia of tax ownership with
respect to such assets. The question of whether the Institution or its
non-consolidated subsidiary should be treated as the owner of a Covered
Asset was not considered because that scenario was not envisioned at
the time the current regulations were promulgated. The proposed
regulations modify this rule to clarify that the entity that actually
holds the Covered Asset will be treated as the owner of such asset.
Pursuant to proposed regulation Sec. 1.597-2(d)(2)(ii), appropriate
basis adjustments must be made to reflect the receipt of FFA by the
Institution when the Covered Asset is disposed of or charged off by the
asset's owner. The proposed regulations also provide that the deemed
transfer of FFA by a regulated investment company (``RIC'') or a REIT
to the Institution, if a deemed distribution, will not be treated as a
preferential dividend for purposes of sections 561, 562, 852, or 857.
5. Determination of Purchase Price When Acquiring Has Option To
Purchase Additional Assets
Some taxpayers have questioned how the purchase price for assets is
determined when the purchase agreement provides Acquiring an option
period (for example, 90 days) to decide whether it also wants to
acquire the troubled Institution's physical assets (for example, branch
buildings). The Treasury Department and the IRS believe that, in accord
with general principles of tax law and the intent of the current
regulations, the amount paid for assets subsequently acquired under an
option should be integrated into the overall purchase price because the
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purchase of those assets relates back to, and is part of, the overall
purchase agreement. The proposed regulations clarify the current
regulations and update the citation in Sec. 1.597-5(d)(1) to the final
regulations under section 1060.
6. E-Filing
The proposed regulations make two changes to facilitate e-filing.
First, the proposed regulations replace the requirement in current
Sec. 1.597-4(g)(5)(i)(A) that a consolidated group attach a copy of
any election statement mailed to an affected Institution and the
accompanying certified mail receipt to its income tax return with the
requirement that the consolidated group include an election statement
with its income tax return and retain a copy of certain documents in
its records. Second, if an Institution without Continuing Equity (in
other words, an Institution that is a Bridge Bank, in Agency
receivership, or treated as a New Entity on the last day of the taxable
year) is liable for income tax that is potentially not subject to
collection because it would be borne by Agency, the proposed
regulations replace the requirement in current Sec. 1.597-6(c) that a
consolidated group make a notation of such amount directly on the front
page of its tax return with the requirement that a consolidated group
include a statement providing such amount on its income tax return.
7. Removal of Outdated Provision
The proposed regulations remove paragraph Sec. 1.597-4(f)(2) of
the current regulations relating to a 30-day election to be excluded
from the consolidated group. The 30-day election was eliminated for
subsidiary members of a consolidated group that became or ceased to be
members of the consolidated group on or after January 1, 1995.
Therefore, the reference to such election is no longer necessary.
8. Consolidated Subsidiary
As noted previously, Sec. 1.597-1(b) of the current regulations
defines ``Consolidated Subsidiary'' to mean 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). These
proposed regulations modify this definition to provide that a
``Consolidated Subsidiary'' is a corporation that both (i) is a member
of the same consolidated group as an Institution, and (ii) would be a
member of the affiliated group that would be determined under section
1504(a) if the Institution were the common parent thereof. This change
is intended merely to clarify the meaning of ``Consolidated
Subsidiary'' and is not intended to be a substantive change.
The Treasury Department and the IRS request comments as to whether
the rules in these proposed regulations concerning Consolidated
Subsidiaries should be expanded to apply either to (i) an Institution's
subsidiaries that are ``includible corporations'' (within the meaning
of section 1504(b)) but that are not members of the Institution's
consolidated group (such as affiliated but non-consolidated
subsidiaries of an Institution or subsidiaries of an Institution that
is an S corporation), or (ii) an Institution's subsidiaries that are
not ``includible corporations'' (such as REITs). Any such comments
should explain which (if any) provisions in the regulations should be
changed and which provisions should continue to apply solely to
Consolidated Subsidiaries (as defined in the proposed regulations).
Such comments also should describe the reasons for the recommended
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change (or for making no change). Final regulations issued pursuant to
this notice of proposed rulemaking may contain a broader rule than
these proposed regulations.
9. Basis-Step-Up and Six-Year-Inclusion Rules
As noted previously, certain Taxable Transfers can result in the
fair market value of Class I and Class II assets exceeding their
purchase price and the inclusion of the excess in income by Acquiring
or a New Entity over a six-year period. See Sec. 1.597-5(d)(2)(iii).
For example, assume that Acquiring assumes $150,000 of a troubled
Institution's deposit liabilities in Year 1 in exchange for
Institution's Assets 1 and 2 (which have a 10-year weighted average
life) and Agency's provision of an $80,000 Loss Guarantee with respect
to Asset 1 and a $100,000 Loss Guarantee with respect to Asset 2.
(These Loss Guarantees are not Loss Share Agreements.) Further assume
that the Third-Party Price for Assets 1 and 2 is $70,000 and $95,000,
respectively. Under the current regulations, the fair
[[Page 28878]]
market value of Assets 1 and 2 equals $80,000 and $100,000,
respectively--each asset's highest guaranteed value. Under the proposed
regulations, the fair market value of Assets 1 and 2 also equals
$80,000 and $100,000, respectively--each asset's Expected Value. The
aggregate fair market value of Assets 1 and 2 ($180,000) thus exceeds
their purchase price ($150,000). At the end of Year 2, Acquiring wholly
charges off Assets 1 and 2 and receives $180,000 from Agency. Under the
basis-step-up and six-year-inclusion rules in Sec. 1.597-5(d)(2)(iii),
Acquiring's aggregate basis in Assets 1 and 2 upon their acquisition
equals their fair market value ($180,000). Even though Assets 1 and 2
have a 10-year weighted average life, Acquiring may not depreciate
these assets below $180,000 because Agency guarantees Acquiring
$180,000 on the disposition of the assets. See Sec. 1.597-3(f).
Acquiring thus recognizes no gain or loss with respect to the chargeoff of these assets in Year 2. Instead, Acquiring includes $5,000 in
income for each of Years 1-6 ($30,000 excess of fair market value over
purchase price/6 years).
One commenter suggested that the current rules may create a
mismatch in the timing of a taxpayer's economic and taxable income that
results in a timing benefit for, or a timing detriment to, either the
taxpayer or the government, depending on the expected life of the
purchased assets. For instance, in the foregoing example, Acquiring
must include amounts in income over a six-year period even though
Assets 1 and 2 have a 10-year weighted average life; consequently, this
mismatch results in a detriment to the taxpayer. The commenter thus
would eliminate the basis-step-up and six-year-inclusion rules, have
Acquiring take an initial basis in the Class I and Class II assets
equal to their purchase price, and then have Acquiring either (a)
recognize gain upon the disposition of the assets, or (b) accrue income
(and increase basis) in each year based on the weighted average life of
the assets (rather than over a six-year period).
Under the commenter's first proposed approach, Acquiring's
aggregate asset basis in the foregoing example would be $150,000 (the
amount of liabilities assumed) rather than $180,000, and Acquiring
would recognize $30,000 of gain at the end of Year 2. Under the
commenter's second proposed approach, the $30,000 would be spread over
10 years; thus, Acquiring's economic and taxable income would be
matched.
After consideration of the comment, these proposed regulations
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retain the current basis-step-up and six-year-inclusion rules. The
basis-step-up and six-year-inclusion rules prevent the realization of
income from being a factor in the acquirer's decision whether to retain
or dispose of Covered Assets. Furthermore, these rules lock in the tax
cost of the purchase, which reduces the cost of uncertainties
ultimately borne by Agency.
The Treasury Department and the IRS believe that, although the
current rules may be imperfect (in that sometimes there will be a
benefit and other times a detriment), they are administratively
efficient and they satisfy the intent of the current regulations.
Accordingly, these proposed regulations retain the current rules.
10. Treatment of Debt or Equity Issued to Agency
Section 1.597-3(b) of the current regulations disregards any debt
of or equity interests in the Institution (or any affiliates) that
Agency receives in connection with a transaction in which FFA is
provided while such debt or equity interests are held by Agency. One
commenter supported eliminating the current rule (resulting in an
Institution's debt or equity issued to Agency being included in
Acquiring's purchase price) and replacing it with anti-abuse rules to
address any concerns.
After consideration of the comment, these proposed regulations
retain the current rules. The Treasury Department and the IRS believe
that treating debt or equity interests in an Institution as having
value would be inconsistent with section 597(c), which provides that
all amounts provided by Agency are FFA regardless of whether Agency
takes back an instrument in exchange therefor. Further, the current
rule eliminates any issues for Agency and the IRS relating to valuation
of the debt or equity interests.
11. Tax Treatment of Agency Payments Under Loss Share Agreements
The current regulations integrate the treatment of Loss Guarantee
payments with other proceeds received with respect to Covered Assets,
whereas under non-tax accounting principles a Loss Guarantee is treated
as a separate asset and source of income. Commenters suggested that the
tax treatment of Loss Guarantees and payments thereunder be conformed
to the non-tax accounting treatment thereof. After consideration of
these comments, these proposed regulations retain the current rules.
The Treasury Department and the IRS believe the treatment of Loss
Guarantee payments in the current and proposed regulations comports
better with general income tax principles (for example, treating Loss
Guarantee payments as part of the consideration received with respect
to a Covered Asset is analogous to the tax treatment of insurance
proceeds received with respect to other losses).
12. Effective/Applicability Date
The proposed regulations will be effective on the date of
publication of the Treasury decision adopting these proposed rules as
final regulations in the Federal Register, except with respect to FFA
provided pursuant to an agreement entered into before such date. In the
latter case, the current regulations will continue to apply unless the
taxpayer elects to apply the final regulations on a retroactive basis.
However, the election to apply the final regulations on a retroactive
basis 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 Sec. Sec. 1.597-1 through 1.597-6 would affect the determination
of the electing entity's or group's income, deductions, gain, loss,
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basis, or other items.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866, as supplemented by Executive Order 13563. Therefore, a
regulatory assessment is not required. It also has been determined that
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)
does not apply to these regulations. It is hereby certified that these
regulations will not have a significant economic impact on a
substantial number of small entities. This certification is based on
the fact that the regulations apply only to transactions involving
banks or domestic building and loan associations, which tend to be
larger businesses. Accordingly, 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 Code, these regulations have been
submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on their impact on small business.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written comments (a signed original
and eight (8) copies) or electronic comments that are submitted timely
to the IRS. In addition to the specific requests for
[[Page 28879]]
comments made elsewhere in this preamble, the Treasury Department and
the IRS request comments on all aspects of the proposed rules. All
comments will be available for public inspection and copying. A public
hearing may be scheduled if requested in writing by any person who
timely submits written comments. If a public hearing is scheduled,
notice of the date, time, and place of the hearing will be published in
the Federal Register.
Drafting Information
The principal author of these proposed regulations is Russell G.
Jones of the Office of Associate Chief Counsel (Corporate). However,
other personnel from the Treasury Department and the IRS participated
in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805, unless otherwise noted. * * *
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0
Par. 2. Section 1.597-1 is revised 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.
Average Reimbursement Rate. The term Average Reimbursement Rate
means the percentage of losses (as determined under the terms of the
Loss Share Agreement) that would be reimbursed by Agency or a
Controlled Entity if every asset subject to a Loss Share Agreement were
disposed of for the Third-Party Price. The Average Reimbursement Rate
is determined at the time of the Taxable Transfer and is not adjusted
for any changes in Third-Party Price over the life of any asset subject
to the Loss Share Agreement or the prior disposition of any asset
subject to the Loss Share Agreement.
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), prior to its repeal by Pub. L. 111-203), or
under 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), prior to its repeal by
Pub. L. 111-203) or any successor section; or
(3) A similar Institution chartered under any other statutory
provisions.
Consolidated Subsidiary. The term Consolidated Subsidiary means a
corporation that both:
(1) Is a member of the same consolidated group as an Institution;
and
(2) Would be a member of the affiliated group that would be
determined under section 1504(a) if the Institution were the common
parent thereof.
Continuing Equity. An Institution has Continuing Equity for any
taxable year if, on the last day of the taxable year, the Institution
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is not a Bridge Bank, in Agency receivership, or treated as a New
Entity.
Controlled Entity. The term Controlled Entity means an entity under
Agency Control.
Covered Asset. The term Covered Asset means an asset subject to a
Loss Guarantee. The fair market value of a Covered Asset equals the
asset's Expected Value.
Expected Value. The term Expected Value means the sum of the ThirdParty Price for a Covered Asset and the amount that Agency or a
Controlled Entity would pay under the Loss Guarantee if the asset
actually were sold for the Third-Party Price. For purposes of the
preceding sentence, if an asset is subject to a Loss Share Agreement,
the amount that Agency or a Controlled Entity would pay under a Loss
Guarantee with respect to the asset is determined by multiplying the
amount of loss that would be realized under the terms of the Loss Share
Agreement if the asset were disposed of at the Third-Party Price by the
Average Reimbursement Rate.
Federal Financial Assistance. 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), prior to its repeal by Pub. L. 101-73), section
21A(b)(4) of the Federal Home Loan Bank Act (12 U.S.C. 1441a(b)(4),
prior to its repeal by Pub. L. 111-203), section 11(f) or 13(c) of the
Federal Deposit Insurance Act (12 U.S.C. 1821(f), 1823(c)), or 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
[[Page 28880]]
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, a Loss Share Agreement, or a similar arrangement.
Loss Share Agreement. The term Loss Share Agreement means an
agreement pursuant to which Agency or a Controlled Entity agrees to
reimburse the guaranteed party a percentage of losses realized.
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
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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).
Third-Party Price. The term Third-Party Price means the amount that
a third party would pay for an asset absent the existence of a Loss
Guarantee.
0
Par. 3. Section 1.597-2 is revised to read as follows:
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. 1.5973(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 the
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
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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
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 paragraphs (d)(4) and (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 (for
example, 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-[[Page 28881]]
(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
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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 Sec. Sec. 1.150215, 1.1502-21, and 1.1502-22 (or Sec. Sec. 1.1502-15A, 1.1502-21A, and
1.1502-22A, as appropriate) 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. Sec. 1.150215, 1.1502-21, or 1.1502-22 (or Sec. Sec. 1.1502-15A, 1.1502-21A, or
1.1502-22A, as appropriate) 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
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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 Covered Assets-(1) Transfers of property to Agency. Except as provided in paragraph
(d)(4)(iii) of this section, 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 the property's
fair market value.
(2) FFA with respect to Covered Assets other than on transfer to
Agency--(i) FFA provided pursuant to a Loss Guarantee with respect to a
Covered Asset is included in the amount realized with respect to the
Covered Asset.
(ii) If Agency makes a payment to an Institution pursuant to a Loss
Guarantee with respect to a Covered Asset owned by an entity other than
the Institution, the payment will be treated as made directly to the
owner of the Covered Asset and included in the amount realized with
respect to the Covered Asset when the Covered Asset is sold or charged
off. The payment will be treated as further transferred through chains
of ownership to the extent necessary to reflect the actual receipt of
such payment. Any such transfer, if a deemed distribution, will not be
a preferential dividend for purposes of sections 561, 562, 852, or 857.
(iii) For the purposes of this paragraph (d)(2), references to an
amount realized include amounts obtained in whole or partial
satisfaction of loans, amounts obtained by virtue of charging off or
marking to market a Covered Asset, 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 the fair market value of the property is an
[[Page 28882]]
adjustment to its FFA to the extent the amount paid and transferred
exceeds the amount of money and the fair market value of any property
that Agency or a Controlled Entity provides in exchange.
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(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. 1.5973(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) Affiliated groups. For purposes of this paragraph (d), an
Institution is treated as having made any transfer to Agency or a
Controlled Entity that was made by any other member of its affiliated
group. The affiliated group must make appropriate basis adjustments or
other 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. 1.338-7).
(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, 2016, 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 2016. Agency provides
$30 million of FFA to M in 2016. The amount of this FFA that M must
include in income in 2016 is limited by paragraph (c)(2) of this
section 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 paragraph
(c)(4)(i) of this section, M must establish a deferred FFA account
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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 under section 597(c), paragraph (b)
of Sec. 1.597-1, and paragraph (b) of Sec. 1.597-3.
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 2016,
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 2016. During the
year, M transfers property not subject to 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 2016.
(ii) Under paragraph (d)(1) of this section, 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 paragraph (d)(4) of this section 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 2016,
this adjustment reduces the balance of M's deferred FFA account to
$9 million ($10 million - $1 million) under paragraph (d)(5)(i)(B)
of this section. Because M's $4 million loss causes M's deductions
to exceed its gross income by $4 million in 2016 and M has no
remaining equity, under paragraph (c)(4)(iii)(A) of this section 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, holds a Covered Asset (Asset Z). Q's adjusted basis in
Asset Z is $10,000. Q sells Asset Z to an unrelated third party for
$4,000. Pursuant to the Loss Guarantee, Agency pays Q $6,000
($10,000 - $4,000). Q's amount realized from the sale of Asset Z is
$10,000 ($4,000 from the third party and $6,000 from Agency) under
paragraph (d)(2) of this section. 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
under paragraph (d)(3) of this section.
0
Par. 4. Section 1.597-3 is revised to read as follows:
Sec.
1.597-3
Other rules.
(a) Ownership of assets. For all income tax purposes, Agency is not
treated as the owner of assets subject to a Loss Guarantee, yield
maintenance agreement, or cost to carry or cost of funds reimbursement
agreement, regardless of whether it 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 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
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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
[[Page 28883]]
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) [Reserved].
(f) Losses and deductions with respect to Covered Assets. Prior to
the disposition of a Covered Asset, 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 asset's fair market value. See Sec. 1.597-1(b).
(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.
0
Par. 5. Section 1.597-4 is revised to read as follows:
Sec.
1.597-4
Bridge Banks and Agency Control.
(a) Scope. This section provides rules that apply to a Bridge Bank
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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 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.
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(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.
[[Page 28884]]
(2) 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 and intercompany items
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
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treat their stock in the Institution as worthless. (See Sec. Sec.
1.337(d)-2, 1.1502-35(f), and 1.1502-36 for rules applicable when a
member of a consolidated group is entitled to a worthless stock
deduction with respect to stock of another member of the group.) 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 Sec. Sec. 1.1502-15,
1.1502-21, and 1.1502-22 (or Sec. Sec. 1.1502-15A, 1.1502-21A, and
1.1502-22A, as appropriate) 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 Sec. Sec. 1.1502-15,
1.1502-21, or 1.1502-22 (or Sec. Sec. 1.1502-15A, 1.1502-21A, or
1.1502-22A, as appropriate) 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 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
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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(k), 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
[[Page 28885]]
before 120 days after its placement in Agency receivership. 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 BELOWREFERENCED 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
retain a copy of the statement sent to any affected or subsidiary
Institution (and the accompanying certified mail receipt) as proof that
it mailed the statement to the affected Institution, and the
consolidated group must make the statement and receipt available for
inspection by the Commissioner upon request. The consolidated group
must include an election statement 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(k) 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 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
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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, 2016, 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,
2016, Agency places M in receivership and begins liquidating M. X
does not make an election under paragraph (g) of this section. M
remains a member of the X consolidated group after May 1, 2016 under
paragraph (f)(1) of this section.
Example 2. Effect of Bridge Bank on consolidation--(i)
Additional facts. On May 1, 2016, 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 under paragraph (d)(1) of this section. (If
M had a deferred FFA account, MB would also succeed to that account
under paragraph (d)(1) of this section.) MB continues M's taxable
year and succeeds to M's status as a member of the X consolidated
group after May 1, 2016 under paragraphs (d)(1) and (f) of this
section. MB and M are treated as a single entity for income tax
purposes under paragraph (e) of this section.
(iii) Consequences with an election to disaffiliate. If, on July
1, 2016, X makes an election under paragraph (g) of this section
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
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adjusted basis) in income as of May 1, 2016 under paragraph (g)(2)
and (3) of this section. 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 under
paragraph (g)(4) of this section. 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 under paragraph (d)(1) of this section. 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
under paragraph (d)(1) of this section.
0
Par. 6. Section 1.597-5 is revised to read as follows:
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 (for example, 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
[[Page 28886]]
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 Institution is a Bridge Bank;
(iii) While the Institution 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
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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 Institution or Consolidated Subsidiary-(i) Becomes a non-member (within the meaning of Sec. 1.150232(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 acquirers' 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. 1.338-6(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 Covered Assets 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 (see Sec. 1.597-1(b)) 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.
(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. 1.1060-1(c)(1). All assets transferred in related
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transactions pursuant to an option included in an agreement between the
transferor and Acquiring in the Taxable Transfer are included in the
group of assets among which the consideration paid is allocated for
purposes of determining the New Entity's or Acquiring's basis in each
of the assets. 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 acquirers' 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. 1.338-6(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
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.
The basis of Class I and Class II assets equals their fair market
value. See Sec. 1.597-1(b). If the fair market value of the Class I
and Class II assets exceeds the purchase price for the acquired assets,
the excess 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
[[Page 28887]]
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. 1.5973(c)(3) for rules regarding other adjustments to the principal amount
of an Agency Obligation.)
(B) Covered Assets. If, immediately after a Taxable Transfer, an
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asset is not subject to a Loss Guarantee but the New Entity or
Acquiring has the right to designate specific assets that will be
subject to the 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, the New Entity succeeds
to the TIN of the Old Entity 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 that is 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
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assets.
(f) Examples. The following examples illustrate the provisions of
this section. For purposes of these examples, an Institution's loans
are treated as if they were a single asset. However, in applying these
regulations, the fair market value of each loan (including, for
purposes of a Covered Asset, the Third-Party Price and the Expected
Value) must be determined separately.
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, 2016, 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 2016 and, except as described below, M receives no FFA. On
September 30, 2016, 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 under paragraph (a)(1) of this
section. (M is treated as directly receiving the $121 million of Net
Worth Assistance immediately before the Taxable Transfer under
paragraph (c)(1) of this section.) 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 2016 is limited by paragraph (c) of Sec. 1.597-2 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 2016 and 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 under paragraph (c)(4) of Sec.
1.597-2.
(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, that is, $121 million
under paragraph (d)(2) of this section. 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 paragraph
(d)(2) of this section, must recapture the $1 million excess at an
annual rate of $166,667 in the six consecutive taxable years
beginning with 2016 (subject to acceleration for certain events).
Example 2. Stock issuance by Bridge Bank causing Taxable
Transfer. (i) On April 1, 2016, Institution P is placed in
receivership and caused to transfer assets and liabilities to Bridge
Bank PB. On August 31, 2016, the assets of PB consist of $20 million
in cash, loans outstanding with an adjusted basis of $50 million and
a Third-Party Price 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, 2016, Agency causes PB to issue 100 percent
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of its common stock
[[Page 28888]]
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,
2016. 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,
under paragraph (b)(1) of this section. PB is treated as directly
receiving $25 million of Net Worth Assistance (the issue price of
the Agency Obligation) immediately before the Taxable Transfer under
paragraph (c)(2) of Sec. 1.597-3 and paragraph (c)(1) of this
section. The amount of FFA PB must include in income is determined
under paragraphs (a) and (c) of Sec. 1.597-2. PB in turn is deemed
to transfer the note (with a basis of $25 million) 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 nonfinancial 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; 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 under paragraph (b)(3) of this section. (P's
only liability is to Agency and a liability to Agency is not treated
as a debt under paragraph (b) of Sec. 1.597-3.) P's basis in its
assets is $10 million; thus, P realizes a $10 million loss on the
transfer to New P. The combined return filed by PB and P for 2016
will reflect a total loss on the Taxable Transfer of $10 million ($0
for PB and $10 million for P) under paragraph (e)(3) of this
section. That return also will reflect FFA income from the Net Worth
Assistance, determined under paragraphs (a) and (c) of Sec. 1.5972.
(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 Assets) 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), and the fair market
value of the loans is their Expected Value, $50 million (the sum of
the $40 million Third-Party Price and the $10 million that Agency
would pay if PB sold the loans for $40 million) under paragraph (b)
of Sec. 1.597-1. Alternatively, if the Third-Party Price for the
loans were $60 million, then the fair market value of the loans
would be $60 million, and there would be no payment from Agency.
(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 under paragraph (e)(3) of this section.
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, 2016, M has $4
million of deposit liabilities, $1 million of other liabilities, and
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assets with an adjusted basis of $4 million. On May 1, 2016, Agency
places M in receivership. X elects under paragraph (g) of Sec.
1.597-4 to disaffiliate M. Accordingly, as of May 1, 2016, new
corporation M is not a member of the X consolidated group. On May 1,
2016, Agency causes M to transfer all of its assets and liabilities
to Bridge Bank MB. Under paragraphs (e) and (g)(4) of Sec. 1.597-4,
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.
(ii) During May 2016, 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, 2016, 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 under
paragraph (b) of this section. MB is treated as receiving the Agency
Obligation immediately prior to the Taxable Transfer under paragraph
(c)(1) of this section. 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 paragraph (c) of Sec. 1.597-2. However,
under paragraph (b) of Sec. 1.597-2, MB obtains a $2 million basis
in the Agency Obligation received as FFA.
(v) Under paragraph (c)(2) of this section, 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, 2016, plus
$20,000 net cash from May 2016 activities, plus the $2 million
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 under paragraph (c)
of Sec. 1.597-2. (As of May 1, 2016, Old Entity MB's liabilities
($5 million) did not exceed MB's $5 million adjusted basis of its
assets. For the taxable year, MB's deductions of $1,025,000 ($1
million 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 million. Thus, under paragraph
(c) of Sec. 1.597-2, MB includes in income the entire $1 million 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 paragraph (b)(3) of this
section, but there are no tax consequences as M has no assets or
liabilities at the time of the deemed sale.
(ix) Under paragraph (d)(1) of this section, 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 million is
allocated to the $2 million Agency Obligation, and $3,020,000 is
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allocated to the other assets New Entity MB is treated as purchasing
in the Taxable Transfer.
Example 4. Loss Guarantee. On January 1, 2016, Institution N
acquires assets and assumes liabilities of another Institution in a
Taxable Transfer. In exchange for assuming $1,100,000 of the
transferring Institution's liabilities, N acquires Net Worth
Assistance of $200,000, loans with an unpaid principal balance of $1
million, and two foreclosed properties each having a book value of
$100,000 in the hands of the transferring Institution. In connection
with the Taxable Transfer, Agency guarantees N a price of $800,000
on the disposition or charge-off of the loans and a price of $80,000
on the disposition or charge-off of each of the foreclosed
properties. This arrangement constitutes a Loss Guarantee. The
Third-Party Price is $500,000 for the loans and $50,000 for each of
the foreclosed properties. For basis allocation purposes, the loans
and foreclosed properties are Class II assets because they are
Covered Assets, and N must allocate basis to such assets equal to
their fair market value under paragraphs (c)(3)(ii), (d)(2)(ii), and
(d)(2)(iii) of this section. The fair market value of the loans is
their Expected Value, $800,000 (the sum of the $500,000 Third-Party
Price and the $300,000 that Agency would pay if N sold the loans for
$500,000)). The fair market value of each foreclosed property is its
Expected Value, $80,000 (the sum of the $50,000 Third-Party Price
and the $30,000 that Agency would pay if N sold the foreclosed
property for $50,000)) under paragraph (b) of Sec. 1.597-1.
Accordingly, N's basis in the loans and in each of the foreclosed
properties is $800,000 and $80,000, respectively. Because N's
aggregate basis in the cash, loans, and foreclosed properties
($1,160,000) exceeds N's purchase price ($1,100,000) by $60,000, N
must include $60,000 in income ratably over six years under
paragraph (d)(2)(iii) of this section.
Example 5. Loss Share Agreement. (i) The facts are the same as
in Example 4 except that, in connection with the Taxable Transfer,
Agency agrees to reimburse Institution N in an amount equal to zero
percent of any loss realized (based on the $1 million unpaid
principal balance of the loans and the $100,000 book value of each
of the foreclosed properties) on the disposition or charge-off of
the Covered Assets up to
[[Page 28889]]
$200,000; 50 percent of any loss realized between $200,000 and
$700,000; and 95 percent of any additional loss realized. This
arrangement constitutes a Loss Guarantee that is a Loss Share
Agreement. Thus, the Covered Assets are Class II assets, and N
allocates basis to such assets equal to their fair market value
under paragraphs (c)(3)(ii), (d)(2)(ii), and (d)(2)(iii) of this
section. Because the Third-Party Price for all of the Covered Assets
is $600,000 ($500,000 for the loans and $50,000 for each of the
foreclosed properties), the Average Reimbursement Rate is 33.33%
((($200,000 x 0%) + ($400,000 x 50%) + ($0 x 95%))/$600,000). The
Expected Value of the loans is $666,667 ($500,000 Third-Party Price
+ $166,667 (the amount of the loss if the loans were disposed of for
the Third-Party Price x 33.33%)), and the Expected Value of each
foreclosed property is $66,667 ($50,000 Third-Party Price + $16,667
(the amount of the loss if the foreclosed property were sold for the
Third-Party Price x 33.33%)) under paragraph (b) of Sec. 1.597-1.
For purposes of allocating basis, the fair market value of the loans
is $666,667 (their Expected Value), and the fair market value of
each foreclosed property is $66,667 (its Expected Value) under
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paragraph (b) of Sec. 1.597-1.
(ii) At the end of 2016, the Third-Party Price for the loans
drops to $400,000, and the Third-Party Price for each of the
foreclosed properties remains at $50,000, The fair market value of
the loans at the end of Year 2 is their Expected Value, $600,000
($400,000 Third-Party Price + $200,000 (the amount of the loss if
the loans were disposed of for the Third-Party Price x 33.33% (the
Average Reimbursement Rate does not change)). Thus, if the loans
otherwise may be charged off, marked to a market value, depreciated,
or amortized, then the loans may be marked down to $600,000. The
fair market value of each of the foreclosed properties remains at
$66,667 ($50,000 Third-Party Price + $16,667 (the amount of the loss
if the foreclosed property were sold for the Third-Party Price x
33.33%)). Therefore, the foreclosed properties may not be charged
off or depreciated in 2016.
0
Par. 7. Section 1.597-6 is revised to read as follows:
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 Agency is within the
sole discretion of the Commissioner. In determining whether tax would
be borne by Agency, the Commissioner will disregard indemnity, taxsharing, 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 a
statement included with its Form 1120 (U.S. Corporate Income Tax
Return) 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
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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.
0
Par. 8. Section 1.597-7 is revised to read as follows:
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 (Pub. L. 101-73, 103 Stat 183 (1989)) (``FIRREA'') 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. Sections 1.597-1 through 1.597-6
will be effective on or after the date of publication of the Treasury
decision adopting these proposed rules as final regulations in the
Federal Register, except with respect to FFA provided pursuant to a
written agreement that is binding before the date of publication of the
Treasury decision adopting these proposed rules as final regulations in
the Federal Register, and that continues to be binding at all times
after such date, in which case Sec. Sec. 1.597-1 through 1.597-6 as
contained in 26 CFR part 1, revised April 1, 2014, will continue to
apply unless the taxpayer elects to apply the final regulations on a
retroactive basis pursuant to paragraph (c) of this section.
(c) Elective application to prior years and transactions--(1) In
general. Except as limited in this paragraph (c), an election is
available to apply Sec. Sec. 1.597-1 through 1.597-6 to taxable years
prior to the effective date of these regulations. A consolidated group
may elect to apply Sec. Sec. 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
Sec. Sec. 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 if 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 Sec. Sec. 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.
(3) Manner of making election. An Institution or consolidated group
makes the election provided by this paragraph
[[Page 28890]]
(c) by including a written statement as a part of the taxpayer's or
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consolidated group's first annual income tax return filed on or after
the date of publication of the Treasury decision adopting these
proposed rules as final regulations in the Federal Register. 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 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 INTERNAL REVENUE
SERVICE'' or ``ALL RETURNS PREVIOUSLY FILED ARE CONSISTENT WITH THE
PROVISIONS OF Sec. Sec. 1.597-1 THROUGH 1.597-6.'' 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.
John Dalrymple,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2015-12230 Filed 5-19-15; 8:45 am]
BILLING CODE 4830-01-P
https://www.gpo.gov/fdsys/pkg/FR-2015-05-20/html/2015-12230.htm
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| File Type | application/pdf |
| File Title | https://www.gpo.gov/fdsys/pkg/FR-2015-05-20/html/2015-12230.htm |
| Author | QHRFB |
| File Modified | 2016-12-06 |
| File Created | 2016-12-06 |