H.R. 1338

. The bill is the same as H.R..1135, except that H.R. 1338
would apply to FPSLIC financial assistance paid with respect
to any asset disposed of on or after January 1, 1981 (rather
than on or after January 1, 1991, as under H.R. 1135). All
other provisions of H.R. 1338 are the same as those of H.R.
1135, including the general rule, the exceptions to the
effective date, and the contracts rights provision.

H.R. 561

The bill would impose a recapture tax equal to the net
tax benefits accruing to an affiliated group of corporations
by reason of certain acquisitions of a domestic building and
loan association. The recapture tax would be imposed if a
building and loan association either (1) becomes subject to
the jurisdiction of a bankruptcy court or the FPSLIC or (2)
receives Federal financial assistance (other than assistance
pursuant to the acquisition). The bill would apply to
acquisitions that occurred after November 10, 1988, and

.:before -January..1, 1989, :and with:respect 'to:.which :the -FSLIC
(or;its successor) provided money or :other: property to -which
section 597 (as in effect before the enactment of the
Financial Institutions Reform, Recovery, ‘and*Enforcement Act
of 1989 (FIRREA)) applied. The amount of any recapture tax
would be basically (1) the aggregate reduction in the taxes
of the affiliated group from the losses of the domestic
building and loan association which were incurred after
January 3, 1991, reduced by (2) the amount (if any) required
to paid to the FSLIC (or its successor) in’ respect to the tax
reductions pursuant to the agreement for the acquisition.
This provision of the bill would apply to taxable years
ending after January 3, 1991.

In addition, the bill would provide that, for certain
purposes, the earnings and profits of a member of a
consolidated group would not include any amount excluded from
income under section 597 (as in effect before the enactment
of FIRREA). Thus, under the bill, a member of a consolidated
group that owns stock in a domestic savings and loan
generally would :not -increase the basis of such stock by the
amount of any Federal :financial assistance excluded from
gross income. .:.This provision of the bill would apply to
dispositions after January 3, 1991.



III. DESCRIPTION OF THE BILLS

1. H.R. 1135 (Messrs. Guarini, Moody, Levin, Rangel,
Gradison, Gibbons, Schulze, Matsui, Thomas, Donnelly,
Bunning, Sundquist, Mrs. Johnson, and others)

In general

Under the bill, any FSLIC assistance payable with
respect to any loss of principal, capital, or similar amount
upon the disposition of any asset would be taken into account
as compensation for such loss under section 165 of the Code.
In addition, any FSLIC assistance payable with respect to any
debt would be taken into account for purposes of sections
166, 585, or 593 of the Code in determining whether such debt
is worthless (or to the extent to which such debt is
worthless) and in determining the amount of any addition to a
reserve for bad debts arising from the worthlessness or
partial worthlessness of such debts.

For this purposes, the ‘term’"FSLIC assistance" ‘would
‘mean any money or other property: provided with respect to a
domestic .building :and .loan association by:the:FSLIC, the
FSLIC Resolution Fund, or the RTC, pursuant to section 460(f£)
of the National Housing Act or section 21A of the Federal
Home Loan Bank Act (or under any similar provision of law).

Effective date

In general, the bill would apply to FSLIC financial
assistance paid with respect to any asset disposed of on or
after January 1, 1991. However, the bill would not apply to:
(1) any payment to which the amendments made by section
1401(a)(3) of FIRREA apply (generally, those payments that
must be included in the income of the recipient); (2) any
amount received by a taxpayer to the extent that the IRS has
issued, in writing, to the taxpayer prior to January 1, 1991,
an IRS ruling or a closing agreement expressly providing that
such. amount shall not be. taken. into account in determining
.the amount of any loss under.section 165 of the Code .or in
determining the worthlessness ‘or. partial worthlessness of an
asset for purposes of -section 166, 585, or 593 of the Code;
and (3) FSLIC financial assistance provided with respect to
deductions or losses recognized prior to the commitment to
pay such assistance.

Contract rights

The bill would provide that nothing in the bill should
be construed as affecting any private contractual rights and
remedies that are otherwise available to parties of
agreements for the provision of Federal financial assistance.



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The special rules were repealed by FIRREA, but remain
applicable. to acquisitions of thrift instigfutions before the
enactment of FIRREA (sec. 1401 of FIRREA).

Tax treatment of losses

A taxpayer is allowed as a deduction any loss sustained
during the taxable year and not compensated for by insurance
or otherwise (sec. 165). The amount of loss attributable to
the disposition of an asset generally is determined as the
excess of the adjusted basis of the asset over the amount
realized upon the disposition (sec. 1001). ©

Tax treatment of bad debts

Under present law, taxpayers are permitted a deduction
for any debt which is acquired or incurred in the taxpayer's
trade or business which becomes wholly or partially
worthless. If a thrift institution holds 60 percent of its
assets in so-called "qualifying assets" (generally cash,
government obligations, and loans secured by residential real
property), :the institution is eligible to compute ‘its bad
debt deduction under either the. specific charge-off-method: or
a reserve method.

Under the specific charge-off method, the bad debt
deduction is determined separately with respect to each debt
held by the taxpayer. The deduction generally is allowed for
the year that the taxpayer can prove that the debt became
partially or wholly worthless.

4 under the Technical Corrections and Miscellaneous Revenue
Act of 1988 (TAMRA), taxpayers were required to reduce
certain tax attributes by one-half of the amount of financial
assistance received from the FSLIC or the FDIC pursuant to
acquisitions of certain financially troubled depository
institutions occurring after December 31, 1988 and prior to
the enactment of FIRREA. The following attributes were to be
reduced, in the following order: (1) net operating losses,
(2) interest with respect to which a deduction is allowable
for the taxable year, and (3) recognized built-in losses for
the taxable year on the loan portfolio, on marketable
securities, and on property acquired pursuant to foreclosure.

TAMRA also provided, in a technical correction to the Tax
Reform Act of 1986, that no deduction would be disallowed
under any part of section 265 (which denies deductions for
certain items allocated to tax-exempt income) by reason of
the allocation of the deduction to income exempt from tax
under section 597.



-4-
II. . BACKGROUND AND PRESENT LAW

_Background

Prior to the enactment of the FIRREA, the FSLIC insured
the deposits of its member thrift institutions and was
responsible fgr the resolution of insolvent member
institutions. Pursuant to this responsibility, the FSLIC
entered into agreements that obligated it to give assistance,
generally in the form of cash or notes, to acquirers of
financially troubled thrift institutions. Such assistance
was provided in a variety of circumstances. FSLIC frequently
agreed to pay acquirers so-called "covered asset loss"
assistance in an amount equal to the difference between the
book value of “covered assets" and the proceeds received upon
disposition, or the value determined on a write-down, of the
covered asset. FSLIC also frequently agreed to (1) provide
assistance in amounts specifically determined to offset the
negative net worth of the acquired thrift institution as of
the date of acquisition, (2) guarantee the yield on certain
assets, and/or (3) reimburse the thrift institution for
certain. operating expenses. .Many:of .the:.agreements :contain
_provisions regarding -the allocation,:as ‘between FPSLIC ‘and the
-acquirer gt the troubled institution,:of certain ‘tax
benefits.

Special tax rules relating to the acquisition of a
financially troubled thrift institution

Prior to their amendment in 1989, special rules governed
the tax consequences of an acquisition of a troubled thrift
institution. Under these rules, FSLIC financial assistance
to the thrift institution was excludible from gross income
and did not result in a reduction of the basis of assets held
by the institution (sec. 597 as in effect before May 10,
1989). These rules also generally enabled the acquisition of
troubled institutions to occur on a tax-free basis, giving
the acquirer a carryover basis in the assets of an acquired
institution and the ability to utilize tax attributes,
including net operating losses, of the acquired institution.

2 under FIRREA, the assets and liabilities of the FSLIC were
transferred to the FDIC and the RTC.

3° see, “Report to the Oversight Board of the Resolution
Trust Corporation and the Congress on the 1988/89 Federal
Savings ‘and Loan Insurance Corporation Assistance
Agreements", September 18, 1990, (the "RTC Report") Vol. I,
pp. 47-49.



_ President's budget proposal

The President's fiscal year 1993 budget proposal®

‘provides that Federal financial assistance with respect to
any loss would be taken into account as compensation for
purposes of section 165 of the Code and in determining the
worthlessness of any debt. The proposal would apply to
financial assistance credited on or after March 4, 1991, with
respect to: (1) assets disposed of and charge-offs made in
taxable years ending on or after March 4, 1991; and (2)
assets disposed of and charge-offs made in taxable years
ending before March 4, 1991, but only for purposes of
determining the amount of any net operating loss carryover to
a taxable year ending on or after March 4, 1991.

6 Budget of the United States Government for Fiscal Year
1993, Part Two-8. This proposal is included in section 374
Of H.R. 4150 (introduced by Mr. Michel and others on February
4, 1992).



TAX ASPECTS OF GOVERNMENT-ASSISTED ACQUISITIONS
OF SAVINGS AND LOAN ASSOCIATIONS
(H.R. 1135, H.R. 1326, H.R. 1338 AND H.R. 561)

Scheduled for a Hearing
. before the
HOUSE COMMITTEE ON ‘WAYS ‘AND MEANS

on February 11, 1992

Prepared by the Staff
of the
JOINT COMMITTEE ON TAXATION
February 7, 1992
JICX-2-92



-10-

of the National Housing Act or section 21A of the Federal
Home Loan Bank Act (or under any similar provision of law).

Effective date

In general, the bill would apply to FSLIC financial
assistance paid with respect to any asset disposed of on or
after January 1, 1981. However, the bill would not apply to:
(1) any payment to which the amendments made by section
1401(a}(3) of FIRREA apply (generally, those payments that
must be included in the income of the recipient); (2) any
amount received by a taxpayer to the extent that the IRS has
issued, in writing, to the taxpayer prior to January 1, 1991,
an IRS ruling or a closing agreement expressly providing that
such amount shall not be taken into account in determining
the amount of any loss under section 165 of the Code or in
determining the worthlessness or partial worthlessness of an
asset for purposes of section 166, 585, or 593 of the Code;
and (3) FSLIC financial assistance provided with respect to
deductions or losses recognized prior to the commitment to
pay such assistance.

-. Contract rights

The bill-would.also: provide :that :nothing:‘in ‘the bill
should be construed as affecting any private contractual
rights and remedies that are otherwise available to parties
of agreements for the provision of Federal financial
assistance.

4. H.R. 561 (Mr. Donnelly)

Recapture of certain tax benefits

The bill would impose a recapture tax if a domestic
building and loan association became a member of an
affiliated group by reason of certain acquisitions and, after
January 3, 1991, became subject to a recapture event. A
building and loan association would be subject to a recapture
event.if it either .(1). becomes subject to the jurisdiction of
a court in a title 1l or’ similar case (as defined in section
368(a){3) of the Code), or (2) receives Federal financial
‘assistance (other than assistance pursuant to the
acquisition). The bill would apply to acquisitions that
occurred after November 10, 1988, and before January 1, 1989,
and with respect to which the FSLIC (or its successor)
provided money or other property to which section 597 (as in
effect before the enactment of FIRREA) applied.

The amount of recapture tax would be (1) the aggregate
reduction in the tax imposed on the members of the affiliated
group by reasons of losses of the domestic building and loan
association which were incurred after January 3, 1991, and



-9-
2. 4#H.R. 1326 (Mr. Dorgan)

Under the bill, any section 597 payment with respect to
any loss of principal, capital, or similar amount upon the
disposition of any asset would be taken into account as
compensation for such loss under section 165 of the Code. In
addition, any section 597 payment with respect to any debt
would be taken into account for purposes of sections 166,
585, or 593 of the Code in determining whether such debt is
worthless (or to the extent to which such debt is worthless)
and in determining the amount of any addition to a reserve
for bad debts arising from the worthlessness or partial
worthlessness of such debts.

For this purposes, the term "section 597 payment" would
mean any assistance provided after December 31, 1980, if
section 597 of the Code (as in effect with respect to such
assistance) excluded such assistance from gross income. Such
term would not include payments to which the amendments made
by section 1401(a)(3) of FIRREA apply (generally, those
payments that must be included in the income of the
srecipient).

Further, the bill “would: provide ‘that nothing .in -section
-597.0£ the Code ‘shouldbe construed :to:exclude.:from:gross
income any amount paid by the FSLIC, the FSLIC Resolution
Fund, the RTC, or the FDIC for the repurchase of an asset or
to exclude such amount in determining gain or loss under
section 1001 of the Code.

The bill would apply to taxable years ending after
December 31, 1980.

3. H.R. 1338 (Messrs. Guarini and Moody)

In general

Under the bill, any FSLIC assistance payable with
respect to any loss of principal, capital, or similar amount
upon the disposition. of.any asset would be taken into account

».asS: compensation: fori such loss: under.section 165. of the Code.

.,In: addition, . any FSLIC-assistance payable with.respect to any
debt would: be taken: into account. for. purposes: of. sections
166, 585, or 593 of the Code in determining whether such debt
is worthless (or to the extent to which such debt is
worthless) and in determining the amount of any addition to a
reserve for bad debts arising from the worthlessness or
partial worthlessness of such debts.

For this purposes, the term "FSLIC assistance" would
mean any money or other property provided with respect to a
domestic building and loan association by the FSLIC, the
FSLIC Resolution Fund, or the RTC, pursuant to section 460(f)



-6-

Under the reserve method, the taxpayer may deduct
annually an addition to its bad debt. reserve calculated under
:either the experience method or.the percentage of taxable
income method.

Under the experience method, the taxpayer's bad debt
reserve cannot exceed a percentage of total loans outstanding
equal to the average ratio of total bad debts to total debt
outstanding in the current and 5 preceding taxable years.

The reserve is reduced by the amount of any bad debt actually
written-off during a period and increased by any recovery
during the period with respect to a debt written off ina
prior period. The taxpayer is then allowed a deduction
during the period only for the amount (if any) needed to
increase the reserve to the appropriate level.

Under the percentage of taxable income method, a thrift
institution is allowed a deduction for additions to its loan
loss reserve equal to 8 percent of its taxable income
(subject to certain adjustments and limitations) for the
taxable year.

Treasury ‘Report

In.March, .1991,~-the ‘Treasury. Department ‘issued a
report (the "Treasury Report") addressing the tax
consequences of certain forms of financial assistance
provided by the FSLIC pursuant to assistance transactions.°

The Treasury Report concludes that assisted institutions
should not be allowed to deduct covered capital losses or
certain expenses that are reimbursed by the FSLIC or its
successors. In general, the Treasury Report reasons that
there is no economic loss to be recognized to the extent of
FSLIC assistance. Furthermore, the Treasury Report reasons
that any loss should not be deductible because it is
compensated for by insurance or otherwise within the meaning
of the general loss deduction provision of section 165.
Similar reasoning is applied for purposes of determining
whether acquirers should be allowed bad debt deductions.

The: Treasury.Report observes that. taxpayers may contest
this interpretation of the loss provisions. .The Treasury
Report: states:that' the IRS is prepared to ‘challenge and
litigate, if necessary, the deductibility of covered losses
and expenses.

5 Department of the Treasury, "Report on Tax Issues Relating
to the 1988/89 Federal Savings and Loan Insurance Corporation
Assisted Transactions," March, 1991. This Treasury Report
was undertaken as a result of tax issues raised in the
earlier RTC Report (footnote 3, supra).



-2-
I. SUMMARY OF THE BILLS
H.R. 1135

Under the bill, any Federal Savings and Loan Insurance
Corporation (FSLIC) assistance payable with respect to any
loss of principal, capital, or similar amount upon the
disposition of any asset would be taken into account for
purposes of determining whether a loss is deductible. In
addition, any FSLIC assistance payable with respect to any
debt would be taken into account for purposes of determining
the amount of any bad debt deduction.

In general, the bill would apply to FSLIC financial
assistance paid with respect to any asset disposed of on or
after January 1, 1991, to which the special rules of the 1981
Act applicable to FSLIC assistance payment apply. However,
the bill would not apply to (1) any amount received by a
taxpayer to the extent that the IRS had issued prior to
January 1, 1991, a ruling or a closing agreement expressly
providing that such amount shall not be taken into account in

«determining: the -amount..of any deductible loss or bad debt
-deduction or (2).any FSLIC ‘financial assistance‘ provided with

respect to deductions or losses recognized prior to the
commitment to pay such assistance. ‘Further, the bill
provides that the provisions should not be construed as
affecting any private contractual rights and remedies that
are otherwise available to parties of agreements for the
provision of Federal financial assistance.

H.R. 1326

The bill is similar to H.R. 1338. In addition, H.R.
1326 provides that nothing in section 597 of the Internal
Revenue Code ("Code") would be construed to exclude from
gross income any amount paid by the FSLIC, the FSLIC
Resolution Fund, the Resolution Trust Corporation (RTC), or
the Federal Deposit Insurance Corporation (FDIC) for the
repurchase of an asset or to exclude such amount in
determining the amount of any gain or loss under section 1001
of the Code.

“The bill would apply to. taxable years ending after
December 31, 1980. _H.R..1326' does: not contain the exceptions
to the effective date for (1) taxpayers that had received an
IRS ruling or closing agreement, or (2) amounts provided with
respect to deductions or losses recognized prior to the
commitment to pay such assistance. Finally, H.R. 1326 does
not contain a special rule relating to the effect of the bill
on any contracts rights of the taxpayer.



INTRODUCTION

The Committee on Ways and Means has scheduled a public
hearing on February 11, 1992, on the following four bills,
which deal with tax aspects of government-assisted
acquisitions of savings and loan associations:

(1) H.R. 1135, introduced on February 27, 1991, by
Messrs. Guarini, Moody, Levin (Mich.), Rangel,
Gradison, Gibbons, Schulze, Matsui, Thomas (Calif.),
Donnelly, Bunning, Sundquist, Chandler, Mrs. Johnson
(Conn.), and others;

(2) H.R. 1326, introduced on March 7, 1991, by
Mr. Dorgan;

(3) H.R. 1338, introduced on March 7, 1991, by Messrs.
Guarini and Moody; and

(4). H.R.:561, introduced on.January 18, .1991, by Mr.
Donnelly.

This document). prepared by:the staff of the-Joint
Committee on Taxation in connection with the hearing,
provides a summary of the bills (Part I), background
information concerning present law (Part II), and
descriptions of the four bills (Part III).

1 this document may be cited as follows: Joint Committee on
Taxation, Tax Aspects of Government-Assisted Acquisitions of
Savings and Loan Associations (H.R. 1135, H.R 1326, H.R.
1338, and H.R. 561) (JCX-2-92), February 7, 1992.



CONTENTS

Page
INTRODUCTION ..ceseeccccccccscccecsccccreseeceveecee L
I. SUMMARY OF THE BILLS ...eseececccccccerceceseee 2
II. BACKGROUND AND PRESENT LAW ....eeeccesscccsecee 4
III. DESCRIPTION OF THE BILLS ....cceeessccnceseeees 8

1.

H.R. 1135 (Messrs. Guarini, Moody,

Levin, Rangel, Gradison, Schulze,

Matsui, Thomas, Donnelly, Bunning,
Sundquist, Mrs. Johnson, and others) .... 8

H.R. 1326 (Mr. Dorgan) .csccecessvccvcesee 9

“H.R. 1338 (Messrs..Guarini:and. Moody) .... 9

H.R.3561 (Mr. Donnelly) ...ccccccceresececee 10



-ll-

which offset income of other members of the group which were
-neither domestic building and.loan associations nor banks,
reduced by (2).the amount (if any). required to paid to the
FSLIC (or its successor) in respect to the tax reductions
pursuant to the agreement for the acquisition. The recapture
tax would be imposed on the common parent of the group for
the taxable year in which the domestic building and loan
association becomes subject to the recapture event. The
recapture tax would not be treated as a tax for purposes of
determining the amount of any allowable credit or the amount
of any minimum tax liability.

This provision of the bill would apply to taxable years
ending after January 3, 1991.

Treatment of assistance in determining earnings and profits

In addition, the bill would provide a special rule for
purposes of determining the adjusted tax basis of the stock
of a subsidiary of an affiliated group of corporations filing
a consolidated tax return. Under the special rule, earnings
and profit.would:not:include.any :amount ‘excluded from income

under section ‘597 (as.in effect before. the enactment of
:-FIRREA).. Thus,..under. the bill,:a-member ‘of ‘a ‘consolidated
group..that owns. stock -in -a:domestic savings and loan
generally would not increase the basis of such stock by the
amount of any Federal financial assistance excluded from
gross income.

This provision of the bill would apply to dispositions
after January 3, 1991. For this purpose, any event resulting
in the inclusion of an excess loss account would be treated
as a disposition.