Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations 66091

section in order to report pursuant to

§ 1.671–4(a), (b)(2)(i)(B), or (b)(3)(i) of

this chapter.

(ii) Obligations of persons who make

payments to certain trusts. Any payor

that is required to file an information

return with respect to payments of

income or proceeds to a trust must show

the name and taxpayer identification

number that the trustee has furnished to

the payor on the return. Regardless of

whether the trustee furnishes to the

payor the name and taxpayer

identification number of the grantor or

other person treated as an owner of the

trust, or the name and taxpayer

identification number of the trust, the

payor must furnish a statement to

recipients to the trustee of the trust,

rather than to the grantor or other

person treated as the owner of the trust.

Under these circumstances, the payor

satisfies the obligation to show the name

and taxpayer identification number of

the payee on the information return and

to furnish a statement to recipients to

the person whose taxpayer

identification number is required to be

shown on the form.

(iii) Persons treated as payors. For

purposes of this paragraph (a)(2), the

term payor means a person described in

§ 1.671–4(b)(4) of this chapter.

* * * * *

PART 602—OMB CONTROL NUMBERS

UNDER THE PAPERWORK

REDUCTION ACT

Par. 8. The authority citation for part

602 continues to read as follows:

Authority: 26 U.S.C. 7805.

Par. 9. In § 602.101, paragraph (c) is

amended in the table by revising the

entry for 1.671–4 to read ‘‘1.671–4

. . . . 1545–1442’’.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Approved: December 5, 1995:

Leslie Samuels,

Assistant Secretary of the Treasury.

[FR Doc. 95–30682 Filed 12–20–95; 8:45 am]

BILLING CODE 4830–01–U

26 CFR Parts 1, 301 and 602

[TD 8641]

RIN 1545–AN71

Treatment of Acquisition of Certain

Financial Institutions; Certain Tax

Consequences of Federal Financial

Assistance to Financial Institutions

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final

regulations relating to Federal financial

assistance, as defined in section 597(c)

of the Internal Revenue Code, that is

received by a financially troubled bank

or thrift institution, and to acquisitions

of financially troubled bank or thrift

institutions in which Federal financial

assistance is provided. This document

also contains final regulations under

section 7507. These regulations provide

guidance concerning the proper tax

treatment of various transactions

involving the receipt of Federal

financial assistance.

DATES: These regulations are effective

December 21, 1995.

For dates of applicability, see the

‘‘§ 1.597–7 Effective date’’ section under

the SUPPLEMENTARY INFORMATION portion

of the preamble and the effective date

provisions (§ 1.597–7) of this document.

FOR FURTHER INFORMATION CONTACT:

Steven M. Flanagan at 202–622–7790,

Vicki J. Hyche at 202–622–7530,

William D. Alexander at 202–622–7710,

or Steven R. Glickstein at 202–622–4439

(not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information

contained in these final regulations have

been reviewed and approved by the

Office of Management and Budget in

accordance with the Paperwork

Reduction Act (44 U.S.C. 3507) under

control number 1545–1300. Responses

to these collections of information are

required to track deferred income and

its subsequent recapture, elect to

disaffiliate earlier than would otherwise

be permitted, elect to apply the

provisions of the regulation

retroactively, and report uncollected

income tax.

An agency may not conduct or

sponsor, and a person is not required to

respond to, a collection of information

unless the collection of information

displays a valid control number.

The estimated annual burden per

respondent/recordkeeper varies from 1

hour to 11 hours, depending on

individual circumstances, with an

estimated average of 4.4 hours.

Comments concerning the accuracy of

this burden estimate and suggestions for

reducing this burden should be sent to

the Internal Revenue Service, Attn: IRS

Reports Clearance Officer T:FP,

Washington, DC 20224, and to the

Office of Management and Budget, Attn:

Desk Officer for the Department of the

Treasury, Office of Information and

Regulatory Affairs, Washington, DC

20503.

Books or records relating to these

collections of information must be

retained as long as their contents may

become material in the administration

of any internal revenue law. Generally,

tax returns and tax return information

are confidential, as required by 26

U.S.C. 6103.

Background

This document contains final

regulations under section 597, as

amended by section 1401 of the

Financial Institutions Reform, Recovery,

and Enforcement Act of 1989 (Public

Law 101–73) (FIRREA). The regulations

provide guidance for banks and

domestic building and loan associations

(Institutions) and their affiliates in

connection with receipt of Federal

financial assistance (FFA), as defined in

section 597(c).

Section 597(a) delegates to the

Secretary of the Treasury authority to

prescribe regulations concerning ‘‘any

transaction in which Federal financial

assistance is provided.’’ These

regulations are issued under the

authority of section 597(a).

This document also amends the

regulations under section 7507 to reflect

the treatment of FFA under FIRREA.

The IRS published proposed

regulations under sections 597 and 7507

on April 22, 1992 (57 FR 14794, FI–46–

89, 1992–1 C.B. 1037).

Public Comments and the Final

Regulations

The IRS received comments on the

proposed regulations, and a public

hearing was held on July 17, 1992. After

consideration of the comments and the

statements made at the hearing, the

proposed regulations are adopted as

revised by this Treasury decision. The

principal comments and revisions are

discussed below.

Section 1.597–2 Taxation of FFA

Section 1.597–2 contains rules

concerning accounting for FFA as

income. The final regulations retain the

proposed rule that, generally, FFA is

income to the failed Institution when it

is received or accrued in accordance

with the Institution’s method of

accounting. Section 1.597–2(c) contains

rules permitting certain Institutions to

defer the inclusion of FFA.

Deferral formula without Continuing

Equity. Under the proposed regulations,

unresolved Institutions without

Continuing Equity were permitted to

defer inclusion of FFA in excess of

amounts determined under a formula.

The proposed formula required current

inclusion equal to the sum of liabilities

less aggregate adjusted basis at the
66092 Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations

beginning of the assistance year

(representing losses already recognized),

plus loss in the current year

(disregarding FFA). The proposed

formula generally allowed the

Institution the benefit of any prior losses

of its owners’ equity, but offset any

losses of creditors’ capital by the

inclusion of FFA. However, with respect

to losses during the year FFA is

received, the proposed formula did not

distinguish between losses of owners’

equity and losses of creditors’ capital

and, therefore, offset losses of owners’

equity by inclusion of FFA. The formula

(together with related recapture rules) in

the final regulations has been changed

to reflect that the owners’ equity is the

first capital lost and, in a transaction

without Continuing Equity, is not offset

by inclusion of FFA.

Deferral formula with Continuing

Equity. The proposed regulations

allowed deferral under different

conditions where Continuing Equity is

present. In that case, the Institution

must include currently, in addition to

the normal formula amount, income

equal to all net operating loss carryovers

available to it. Also, an Institution with

Continuing Equity must recapture

deferred FFA at least as quickly as pro

rata over a maximum of six years,

regardless of whether it recognizes all of

its built-in losses during that time.

Commentators suggested that the

proposed regulations unfairly limited

deferral for Institutions with Continuing

Equity and recommended the same

deferral formula apply in all cases. They

criticized the Continuing Equity concept

because it focused on the identity of the

Institution’s shareholders after the

assistance transaction.

Under the definition of Continuing

Equity in the proposed regulations, an

Institution generally would have

Continuing Equity if five percent or

more of its stock at the end of a taxable

year was owned by shareholders who

owned stock before the Institution was

placed in receivership by a supervisory

agency (Agency) or first received FFA.

The five percent reference was

misleading because, under § 1.597–5, a

50 percent change in ownership

generally results in a deemed Taxable

Transfer (now defined in § 1.597–

5(a)(1)) in which the failed Institution is

treated as a New Entity. The deferral

rules do not apply after a deemed

Taxable Transfer. The final regulations

thus clarify that Continuing Equity

exists only if the Institution is not (i) a

Bridge Bank, (ii) in Agency receivership,

or (iii) treated as a New Entity. The

modification to the definition of

Continuing Equity is not intended as a

substantive change. The Continuing

Equity deferral provisions apply only to

the limited number of ‘‘open bank’’

resolutions not subject to the deemed

Taxable Transfer rules. (As discussed

below, the Taxable Transfer definitions

have also been modified to clarify that

most ‘‘open bank’’ assisted transactions

are treated as Taxable Transfers.)

The final regulations do not eliminate

the special treatment of Institutions

with Continuing Equity. The regulations

provide deferral rules to ameliorate a

timing mismatch between FFA income

and related losses. Deferral is not

designed to allow built-in losses to

offset operating income instead of FFA

or to permit the permanent elimination

of any subsidy provided by Agency. The

requirement that Institutions with

Continuing Equity recapture their

deferred FFA within six years is a

reasonable safeguard against indefinite

deferral of FFA income. The results

under these rules are comparable in

effect to those applicable to acquirors in

Taxable Transfers.

The final regulations do, however,

modify the Continuing Equity formula,

which, in the proposed regulations,

counted some losses twice. Recognized

losses represented in the first prong of

the formula (liabilities minus asset

bases) may comprise part of the third

prong (net operating losses available to

the Institution or its consolidated

group). The final regulations correct this

double counting of losses.

Transfers of money and property to

Agency. The proposed regulations

contained rules for taxing FFA if money

or property is also transferred to

Agency. These rules, together with rules

for the treatment of FFA received

pursuant to a Loss Guarantee, have been

clarified, reorganized, and restated in

§ 1.597–2(d).

The proposed regulations provided an

offset or deduction for payments by an

Institution to Agency to the extent of

previously received FFA. The rule as

proposed provided limited relief for

payments made to Agency by a New

Entity or Acquiring, because they

receive little or no FFA. However, an

assisted acquisition can result in income

to a New Entity or Acquiring in the form

of built-in gain. Under section 597(c)

and § 1.597–3(b), an instrument issued

to Agency by a New Entity or Acquiring

is, in effect, disregarded. If a New Entity

or Acquiring issues its instrument to

Agency in connection with the

acquisition of an Institution, the value

of the instrument is not included in the

purchase price. Consequently, a New

Entity or Acquiring may have a basis

shortfall in the assets acquired (or

deemed acquired) from the failed

Institution. The final regulations

provide a New Entity or Acquiring a

purchase price adjustment upon any

transfer to Agency (e.g., in satisfaction

of the disregarded instrument).

In response to comments, the final

regulations also specifically provide for

repayments to Agency by Institution

affiliates. Moreover, the final regulations

provide that if Agency sells an

Institution’s instrument to a third party,

the sales price is treated as a repayment

to Agency by the issuer. Furthermore,

the instrument is treated as having been

newly issued by the issuer to the holder

at that time. The IRS and Treasury

believe that this is an appropriate time

for the issuer to offset FFA or increase

its basis, because the sales price

reasonably fixes the value of the

instrument, and any subsequent cost

associated with the instrument should

be accounted for in accordance with the

nature of the instrument.

Section 1.597–4(g) Elective

Disaffiliation

The proposed regulations would

allow a consolidated group to elect

(after the regulations became final) to

exclude an Institution in receivership

from its group. The election potentially

requires the inclusion of a ‘‘toll charge’’

in the income of those members owning

the common stock of the Institution (the

member shareholders). The amount of

the toll charge is the excess of the

disaffiliated Institution’s liabilities over

the adjusted basis of its assets. The toll

charge is intended to reflect the amount

that would be included in income if

Agency were to provide the entire

amount of FFA necessary to restore the

Institution’s solvency at the time of the

event permitting disaffiliation.

Commentators suggested that the final

regulations should include the toll

charge in the income of the disaffiliated

Institution (rather than its member

shareholders), provide the group with a

‘‘toll charge deduction,’’ and clarify the

ability of the member shareholders to

take a worthless stock deduction.

Toll charge. Commentators suggested

that the final regulations include the toll

charge in the income of the failed

Institution rather than its member

shareholders. According to the

commentators, including the toll charge

in the income of the member

shareholders may result in

disadvantageous state tax consequences

in those states where banking

corporations are not permitted to file

consolidated returns with nonbanking

corporations. Under the proposed

regulations, a bank holding corporation

(the disaffiliated Institution’s

shareholder) would have to include in

income the toll charge without the
Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations 66093

benefit of the Institution’s offsetting

losses.

The IRS and Treasury agree that the

toll charge is more appropriately

included in the income of the

Institution (i.e., the entity that is

reimbursed by Agency for its loss),

because the toll charge represents

accelerated FFA income. Thus, the final

regulations provide that the Institution,

rather than its member shareholders,

takes the toll charge into income.

Toll charge deduction. Under the

proposed regulations, the Institution

does not recognize built-in losses on

disaffiliation. One commentator

suggested the final regulations provide

for a ‘‘toll charge deduction’’ for the

excess of the Institution’s adjusted basis

over its liabilities. According to the

commentator, such a deduction is

appropriate because the Institution

incurred economic loss while it was a

member of the consolidated group,

before the Institution was placed in

receivership by Agency.

The commentator’s recommendation

is not adopted in the final regulations

because a toll charge deduction would

accelerate recognition of losses in

advance of realization. Such a

deduction is particularly inappropriate

because federal banking laws now

permit placing solvent institutions in

receivership. In such cases, it is

uncertain whether the loss represented

by such a deduction will ever be

realized.

Worthless stock deduction. Under the

proposed regulations, if an election to

disaffiliate is made, the members of the

consolidated group are treated as having

disposed of their stock in the

Institution. One commentator suggested

that the final regulations clarify that,

upon disaffiliation, the Institution’s

stock is worthless.

The final regulations address the

commentator’s concerns by providing

that, as a consequence of the election,

the members of the consolidated group

treat their stock in the Institution as

worthless if the Institution is factually

insolvent on the date the Institution is

placed in receivership (or on the date

the consolidated group is deemed to

make the election to disaffiliate). This

rule preempts otherwise applicable tests

for worthlessness under section 165 and

§ 1.1502–19. Any worthless stock

deduction is subject to the limitations of

the loss disallowance regulations

(§§ 1.337(d)–1 and 1.1502–20).

Consistency rule. Under the proposed

regulations, a consolidated group could

elect to disaffiliate a subsidiary

Institution only if the Institution was its

first subsidiary placed in Agency

receivership after the enactment of

FIRREA. The election made for the first

subsidiary bound all future subsidiaries

placed in Agency receivership. To

address the concern that the scope of

the proposed consistency rule was too

broad, the final regulations modify the

consistency rule to require, generally,

that a consolidated group must elect

consistently only for subsidiary

Institutions placed in Agency

receivership within five years of each

other.

Section 1.597–5 Taxable Transfers

Section 597 applies to FFA and

transactions in connection with which

FFA is provided. The proposed

regulations generally define a Taxable

Transfer as a transfer of deposit

liabilities or stock while an Institution

is under Agency Control. However, IRS

and Treasury now understand that it is

possible for Agency to resolve an

Institution under its control without

providing assistance, or to provide

assistance without placing an Institution

under its control. In light of this

information, the final regulations refine

the definition of a Taxable Transfer.

Under the final regulations, Taxable

Transfers include the transfer of any

deposit liability in connection with

which FFA is provided or the transfer

of any asset for which Agency has an

obligation (e.g., assets covered by Loss

Guarantees). Certain transfers of stock

cause a Taxable Transfer if FFA is

provided in connection with the

transfer, if the Institution is a Bridge

Bank or if the Institution has a balance

in its deferred FFA account. The phrase

‘‘in connection with’’ should be

interpreted broadly. If any party to a

transaction receives FFA, all parties and

all related transactions are within the

scope of these regulations. To provide

certainty regarding tax treatment for

purchasers of stock of subsidiaries of

Institutions under Agency Control, the

final regulations treat all transactions in

which such a subsidiary leaves its group

as Taxable Transfers.

Section 1.597–6 Limitation on

Collection of Income Tax

Limitation where tax is borne by

Agency. The proposed regulations

provided that income tax attributable to

the receipt of FFA or gain on a Taxable

Transfer would not be collected from an

Institution without Continuing Equity if

Agency would bear the burden of the

tax. Commentators suggested that the

limitation on noncollection in cases of

Continuing Equity is inappropriate

because it requires Agency to gross-up

any assistance paid to cover the tax

thereon.

The final regulations retain the

limitation on noncollection in cases of

Continuing Equity. The IRS and

Treasury believe that the limitation is

appropriate for transactions in which

Agency assists an Institution while

allowing old shareholders to retain their

ownership. Noncollection should not

inure to the benefit of the Institution’s

old shareholders, who would have use

of the Institution’s losses while escaping

responsibility for the tax on related FFA

income. The congressional purpose in

FIRREA to eliminate any tax subsidy for

assisted transactions requires that the

IRS not waive its rights as a creditor in

cases where all other creditors and

equity holders retain their rights.

Transferee liability. The proposed

regulations limited the collection of a

failed Institution’s income taxes from a

transferee in a Taxable Transfer (i.e., a

New Entity or Acquiring). This rule

would not apply if (similar to the

Continuing Equity rule discussed above

under the heading ‘‘Deferral formula

with Continuing Equity’’) there is a five

percent overlap in the ownership of the

transferor Institution and the New

Entity or Acquiring.

Commentators suggested that the final

regulations should not include the five

percent overlap exception because the

exception appears to punish former

owners of Institutions, Institutions have

difficulty tracking ownership, and the

exception contains no limits on

aggregation.

Because good faith purchasers of

assets for value generally do not have

transferee liability, the final regulations

clarify that Acquiring (the purchaser of

Institution’s assets in an actual Taxable

Transfer) is not subject to such liability

in any case. This rule applies even if

shareholders of Acquiring were

shareholders of the selling Institution.

The final regulations do not, however,

except a New Entity (the resulting

corporation in a deemed Taxable

Transfer) from collection if the

Institution’s previous equity interests

remain outstanding in the New Entity,

or are reacquired or exchanged for

consideration. As in those cases in

which a Taxable Transfer does not

occur, the IRS should remain a creditor

if all other creditors retain their interests

and the Institution’s previous equity

interests had retained value. However,

by focusing on whether previous equity

interests retain value, the final

regulations eliminate the need to track

or aggregate ownership and do not

penalize any particular potential

acquirors.
66094 Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations

Section 1.597–7 Effective Date

As proposed, these final regulations

generally apply to taxable years ending

on or after April 22, 1992. However, the

provisions of these regulations do not

apply to FFA received or accrued for

taxable years ending after April 22,

1992, in connection with an Agency

assisted acquisition that occurs before

April 22, 1992. Taxpayers not subject to

these regulations must comply with an

interpretation of the statute that is

reasonable in light of the legislative

history and applicable administrative

pronouncements. For this purpose, the

rules contained in Notice 89–102 (1989–

2 C.B. 436) apply to the extent provided

in the Notice.

An irrevocable election is available to

apply the regulations to taxable years

prior to the general effective date.

However, the election cannot be made if

the Institution’s statute of limitations

has expired or a section 338 election

was available but not made for the

Institution. In addition, consistent

treatment is required in ‘‘open bank’’

resolutions that would result under the

regulations in deemed Taxable Transfers

before April 22, 1992.

The proposed regulations required an

electing taxpayer to extend the statute of

limitations for all items for three years

from the date of filing the election. The

final regulations adopt a commentator’s

suggestion that the taxpayer extend the

statute of limitations only for items

affected by application of the

regulations.

An Institution or consolidated group

makes the election on its first annual

income tax return filed on or after

March 15, 1996. However, to make the

affirmative election to disaffiliate under

§ 1.597–4(g)(5) for an Institution placed

in Agency receivership in a taxable year

ending before April 22, 1992, a

consolidated group must send the

affected Institution the required

statement advising it of the elective

disaffiliation on or before May 31, 1996.

In that case, the consolidated group is

deemed to have elected retroactive

application of these regulations but

must nevertheless attach the required

statement to its first annual income tax

return filed on or after March 15, 1996.

The final regulations provide that

taxpayers may rely on the provisions of

the proposed regulations to the extent

they acted in reliance on the proposed

regulations prior to December 21, 1995.

Such reliance must be reasonable and

transactions with respect to which such

taxpayers rely must be consistent with

the overriding policies of section 597, as

expressed in the legislative history, as

well as the overriding policies of the

proposed regulations.

Special Analyses

It has been determined that this

Treasury decision is not a significant

regulatory action as defined in EO

12866. Therefore, a regulatory

assessment is not required. It is hereby

certified that these regulations do not

have a significant economic impact on

a substantial number of small entities.

This certification is based on the fact

that these regulations will generally

only apply to certain financially

troubled financial institutions and the

consolidated groups, if any, to which

they belong. Therefore, a Regulatory

Flexibility Analysis under the

Regulatory Flexibility Act (5 U.S.C.

chapter 6) is not required. Pursuant to

section 7805(f) of the Internal Revenue

Code, the notice of proposed rulemaking

preceding these regulations was

submitted to the Chief Counsel for

Advocacy of the Small Business

Administration for comment on its

impact on small business.

Drafting Information

The principal author of these

regulations is Steven M. Flanagan,

Office of the Assistant Chief Counsel

(Corporate), IRS. However, other

personnel from the IRS and Treasury

Department participated in their

development.

List of Subjects

26 CFR Part 1

Income taxes, Reporting and

recordkeeping requirements.

26 CFR Part 301

Employment taxes, Estate taxes,

Excise taxes, Gift taxes, Income taxes,

Penalties, Reporting and recordkeeping

requirements.

26 CFR Part 602

Reporting and recordkeeping

requirements.

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR parts 1, 301 and

602 are amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority for part 1

is amended by adding the following

citation:

Authority: 26 U.S.C. 7805 * * *

Sections 1.597–1 through 1.597–7 also

issued under 26 U.S.C. 597 and 1502.

Par. 2. Sections 1.597–1 through

1.597–7 are added to read as follows:

§ 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 § 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 § 1.597–5(b).

Agency. The term Agency means the

Resolution Trust Corporation, the

Federal Deposit Insurance Corporation,

any similar instrumentality of the

United States government, and any

predecessor or successor of the

foregoing (including the Federal Savings

and Loan Insurance Corporation).

Agency Control. An Institution or

entity is under Agency Control if

Agency is conservator or receiver of the

Institution or entity, or if Agency has

the right to appoint any of the

Institution’s or entity’s directors.

Agency Obligation. The term Agency

Obligation means a debt instrument that

Agency issues to an Institution or to a

direct or indirect owner of an

Institution.

Bridge Bank. The term Bridge Bank

means an Institution that is organized

by Agency to hold assets and liabilities

of another Institution and that continues

the operation of the other Institution’s

business pending its acquisition or

liquidation, and that is any of the

following—

(1) A national bank chartered by the

Comptroller of the Currency under

section 11(n) of the Federal Deposit

Insurance Act (12 U.S.C. 1821(n)) or

section 21A(b)(10)(A) of the Federal

Home Loan Bank Act (12 U.S.C.

1441a(b)(10)(A)) or any successor

sections;

(2) A Federal savings association

chartered by the Director of the Office

of Thrift Supervision under section

21A(b)(10)(A) of the Federal Home Loan

Bank Act (12 U.S.C. 1441a(b)(10)(A)) or

any successor section; or

(3) A similar Institution chartered

under any other statutory provisions.

Consolidated Subsidiary. The term

Consolidated Subsidiary means a

member of the consolidated group of

which an Institution is a member that

bears the same relationship to the

Institution that the members of a

consolidated group bear to their

common parent under section

1504(a)(1).

Continuing Equity. An Institution has

Continuing Equity for any taxable year

if, on the last day of the taxable year, the
Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations 66095

Institution is not (1) a Bridge Bank, (2)

in Agency receivership, or (3) treated as

a New Entity.

Controlled Entity. The term

Controlled Entity means an entity under

Agency Control.

Federal Financial Assistance (FFA).

The term Federal Financial Assistance

(FFA), as defined by section 597(c),

means any money or property provided

by Agency to an Institution or to a direct

or indirect owner of stock in an

Institution under section 406(f) of the

National Housing Act (12 U.S.C.

1729(f)), section 21A(b)(4) of the Federal

Home Loan Bank Act (12 U.S.C.

1441a(b)(4)), section 11(f) or 13(c) of the

Federal Deposit Insurance Act (12

U.S.C. 1821(f), 1823(c)), or under any

similar provision of law. Any such

money or property is FFA, regardless of

whether the Institution or any of its

affiliates issues Agency a note or other

obligation, stock, warrants, or other

rights to acquire stock in connection

with Agency’s provision of the money

or property. FFA includes Net Worth

Assistance, Loss Guarantee payments,

yield maintenance payments, cost to

carry or cost of funds reimbursement

payments, expense reimbursement or

indemnity payments, and interest

(including original issue discount) on an

Agency Obligation.

Institution. The term Institution

means an entity that is, or immediately

before being placed under Agency

Control was, a bank or domestic

building and loan association within the

meaning of section 597 (including a

Bridge Bank). Except as otherwise

provided in the regulations under

section 597, the term Institution

includes a New Entity or Acquiring that

is a bank or domestic building and loan

association within the meaning of

section 597.

Loss Guarantee. The term Loss

Guarantee means an agreement

pursuant to which Agency or a

Controlled Entity guarantees or agrees to

pay an Institution a specified amount

upon the disposition or charge-off (in

whole or in part) of specific assets, an

agreement pursuant to which an

Institution has a right to put assets to

Agency or a Controlled Entity at a

specified price, or a similar

arrangement.

Net Worth Assistance. The term Net

Worth Assistance means money or

property (including an Agency

Obligation to the extent it has a fixed

principal amount) that Agency provides

as an integral part of a Taxable Transfer,

other than FFA that accrues after the

date of the Taxable Transfer. For

example, Net Worth Assistance does not

include Loss Guarantee payments, yield

maintenance payments, cost to carry or

cost of funds reimbursement payments,

or expense reimbursement or indemnity

payments. An Agency Obligation is

considered to have a fixed principal

amount notwithstanding an agreement

providing for its adjustment after

issuance to reflect a more accurate

determination of the condition of the

Institution at the time of the acquisition.

New Entity. The term New Entity

means the new corporation that is

treated as purchasing all of the assets of

an Old Entity in a Taxable Transfer

described in § 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 § 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

§ 1.597–5(a)(1).

§ 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 § 1.597–3(c)(2)). An

Institution (and not the nominal

recipient) is treated as receiving directly

any FFA that Agency provides in a

taxable year to a direct or indirect

shareholder of the Institution, to the

extent money or property is transferred

to the Institution pursuant to an

agreement with Agency.

(2) Cross references. See paragraph (c)

of this section for rules regarding the

timing of inclusion of certain FFA. See

paragraph (d) of this section for

additional rules regarding the treatment

of FFA received in connection with

transfers of money or property to

Agency or a Controlled Entity, or paid

pursuant to a Loss Guarantee. See

§ 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 § 1.597–3(c)(2).

(c) Timing of inclusion of certain

FFA—(1) Scope. This paragraph (c)

limits the amount of FFA an Institution

must include in income currently under

certain circumstances and provides

rules for the deferred inclusion in

income of amounts in excess of those

limits. This paragraph (c) does not apply

to a New Entity or Acquiring.

(2) Amount currently included in

income by an Institution without

Continuing Equity. The amount of FFA

an Institution without Continuing

Equity must include in income in a

taxable year under paragraph (a)(1) of

this section is limited to the sum of—

(i) The excess at the beginning of the

taxable year of the Institution’s

liabilities over the adjusted bases of the

Institution’s assets; and

(ii) The amount by which the excess

for the taxable year of the Institution’s

deductions allowed by chapter 1 of the

Internal Revenue Code (other than net

operating and capital loss carryovers)

over its gross income (determined

without regard to FFA); is greater than

the excess at the beginning of the

taxable year of the adjusted bases of the

Institution’s assets over the Institution’s

liabilities.

(3) Amount currently included in

income by an Institution with

Continuing Equity. The amount of FFA

an Institution with Continuing Equity

must include in income in a taxable

year under paragraph (a)(1) of this

section is limited to the sum of—

(i) The excess at the beginning of the

taxable year of the Institution’s

liabilities over the adjusted bases of the

Institution’s assets;

(ii) The greater of—

(A) The excess for the taxable year of

the Institution’s deductions allowed by

chapter 1 of the Internal Revenue Code

(other than net operating and capital

loss carryovers) over its gross income

(determined without regard to FFA); or

(B) The excess for the taxable year of

the deductions allowed by chapter 1 of

the Internal Revenue Code (other than

net operating and capital loss

carryovers) of the consolidated group of

which the Institution is a member on

the last day of the Institution’s taxable

year over the group’s gross income

(determined without regard to FFA);

and

(iii) The excess of the amount of any

net operating loss carryover of the

Institution (or in the case of a carryover

from a consolidated return year of the

Institution’s current consolidated group,

the net operating loss carryover of the

group) to the taxable year over the
66096 Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations

amount described in paragraph (c)(3)(i)

of this section.

(4) Deferred FFA—(i) Maintenance of

account. An Institution must establish a

deferred FFA account commencing in

the first taxable year in which it receives

FFA that is not currently included in

income under paragraph (c)(2) or (c)(3)

of this section, and must maintain that

account in accordance with the

requirements of this paragraph (c)(4).

The Institution must add the amount of

any FFA that is not currently included

in income under paragraph (c)(2) or

(c)(3) of this section to its deferred FFA

account. The Institution must decrease

the balance of its deferred FFA account

by the amount of deferred FFA included

in income under paragraphs (c)(4)(ii),

(iv) and (v) of this section. (See also

paragraph (d)(5)(i)(B) of this section for

other adjustments that decrease the

deferred FFA account.) If, under

paragraph (c)(3) of this section, FFA is

not currently included in income in a

taxable year, the Institution thereafter

must maintain its deferred FFA account

on a FIFO (first in, first out) basis (e.g.,

for purposes of the first sentence of

paragraph (c)(4)(iv) of this section).

(ii) Deferred FFA recapture. In any

taxable year in which an Institution has

a balance in its deferred FFA account,

it must include in income an amount

equal to the lesser of the amount

described in paragraph (c)(4)(iii) of this

section or the balance in its deferred

FFA account.

(iii) Annual recapture amount—(A)

Institutions without Continuing Equity—

(1) In general. In the case of an

Institution without Continuing Equity,

the amount described in this paragraph

(c)(4)(iii) is the amount by which—

(i) The excess for the taxable year of

the Institution’s deductions allowed by

chapter 1 of the Internal Revenue Code

(other than net operating and capital

loss carryovers) over its gross income

(taking into account FFA included in

income under paragraph (c)(2) of this

section); is greater than

(ii) The Institution’s remaining equity

as of the beginning of the taxable year.

(2) Remaining equity. The

Institution’s remaining equity is—

(i) The amount at the beginning of the

taxable year in which the deferred FFA

account was established equal to the

adjusted bases of the Institution’s assets

minus the Institution’s liabilities (which

amount may be positive or negative);

plus

(ii) The Institution’s taxable income

(computed without regard to any

carryover from any other year) in any

subsequent taxable year or years; minus

(iii) The excess in any subsequent

taxable year or years of the Institution’s

deductions allowed by chapter 1 of the

Internal Revenue Code (other than net

operating and capital loss carryovers)

over its gross income.

(B) Institutions with Continuing

Equity. In the case of an Institution with

Continuing Equity, the amount

described in this paragraph (c)(4)(iii) is

the amount by which the Institution’s

deductions allowed by chapter 1 of the

Internal Revenue Code (other than net

operating and capital loss carryovers)

exceed its gross income (taking into

account FFA included in income under

paragraph (c)(3) of this section).

(iv) Additional deferred FFA

recapture by an Institution with

Continuing Equity. To the extent that, as

of the end of a taxable year, the

cumulative amount of FFA deferred

under paragraph (c)(3) of this section

that an Institution with Continuing

Equity has recaptured under this

paragraph (c)(4) is less than the

cumulative amount of FFA deferred

under paragraph (c)(3) of this section

that the Institution would have

recaptured if that FFA had been

included in income ratably over the six

taxable years immediately following the

taxable year of deferral, the Institution

must include that difference in income

for the taxable year. An Institution with

Continuing Equity must include in

income the balance of its deferred FFA

account in the taxable year in which it

liquidates, ceases to do business,

transfers (other than to a Bridge Bank)

substantially all of its assets and

liabilities, or is deemed to transfer all of

its assets under § 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

§§ 1.1502–15, 1.1502–21 and 1.1502–22

do not limit the use of the attributes of

the Institution to the extent, if any, that

the inclusion of FFA (including

recaptured FFA) in income results in

taxable income or alternative minimum

taxable income (determined without

regard to this paragraph (c)(5)) for the

taxable year. This paragraph (c)(5) does

not apply to any limitation under

section 382 or 383 or § 1.1502–15,

1.1502–21 or 1.1502–22 that arose in

connection with or prior to a

corporation becoming a Consolidated

Subsidiary of the Institution.

(6) Operating rules—(i) Bad debt

reserves. For purposes of paragraphs

(c)(2), (c)(3) and (c)(4) of this section,

the adjusted bases of an Institution’s

assets are reduced by the amount of the

Institution’s reserves for bad debts

under section 585 or 593, other than

supplemental reserves under section

593.

(ii) Aggregation of Consolidated

Subsidiaries. For purposes of this

paragraph (c), an Institution is treated as

a single entity that includes the income,

expenses, assets, liabilities, and

attributes of its Consolidated

Subsidiaries, with appropriate

adjustments to prevent duplication.

(iii) Alternative minimum tax. To

compute the alternative minimum

taxable income attributable to FFA of an

Institution for any taxable year under

section 55, the rules of this section, and

related rules, are applied by using

alternative minimum tax basis,

deductions, and all other items required

to be taken into account. All other

alternative minimum tax provisions

continue to apply.

(7) Earnings and profits. FFA that is

not currently included in income under

this paragraph (c) is included in

earnings and profits for all purposes of

the Internal Revenue Code to the extent

and at the time it is included in income

under this paragraph (c).

(d) Transfers of money or property to

Agency, and property subject to a Loss

Guarantee—(1) Transfers of property to

Agency. The transfer of property to

Agency or a Controlled Entity is a

taxable sale or exchange in which the

Institution is treated as realizing an

amount equal to—

(i) The property’s fair market value; or

(ii) For property subject to a Loss

Guarantee, the greater of the property’s

fair market value or the guaranteed

value or price at which the property can

be put at the time of transfer.

(2) FFA with respect to property

covered by a Loss Guarantee other than

on transfer to Agency. (i) FFA provided

pursuant to a Loss Guarantee with

respect to covered property is included

in the amount realized with respect to

the property to the extent the total

amount realized does not exceed the

greater of—

(A) The property’s fair market value;

or

(B) The guaranteed value or price at

which the property can be put at the

time of transfer.

(ii) For the purposes of this paragraph

(d)(2), references to an amount realized

include amounts obtained in whole or

partial satisfaction of loans, amounts
Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations 66097

obtained by virtue of charging off or

marking to market covered property,

and other amounts similarly related to

property, whether or not disposed of.

(3) Treatment of FFA received in

exchange for property. FFA included in

the amount realized for property under

this paragraph (d) is not includible in

income under paragraph (a)(1) of this

section. The amount realized is treated

in the same manner as if realized from

a person other than Agency or a

Controlled Entity. For example, gain

attributable to FFA received with

respect to a capital asset retains its

character as capital gain. Similarly, FFA

received with respect to property that

has been charged off for income tax

purposes is treated as a recovery to the

extent of the amount previously charged

off. Any FFA provided in excess of the

amount realized under this paragraph

(d) is includible in income under

paragraph (a)(1) of this section.

(4) Adjustment to FFA—(i) In general.

If an Institution pays or transfers money

or property to Agency or a Controlled

Entity, the amount of money and fair

market value of the property is an

adjustment to its FFA to the extent the

amount paid and transferred exceeds

the amount of money and fair market

value of property Agency or a

Controlled Entity provides in exchange.

(ii) Deposit insurance. This paragraph

(d)(4) does not apply to amounts paid to

Agency with respect to deposit

insurance.

(iii) Treatment of an interest held by

Agency or a Controlled Entity—(A) In

general. For purposes of this paragraph

(d), an interest described in § 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 § 1.597–3(b) to a holder

other than the issuer, Agency or a

Controlled Entity, the issuer is treated

for purposes of this paragraph (d)(4) as

having transferred to Agency an amount

of money equal to the sum of the

amount of money and the fair market

value of property that was paid by the

new holder as consideration for the

interest.

(iv) Consolidated groups. For

purposes of this paragraph (d), an

9Institution will be treated as having

made any transfer to Agency or a

Controlled Entity that was made by any

other member of its consolidated group.

The consolidated group must make

appropriate investment basis

adjustments to the extent the member

transferring money or other property is

not the member that received FFA.

(5) Manner of making adjustments to

FFA—(i) Reduction of FFA and deferred

FFA. An Institution adjusts its FFA

under paragraph (d)(4) of this section by

reducing in the following order and in

an aggregate amount not greater than the

adjustment—

(A) The amount of any FFA that is

otherwise includible in income for the

taxable year (before application of

paragraph (c) of this section); and

(B) The balance (but not below zero)

in the deferred FFA account, if any,

maintained under paragraph (c)(4) of

this section.

(ii) Deduction of excess amounts. If

the amount of the adjustment exceeds

the sum of the amounts described in

paragraph (d)(5) (i) of this section, the

Institution may deduct the excess to the

extent the deduction does not exceed

the amount of FFA included in income

for prior taxable years reduced by the

amount of deductions allowable under

this paragraph (d)(5)(ii) in prior taxable

years.

(iii) Additional adjustments. Any

adjustment to FFA in excess of the sum

of the amounts described in paragraphs

(d)(5)(i) and (ii) of this section is

treated—

(A) By an Institution other than a New

Entity or Acquiring, as a deduction of

the amount in excess of FFA received

that is required to be transferred to

Agency under section 11(g) of the

Federal Deposit Insurance Act (12

U.S.C. 1821(g)); or

(B) By a New Entity or Acquiring, as

an adjustment to the purchase price

paid in the Taxable Transfer (see

§ 1.338(b)–3T).

(e) Examples. The following examples

illustrate the provisions of this section:

Example 1. Timing of inclusion of FFA in

income. (i) Institution M, a calendar year

taxpayer without Continuing Equity because

it is in Agency receivership, is not a member

of a consolidated group and has not been

acquired in a Taxable Transfer. On January

1, 1997, M has assets with a total adjusted

basis of $100 million and total liabilities of

$120 million. M’s deductions do not exceed

its gross income (determined without regard

to FFA) for 1997. Agency provides $30

million of FFA to M in 1997. The amount of

this FFA that M must include in income in

1997 is limited by § 1.597–2(c)(2) to $20

million, the amount by which M’s liabilities

($120 million) exceed the total adjusted basis

of its assets ($100 million) at the beginning

of the taxable year. Pursuant to § 1.597–

2(c)(4)(i), M must establish a deferred FFA

account for the remaining $10 million.

(ii) If Agency instead lends M the $30

million, M’s indebtedness to Agency is

disregarded and the results are the same as

in paragraph (i) of this Example 1. Section

597(c); §§ 1.597–1(b) (defining FFA) and

1.597–3(b).

Example 2. Transfer of property to Agency.

(i) Institution M, a calendar year taxpayer

without Continuing Equity because it is in

Agency receivership, is not a member of a

consolidated group and has not been

acquired in a Taxable Transfer. At the

beginning of 1998, M’s remaining equity is $0

and M has a deferred FFA account of $10

million. Agency does not provide any FFA to

M in 1998. During the year, M transfers

property not covered by a Loss Guarantee to

Agency and does not receive any

consideration. The property has an adjusted

basis of $5 million and a fair market value

of $1 million at the time of the transfer. M

has no other taxable income or loss in 1998.

(ii) Under § 1.597–2(d)(1), M is treated as

selling the property for $1 million, its fair

market value, thus recognizing a $4 million

loss ($5 million–$1 million). In addition,

because M did not receive any consideration

from Agency, under § 1.597–2(d)(4) M has an

adjustment to FFA of $1 million, the amount

by which the fair market value of the

transferred property ($1 million) exceeds the

consideration M received from Agency ($0).

Because no FFA is provided to M in 1998,

this adjustment reduces the balance of M’s

deferred FFA account to $9 million ($10

million–$1 million). Section 1.597–

2(d)(5)(i)(B). Because M’s $4 million loss

causes M’s deductions to exceed its gross

income by $4 million in 1998 and M has no

remaining equity, under § 1.597–

2(c)(4)(iii)(A) M must include $4 million of

deferred FFA in income, and must decrease

the remaining $9 million balance of its

deferred FFA account by the same amount,

leaving a balance of $5 million.

Example 3. Loss Guarantee. Institution Q,

a calendar year taxpayer, sells an asset

covered by a Loss Guarantee to an unrelated

third party for $4,000. Q’s adjusted basis in

the asset at the time of sale and the asset’s

guaranteed value are both $10,000. Pursuant

to the Loss Guarantee, Agency pays Q $6,000

($10,000–$4,000). Q’s amount realized from

the sale of the asset is $10,000 ($4,000 from

the third party and $6,000 from Agency).

Section 1.597–2(d)(2). Q realizes no gain or

loss on the sale ($10,000–$10,000 = $0), and

therefore includes none of the $6,000 of FFA

it receives pursuant to the Loss Guarantee in

income. Section 1.597–2(d)(3).

§ 1.597–3 Other rules.

(a) Ownership of assets. For all

income tax purposes, an Institution is

treated as the owner of all assets

covered by a Loss Guarantee, yield

maintenance agreement, or cost to carry

or cost of funds reimbursement

agreement, regardless of whether

Agency (or a Controlled Entity)

otherwise would be treated as the owner

under general principles of income

taxation.

(b) Debt and equity interests received

by Agency. Debt instruments, stock,

warrants, or other rights to acquire stock

of an Institution (or any of its affiliates)

that Agency or a Controlled Entity
66098 Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations

receives in connection with a

transaction in which FFA is provided

are not treated as debt, stock or other

equity interests of or in the issuer for

any purpose of the Internal Revenue

Code while held by Agency or a

Controlled Entity. On the date Agency

or a Controlled Entity transfers an

interest described in this paragraph (b)

to a holder other than Agency or a

Controlled Entity, the interest is treated

as having been newly issued by the

issuer to the holder with an issue price

equal to the sum of the amount of

money and the fair market value of

property paid by the new holder in

exchange for the interest.

(c) Agency Obligations—(1) In

general. Except as otherwise provided

in this paragraph (c), the original issue

discount rules of sections 1271 et seq.

apply to Agency Obligations.

(2) Issue price of Agency Obligations

provided as Net Worth Assistance. The

issue price of an Agency Obligation that

is provided as Net Worth Assistance and

that bears interest at either a single fixed

rate or a qualified floating rate (and

provides for no contingent payments) is

the lesser of the sum of the present

values of all payments due under the

obligation, discounted at a rate equal to

the applicable Federal rate (within the

meaning of section 1274(d) (1) and (3))

in effect for the date of issuance, or the

stated principal amount of the

obligation. The issue price of an Agency

Obligation that bears a qualified floating

rate of interest (within the meaning of

§ 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 § 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 § 1.597–

2(d)(4).

(d) Successors. To the extent

necessary to effectuate the purposes of

the regulations under section 597, an

entity’s treatment under the regulations

applies to its successor. A successor

includes a transferee in a transaction to

which section 381(a) applies or a Bridge

Bank to which another Bridge Bank

transfers deposit liabilities.

(e) Loss disallowance. For purposes of

§ 1.1502–20, FFA and the amount

described in § 1.597–4(g)(3) are treated

as an extraordinary gain disposition

within the meaning of § 1.1502–

20(c)(2)(i) and a Taxable Transfer is

treated as an applicable asset

acquisition under section 1060(c) within

the meaning of § 1.1502–

20(c)(2)(i)(A)(4).

(f) Losses and deductions with respect

to covered assets. Prior to the

disposition of an asset covered by a Loss

Guarantee, the asset cannot be charged

off, marked to a market value,

depreciated, amortized, or otherwise

treated in a manner that supposes an

actual or possible diminution of value

below the greater of the asset’s highest

guaranteed value or the highest price at

which the asset can be put.

(g) Anti-abuse rule. The regulations

under section 597 must be applied in a

manner consistent with the purposes of

section 597. Accordingly, if, in

structuring or engaging in any

transaction, a principal purpose is to

achieve a tax result that is inconsistent

with the purposes of section 597 and the

regulations thereunder, the

Commissioner can make appropriate

adjustments to income, deductions and

other items that would be consistent

with those purposes.

§ 1.597–4 Bridge Banks and Agency

Control.

(a) Scope. This section provides rules

that apply to a Bridge Bank or other

Institution under Agency Control and to

transactions in which an Institution

transfers deposit liabilities (whether or

not the Institution also transfers assets)

to a Bridge Bank.

(b) Status as taxpayer. A Bridge Bank

or other Institution under Agency

Control is a corporation within the

meaning of section 7701(a)(3) for all

purposes of the Internal Revenue Code

and is subject to all Internal Revenue

Code provisions that generally apply to

corporations, including those relating to

methods of accounting and to

requirements for filing returns, even if

Agency owns stock of the Institution.

(c) No section 382 ownership change.

The imposition of Agency Control, the

cancellation of Institution stock by

Agency, a transaction in which an

Institution transfers deposit liabilities to

a Bridge Bank, and an election under

paragraph (g) of this section are

disregarded in determining whether an

ownership change has occurred within

the meaning of section 382(g).

(d) Transfers to Bridge Banks—(1) In

general. Except as otherwise provided

in paragraph (g) of this section, the rules

of this paragraph (d) apply to transfers

to Bridge Banks. In general, a Bridge

Bank and its associated Residual Entity

are together treated as the successor

entity to the transferring Institution. If

an Institution transfers deposit

liabilities to a Bridge Bank (whether or

not it also transfers assets), the

Institution recognizes no gain or loss on

the transfer and the Bridge Bank

succeeds to the transferring Institution’s

basis in any transferred assets. The

associated Residual Entity retains its

basis in any assets it continues to hold.

Immediately after the transfer, the

Bridge Bank succeeds to and takes into

account the transferring Institution’s

items described in section 381(c)

(subject to the conditions and

limitations specified in section 381(c)),

taxpayer identification number (‘‘TIN’’),

deferred FFA account, and account

receivable for future FFA as described

in paragraph (g)(4)(ii) of this section.

The Bridge Bank also succeeds to and

continues the transferring Institution’s

taxable year.

(2) Transfers to a Bridge Bank from

multiple Institutions. If two or more

Institutions transfer deposit liabilities to

the same Bridge Bank, the rules in

paragraph (d)(1) of this section are

modified to the extent provided in this

paragraph (d)(2). The Bridge Bank

succeeds to the TIN and continues the

taxable year of the Institution that

transfers the largest amount of deposits.

The taxable years of the other

transferring Institutions close at the time

of the transfer. If all the transferor

Institutions are members of the same

consolidated group, the Bridge Bank’s

carryback of losses to the Institution that

transfers the largest amount of deposits

is not limited by section 381(b)(3). The

limitations of section 381(b)(3) do apply

to the Bridge Bank’s carrybacks of losses

to all other transferor Institutions. If the

transferor Institutions are not all

members of the same consolidated

group, the limitations of section

381(b)(3) apply with respect to all

transferor Institutions. See paragraph

(g)(6)(ii) of this section for additional

rules that apply if two or more

Institutions that are not members of the

same consolidated group transfer

deposit liabilities to the same Bridge

Bank.

(e) Treatment of Bridge Bank and

Residual Entity as a single entity. A

Bridge Bank and its associated Residual

Entity or Entities are treated as a single

entity for income tax purposes and must

file a single combined income tax

return. The Bridge Bank is responsible

for filing all income tax returns and

statements for this single entity and is
Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations 66099

the agent of each associated Residual

Entity to the same extent as if the Bridge

Bank were the common parent of a

consolidated group including the

Residual Entity. The term Institution

includes a Residual Entity that files a

combined return with its associated

Bridge Bank.

(f) Rules applicable to members of

consolidated groups—(1) Status as

members. Unless an election is made

under paragraph (g) of this section,

Agency Control of an Institution does

not terminate the Institution’s

membership in a consolidated group.

Stock of a subsidiary that is canceled by

Agency is treated as held by the

members of the consolidated group that

held the stock prior to its cancellation.

If an Institution is a member of a

consolidated group immediately before

it transfers deposit liabilities to a Bridge

Bank, the Bridge Bank succeeds to the

Institution’s status as the common

parent or, unless an election is made

under paragraph (g) of this section, as a

subsidiary of the group. If a Bridge Bank

succeeds to an Institution’s status as a

subsidiary, its stock is treated as held by

the shareholders of the transferring

Institution, and the stock basis or excess

loss account of the Institution carries

over to the Bridge Bank. A Bridge Bank

is treated as owning stock owned by its

associated Residual Entities, including

for purposes of determining

membership in an affiliated group.

(2) No 30-day election to be excluded

from consolidated group. Neither an

Institution nor any of its Consolidated

Subsidiaries may be excluded from a

consolidated group for a taxable year

under § 1.1502–76(b)(5)(ii), as contained

in 26 CFR part 1 edition revised April

1, 1994, if the Institution is under

Agency Control at any time during the

year.

(3) Coordination with consolidated

return regulations. The provisions of the

regulations under section 597 take

precedence over conflicting provisions

in the regulations under section 1502.

(g) Elective disaffiliation—(1) In

general. A consolidated group of which

an Institution is a subsidiary may elect

irrevocably not to include the

Institution in its affiliated group if the

Institution is placed in Agency

receivership (whether or not assets or

deposit liabilities of the Institution are

transferred to a Bridge Bank). See

paragraph (g)(6) of this section for

circumstances under which a

consolidated group is deemed to make

this election.

(2) Consequences of election. If the

election under this paragraph (g) is

made with respect to an Institution, the

following consequences occur

immediately before the subsidiary

Institution to which the election applies

is placed in Agency receivership (or, in

the case of a deemed election under

paragraph (g)(6) of this section,

immediately before the consolidated

group is deemed to make the election)

and in the following order—

(i) All adjustments of the Institution

and its Consolidated Subsidiaries under

section 481 are accelerated;

(ii) Deferred intercompany gains and

losses with respect to the Institution and

its Consolidated Subsidiaries are taken

into account and the Institution and its

Consolidated Subsidiaries take into

account any other items required under

the regulations under section 1502 for

members that become nonmembers

within the meaning of § 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 § 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 § 1.1502–32(d)(4); and

(v) If the Institution’s liabilities

exceed the aggregate fair market value of

its assets on the date the Institution is

placed in Agency receivership (or, in

the case of a deemed election under

paragraph (g)(6) of this section, on the

date the consolidated group is deemed

to make the election), the members of

the consolidated group treat their stock

in the Institution as worthless. (See

§§ 1.337(d)-1 and 1.1502–20 for

potential limitations on the group’s

worthless stock deduction.) In all other

cases, the consolidated group will be

treated as owning stock of a nonmember

corporation until such stock is disposed

of or becomes worthless under rules

otherwise applicable.

(3) Toll charge. The amount described

in this paragraph (g)(3) is the excess of

the Institution’s liabilities over the

adjusted bases of its assets immediately

before the Institution is placed in

Agency receivership (or, in the case of

a deemed election under paragraph

(g)(6) of this section, immediately before

the consolidated group is deemed to

make the election). In computing this

amount, the adjusted bases of an

Institution’s assets are reduced by the

amount of the Institution’s reserves for

bad debts under section 585 or 593,

other than supplemental reserves under

section 593. For purposes of this

paragraph (g)(3), an Institution is treated

as a single entity that includes the assets

and liabilities of its Consolidated

Subsidiaries, with appropriate

adjustments to prevent duplication. The

amount described in this paragraph

(g)(3) for alternative minimum tax

purposes is determined using

alternative minimum tax basis,

deductions, and all other items required

to be taken into account. In computing

the increase in the group’s taxable

income or alternative minimum taxable

income, sections 56(d)(1), 382 and 383

and §§ 1.1502–15, 1.1502–21 and

1.1502–22 do not limit the use of the

attributes of the Institution and its

Consolidated Subsidiaries to the extent,

if any, that the inclusion of the amount

described in this paragraph (g)(3) in

income would result in the group

having taxable income or alternative

minimum taxable income (determined

without regard to this sentence) for the

taxable year. The preceding sentence

does not apply to any limitation under

section 382 or 383 or §§ 1.1502–15,

1.1502–21, or 1.1502–22 that arose in

connection with or prior to a

corporation becoming a Consolidated

Subsidiary of the Institution.

(4) Treatment of Institutions after

disaffiliation—(i) In general. If the

election under this paragraph (g) is

made with respect to an Institution,

immediately after the Institution is

placed in Agency receivership (or, in

the case of a deemed election under

paragraph (g)(6) of this section,

immediately after the consolidated

group is deemed to make the election),

the Institution and each of its

Consolidated Subsidiaries are treated for

income tax purposes as new

corporations that are not members of the

electing group’s affiliated group. Each

new corporation retains the TIN of the

corresponding disaffiliated corporation

and is treated as having received the

assets and liabilities of the

corresponding disaffiliated corporation

in a transaction to which section 351

applies (and in which no gain was

recognized under section 357(c) or

otherwise). Thus, the new corporation

has no net operating or capital loss

carryforwards. An election under this

paragraph (g) does not terminate the

single entity treatment of a Bridge Bank

and its Residual Entities provided in

paragraph (e) of this section.

(ii) FFA. A new Institution is treated

as having a non- interest bearing,

nontransferable account receivable for

future FFA with a basis equal to the

amount described in paragraph (g)(3) of

this section. If a disaffiliated Institution

has a deferred FFA account at the time
66100 Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations

of its disaffiliation, the corresponding

new Institution succeeds to and takes

into account that deferred FFA account.

(iii) Filing of consolidated returns. If

a disaffiliated Institution has

Consolidated Subsidiaries at the time of

its disaffiliation, the corresponding new

Institution is required to file a

consolidated income tax return with the

subsidiaries in accordance with the

regulations under section 1502.

(iv) Status as Institution. If an

Institution is disaffiliated under this

paragraph (g), the resulting new

corporation is treated as an Institution

for purposes of the regulations under

section 597 regardless of whether it is a

bank or domestic building and loan

association within the meaning of

section 597.

(v) Loss carrybacks. To the extent a

carryback of losses would result in a

refund being paid to a fiduciary under

section 6402(i), an Institution or

Consolidated Subsidiary with respect to

which an election under this paragraph

(g) (other than under paragraph (g)(6)(ii)

of this section) applies is allowed to

carry back losses as if the Institution or

Consolidated Subsidiary had continued

to be a member of the consolidated

group that made the election.

(5) Affirmative election—(i) Original

Institution—(A) Manner of making

election. Except as otherwise provided

in paragraph (g)(6) of this section, a

consolidated group makes the election

provided by this paragraph (g) by

sending a written statement by certified

mail to the affected Institution on or

before the later of 120 days after its

placement in Agency receivership or

May 31, 1996. The statement must

contain the following legend at the top

of the page: ‘‘THIS IS AN ELECTION

UNDER § 1.597–4(g) TO EXCLUDE THE

BELOW-REFERENCED INSTITUTION

AND CONSOLIDATED SUBSIDIARIES

FROM THE AFFILIATED GROUP,’’ and

must include the names and taxpayer

identification numbers of the common

parent and of the Institution and

Consolidated Subsidiaries to which the

election applies, and the date on which

the Institution was placed in Agency

receivership. The consolidated group

must send a similar statement to all

subsidiary Institutions placed in Agency

receivership during the consistency

period described in paragraph (g)(5)(ii)

of this section. (Failure to satisfy the

requirement in the preceding sentence,

however, does not invalidate the

election with respect to any subsidiary

Institution placed in Agency

receivership during the consistency

period described in paragraph (g)(5)(ii)

of this section.) The consolidated group

must include a copy of any election

statement and accompanying certified

mail receipt as part of its first income

tax return filed after the due date under

this paragraph (g)(5) for such statement.

A statement must be attached to this

return indicating that the individual

who signed the election was authorized

to do so on behalf of the consolidated

group. Agency cannot make this

election under the authority of section

6402(i) or otherwise.

(B) Consistency limitation on

affirmative elections. A consolidated

group may make an affirmative election

under this paragraph (g)(5) with respect

to a subsidiary Institution placed in

Agency receivership only if the group

made, or is deemed to have made, the

election under this paragraph (g) with

respect to every subsidiary Institution of

the group placed in Agency receivership

on or after May 10, 1989 and within five

years preceding the date the subject

Institution was placed in Agency

receivership.

(ii) Effect on Institutions placed in

receivership simultaneously or

subsequently. An election under this

paragraph (g), other than under

paragraph (g)(6)(ii) of this section,

applies to the Institution with respect to

which the election is made or deemed

made (the original Institution) and each

subsidiary Institution of the group

placed in Agency receivership or

deconsolidated in contemplation of

Agency Control or the receipt of FFA

simultaneously with the original

Institution or within five years

thereafter.

(6) Deemed Election—(i)

Deconsolidations in contemplation. If

one or more members of a consolidated

group deconsolidate (within the

meaning of § 1.1502–19(c)(1)(ii)(B)) a

subsidiary Institution in contemplation

of Agency Control or the receipt of FFA,

the consolidated group is deemed to

make the election described in this

paragraph (g) with respect to the

Institution on the date the

deconsolidation occurs. A subsidiary

Institution is conclusively presumed to

have been deconsolidated in

contemplation of Agency Control or the

receipt of FFA if either event occurs

within six months after the

deconsolidation.

(ii) Transfers to a Bridge Bank from

multiple groups. On the day an

Institution’s transfer of deposit

liabilities to a Bridge Bank results in the

Bridge Bank holding deposit liabilities

from both a subsidiary Institution and

an Institution not included in the

subsidiary Institution’s consolidated

group, each consolidated group of

which a transferring Institution or the

Bridge Bank is a subsidiary is deemed

to make the election described in this

paragraph (g) with respect to its

subsidiary Institution. If deposit

liabilities of another Institution that is a

subsidiary member of any consolidated

group subsequently are transferred to

the Bridge Bank, the consolidated group

of which the Institution is a subsidiary

is deemed to make the election

described in this paragraph (g) with

respect to that Institution at the time of

the subsequent transfer.

(h) Examples. The following examples

illustrate the provisions of this section:

Facts. Corporation X, the common parent

of a consolidated group, owns all the stock

(with a basis of $4 million) of Institution M,

an insolvent Institution with no Consolidated

Subsidiaries. At the close of business on

April 30, 1996, M has $4 million of deposit

liabilities, $1 million of other liabilities, and

assets with an adjusted basis of $4 million

and a fair market value of $3 million.

Example 1. Effect of receivership on

consolidation. On May 1, 1996, Agency

places M in receivership and begins

liquidating M. X does not make an election

under § 1.597–4(g). M remains a member of

the X consolidated group after May 1, 1996.

Section 1.597–4(f)(1).

Example 2. Effect of Bridge Bank on

consolidation—(i) Additional facts. On May

1, 1996, Agency places M in receivership and

causes M to transfer all of its assets and

deposit liabilities to Bridge Bank MB.

(ii) Consequences without an election to

disaffiliate. M recognizes no gain or loss from

the transfer and MB succeeds to M’s basis in

the transferred assets, M’s items described in

section 381(c) (subject to the conditions and

limitations specified in section 381(c)) and

TIN. Section 1.597–4(d)(1). (If M had a

deferred FFA account, MB would also

succeed to that account. Section 1.597–

4(d)(1).) MB continues M’s taxable year and

succeeds to M’s status as a member of the X

consolidated group after May 1, 1996.

Section 1.597–4 (d)(1) and (f). MB and M are

treated as a single entity for income tax

purposes. Section 1.597–4(e).

(iii) Consequences with an election to

disaffiliate. If, on July 1, 1996, X makes an

election under § 1.597–4(g) with respect to

M, the following consequences are treated as

occurring immediately before M was placed

in Agency receivership. M must include $1

million ($5 million of liabilities—$4 million

of adjusted basis) in income as of May 1,

1996. Section 1.597–4(g) (2) and (3). M is

then treated as a new corporation that is not

a member of the X consolidated group and

that has assets (including a $1 million

account receivable for future FFA) with a

basis of $5 million and $5 million of

liabilities received from disaffiliated

corporation M in a section 351 transaction.

New corporation M retains the TIN of

disaffiliated corporation M. Section 1.597–

4(g)(4). Immediately after the disaffiliation,

new corporation M is treated as transferring

its assets and deposit liabilities to Bridge

Bank MB. New corporation M recognizes no

gain or loss from the transfer and MB

succeeds to M’s TIN and taxable year.
Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations 66101

Section 1.597–4(d)(1). Bridge Bank MB is

treated as a single entity that includes M and

has $5 million of liabilities, an account

receivable for future FFA with a basis of $1

million, and other assets with a basis of $4

million. Section 1.597–4(d)(1).

§ 1.597–5 Taxable Transfers.

(a) Taxable Transfers—(1) Defined.

The term Taxable Transfer means—

(i) A transaction in which an entity

transfers to a transferee other than a

Bridge Bank—

(A) Any deposit liability (whether or

not the Institution also transfers assets),

if FFA is provided in connection with

the transaction; or

(B) Any asset for which Agency or a

Controlled Entity has any financial

obligation (e.g., pursuant to a Loss

Guarantee or Agency Obligation); or

(ii) A deemed transfer of assets

described in paragraph (b) of this

section.

(2) Scope. This section provides rules

governing Taxable Transfers. Rules

applicable to both actual and deemed

asset acquisitions are provided in

paragraphs (c) and (d) of this section.

Special rules applicable only to deemed

asset acquisitions are provided in

paragraph (e) of this section.

(b) Deemed asset acquisitions upon

stock purchase—(1) In general. In a

deemed transfer of assets under this

paragraph (b), an Institution (including

a Bridge Bank or a Residual Entity) or

a Consolidated Subsidiary of the

Institution (the Old Entity) is treated as

selling all of its assets in a single

transaction and is treated as a new

corporation (the New Entity) that

purchases all of the Old Entity’s assets

at the close of the day immediately

preceding the occurrence of an event

described in paragraph (b)(2) of this

section. However, such an event results

in a deemed transfer of assets under this

paragraph (b) only if it occurs—

(i) In connection with a transaction in

which FFA is provided;

(ii) While the Old Entity is a Bridge

Bank;

(iii) While the Old Entity has a

positive balance in a deferred FFA

account (see § 1.597–2(c)(4)(v) regarding

the optional accelerated recapture of

deferred FFA); or

(iv) With respect to a Consolidated

Subsidiary, while the Institution of

which it is a Consolidated Subsidiary is

under Agency Control.

(2) Events. A deemed transfer of assets

under this paragraph (b) results if the

Old Entity—

(i) Becomes a non-member within the

meaning of § 1.1502–32(d)(4) of its

consolidated group (other than pursuant

to an election under § 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 § 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

§ 1.597–2 (a) and (c) for rules regarding

the inclusion of FFA in income and

§ 1.597–2(a)(1) for related rules

regarding FFA provided to

shareholders.) The Net Worth

Assistance is treated as an asset of the

transferor that is sold to the New Entity

or Acquiring in the Taxable Transfer.

(2) Amount realized in a Taxable

Transfer. In a Taxable Transfer

described in paragraph (a)(1)(i) of this

section, the amount realized is

determined under section 1001(b) by

reference to the consideration paid for

the assets. In a Taxable Transfer

described in paragraph (a)(1)(ii) of this

section, the amount realized is the sum

of the grossed-up basis of the stock

acquired in connection with the Taxable

Transfer (excluding stock acquired from

the Old or New Entity), plus the amount

of liabilities assumed or taken subject to

in the deemed transfer, plus other

relevant items. The grossed-up basis of

the acquired stock equals the acquirors’

basis in the acquired stock divided by

the percentage of the Old Entity’s stock

(by value) attributable to the acquired

stock.

(3) Allocation of amount realized—(i)

In general. The amount realized under

paragraph (c)(2) of this section is

allocated among the assets transferred in

the Taxable Transfer in the same

manner as amounts are allocated among

assets under § 1.338(b)–2T (b), (c)(1) and

(2).

(ii) Modifications to general rule. This

paragraph (c)(3)(ii) modifies certain of

the allocation rules of paragraph (c)(3)(i)

of this section. Agency Obligations and

assets covered by Loss Guarantees in the

hands of the New Entity or Acquiring

are treated as Class II assets. Stock of a

Consolidated Subsidiary is treated as a

Class II asset to the extent the fair

market value of the Consolidated

Subsidiary’s Class I and Class II assets

exceeds the amount of its liabilities. The

fair market value of an Agency

Obligation is deemed to equal its

adjusted issue price immediately before

the Taxable Transfer. The fair market

value of an asset covered by a Loss

Guarantee immediately after the Taxable

Transfer is deemed to be not less than

the greater of the asset’s highest

guaranteed value or the highest price at

which the asset can be put.

(d) Treatment of a New Entity and

Acquiring—(1) Purchase price. The

purchase price for assets acquired in a

Taxable Transfer described in paragraph

(a)(1)(i) of this section is the cost of the

assets acquired. See § 1.1060–1T(c)(1).

The purchase price for assets acquired

in a Taxable Transfer described in

paragraph (a)(1)(ii) of this section is the

sum of the grossed-up basis of the stock

acquired in connection with the Taxable

Transfer (excluding stock acquired from

the Old or New Entity), plus the amount

of liabilities assumed or taken subject to

in the deemed transfer, plus other

relevant items. The grossed-up basis of

the acquired stock equals the acquirors’

basis in the acquired stock divided by

the percentage of the Old Entity’s stock

(by value) attributable to the acquired

stock. FFA provided in connection with

a Taxable Transfer is not included in the

New Entity’s or Acquiring’s purchase

price for the acquired assets. Any Net

Worth Assistance so provided is treated

as an asset of the transferor sold to the

New Entity or Acquiring in the Taxable

Transfer.

(2) Allocation of basis—(i) In general.

Except as otherwise provided in this

paragraph (d)(2), the purchase price

determined under paragraph (d)(1) of

this section is allocated among the

assets transferred in the Taxable

Transfer in the same manner as amounts

are allocated among assets under

§ 1.338(b)–2T(b), (c) (1) and (2).

(ii) Modifications to general rule. The

allocation rules contained in paragraph

(c)(3)(ii) of this section apply to the

allocation of basis among assets

acquired in a Taxable Transfer. No basis

is allocable to Agency’s agreement to

provide Loss Guarantees, yield

maintenance payments, cost to carry or

cost of funds reimbursement payments,

or expense reimbursement or indemnity

payments. A New Entity’s basis in assets

it receives from its shareholders is
66102 Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations

determined under general principles of

income taxation and is not governed by

this paragraph (d).

(iii) Allowance and recapture of

additional basis in certain cases. If the

fair market value of the Class I and Class

II assets acquired in a Taxable Transfer

is greater than the New Entity’s or

Acquiring’s purchase price for the

acquired assets, the basis of the Class I

and Class II assets equals their fair

market value. The amount by which the

fair market value of the Class I and Class

II assets exceeds the purchase price is

included ratably as ordinary income by

the New Entity or Acquiring over a

period of six taxable years beginning in

the year of the Taxable Transfer. The

New Entity or Acquiring must include

as ordinary income the entire amount

remaining to be recaptured under the

preceding sentence in the taxable year

in which an event occurs that would

accelerate inclusion of an adjustment

under section 481.

(iv) Certain post-transfer

adjustments—(A) Agency Obligations. If

an adjustment to the principal amount

of an Agency Obligation or cash

payment to reflect a more accurate

determination of the condition of the

Institution at the time of the Taxable

Transfer is made before the earlier of the

date the New Entity or Acquiring files

its first post-transfer income tax return

or the due date of that return (including

extensions), the New Entity or

Acquiring must adjust its basis in its

acquired assets to reflect the adjustment.

In making adjustments to the New

Entity’s or Acquiring’s basis in its

acquired assets, paragraph (c)(3)(ii) of

this section is applied by treating an

adjustment to the principal amount of

an Agency Obligation pursuant to the

first sentence of this paragraph

(d)(2)(iv)(A) as occurring immediately

before the Taxable Transfer. (See

§ 1.597–3(c)(3) for rules regarding other

adjustments to the principal amount of

an Agency Obligation.)

(B) Assets covered by a Loss

Guarantee. If, immediately after a

Taxable Transfer, an asset is not covered

by a Loss Guarantee but the New Entity

or Acquiring has the right to designate

specific assets that will be covered by a

Loss Guarantee, the New Entity or

Acquiring must treat any asset so

designated as having been subject to the

Loss Guarantee at the time of the

Taxable Transfer. The New Entity or

Acquiring must adjust its basis in the

covered assets and in its other acquired

assets to reflect the designation in the

manner provided by paragraph (d)(2) of

this section. The New Entity or

Acquiring must make appropriate

adjustments in subsequent taxable years

if the designation is made after the New

Entity or Acquiring files its first posttransfer income tax return or the due

date of that return (including

extensions) has passed.

(e) Special rules applicable to Taxable

Transfers that are deemed asset

acquisitions—(1) Taxpayer

identification numbers. Except as

provided in paragraph (e)(3) of this

section, a New Entity succeeds to the

TIN of the transferor in a deemed sale

under paragraph (b) of this section.

(2) Consolidated Subsidiaries—(i) In

general. A Consolidated Subsidiary that

is treated as selling its assets in a

Taxable Transfer under paragraph (b) of

this section is treated as engaging

immediately thereafter in a complete

liquidation to which section 332

applies. The consolidated group of

which the Consolidated Subsidiary is a

member does not take into account gain

or loss on the sale, exchange, or

cancellation of stock of the Consolidated

Subsidiary in connection with the

Taxable Transfer.

(ii) Certain minority shareholders.

Shareholders of the Consolidated

Subsidiary that are not members of the

consolidated group that includes the

Institution do not recognize gain or loss

with respect to shares of Consolidated

Subsidiary stock retained by the

shareholder. The shareholder’s basis for

that stock is not affected by the Taxable

Transfer.

(3) Bridge Banks and Residual

Entities—(i) In general. A Bridge Bank

or Residual Entity’s sale of assets to a

New Entity under paragraph (b) of this

section is treated as made by a single

entity under § 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 § 1.597–4(f)(1) ceases.

However, the New Entity deemed to

acquire the assets of a Residual Entity is

a member of the selling consolidated

group after the deemed sale. The group’s

basis or excess loss account in the stock

of the New Entity that is deemed to

acquire the assets of the Residual Entity

is the group’s basis or excess loss

account in the stock of the Bridge Bank

immediately before the deemed sale, as

adjusted for the results of the sale.

(4) Certain returns. If an Old Entity

without Continuing Equity is not a

subsidiary of a consolidated group at the

time of the Taxable Transfer, the

controlling Agency must file all income

tax returns for the Old Entity for periods

ending on or prior to the date of the

deemed sale described in paragraph (b)

of this section that are not filed as of

that date.

(5) Basis limited to fair market value.

If all of the stock of the corporation is

not acquired on the date of the Taxable

Transfer, the Commissioner may make

appropriate adjustments under

paragraphs (c) and (d) of this section to

the extent using a grossed-up basis of

the stock of a corporation results in an

aggregate amount realized for, or basis

in, the assets other than the aggregate

fair market value of the assets.

(f) Examples. The following examples

illustrate the provisions of this section:

Example 1. Branch sale resulting in

Taxable Transfer. (i) Institution M is a

calendar year taxpayer in Agency

receivership. M is not a member of a

consolidated group. On January 1, 1997, M

has $200 million of liabilities (including

deposit liabilities) and assets with an

adjusted basis of $100 million. M has no

income or loss for 1997 and, except as

described below, receives no FFA. On

September 30, 1997, Agency causes M to

transfer six branches (with assets having an

adjusted basis of $1 million) together with

$120 million of deposit liabilities to N. In

connection with the transfer, Agency

provides $121 million in cash to N.

(ii) The transaction is a Taxable Transfer in

which M receives $121 million of Net Worth

Assistance. Section 1.597–5(a)(1). (M is

treated as directly receiving the $121 million

of Net Worth Assistance immediately before

the Taxable Transfer. Section 1.597–5(c)(1).)

M transfers branches having a basis of $1

million and is treated as transferring $121

million in cash (the Net Worth Assistance) to

N in exchange for N’s assumption of $120

million of liabilities. Thus, M realizes a loss

of $2 million on the transfer. The amount of

the FFA M must include in its income in

1997 is limited by § 1.597–2(c) to $102

million, which is the sum of the $100 million

excess of M’s liabilities ($200 million) over

the total adjusted basis of its assets ($100

million) at the beginning of 1997, plus the $2

million excess for the taxable year, which

results from the Taxable Transfer, of M’s

deductions (other than carryovers) over its

gross income other than FFA. M must

establish a deferred FFA account for the

remaining $19 million of FFA. Section

1.597–2(c)(4).

(iii) N, as Acquiring, must allocate its $120

million purchase price for the assets acquired

from M among those assets. Cash is a Class

I asset. The branch assets are in Classes III

and IV. N’s adjusted basis in the cash is its

amount, i.e., $121 million. Section 1.597–

5(d)(2). Because this amount exceeds N’s

purchase price for all of the acquired assets

by $1 million, N allocates no basis to the

other acquired assets and, under § 1.597–

5(d)(2), must recapture the $1 million excess

at an annual rate of $166,667 in the six

consecutive taxable years beginning with
Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations 66103

1997 (subject to acceleration for certain

events).

Example 2. Stock issuance by Bridge Bank

causing Taxable Transfer. (i) On April 1,

1996, Institution P is placed in receivership

and caused to transfer assets and liabilities to

Bridge Bank PB. On August 31, 1996, the

assets of PB consist of $20 million in cash,

loans outstanding with an adjusted basis of

$50 million and a fair market value of $40

million, and other non-financial assets

(primarily branch assets and equipment) with

an adjusted basis of $5 million. PB has

deposit liabilities of $95 million and other

liabilities of $5 million. P, the Residual

Entity, holds real estate with an adjusted

basis of $10 million and claims in litigation

having a zero basis. P retains no deposit

liabilities and has no other liabilities (except

its liability to Agency for having caused its

deposit liabilities to be satisfied).

(ii) On September 1, 1996, Agency causes

PB to issue 100 percent of its common stock

for $2 million cash to X. On the same day,

Agency issues a $25 million note to PB. The

note bears a fixed rate of interest in excess

of the applicable federal rate in effect for

September 1, 1996. Agency provides Loss

Guarantees guaranteeing PB a value of $50

million for PB’s loans outstanding.

(iii) The stock issuance is a Taxable

Transfer in which PB is treated as selling all

of its assets to a new corporation, New PB.

Section 1.597–5(b)(1). PB is treated as

directly receiving $25 million of Net Worth

Assistance (the issue price of the Agency

Obligation) immediately before the Taxable

Transfer. Section 1.597–3(c)(2); § 1.597-

5(c)(1). The amount of FFA PB must include

in income is determined under § 1.597–2(a)

and (c). PB in turn is deemed to transfer the

note to New PB in the Taxable Transfer,

together with $20 million of cash, all its

loans outstanding (with a basis of $50

million) and its other non-financial assets

(with a basis of $5 million). The amount

realized by PB from the sale is $100 million,

the amount of PB’s liabilities deemed to be

assumed by New PB. This amount realized

equals PB’s basis in its assets and thus, PB

realizes no gain or loss on the transfer to New

PB.

(iv) Residual Entity P also is treated as

selling all its assets (consisting of real estate

and claims in litigation) for $0 (the amount

of consideration received by P) to a new

corporation (New P) in a Taxable Transfer.

Section 1.597–5(b)(3). (P’s only liability is to

Agency and a liability to Agency is not

treated as a debt under § 1.597–3(b).) Thus,

P realizes a $10 million loss on the transfer

to New P. The combined return filed by PB

and P for 1996 will reflect a total loss on the

Taxable Transfer of $10 million ($0 for PB

and $10 million for P). Section 1.597–5(e)(3).

That return also will reflect FFA income from

the Net Worth Assistance, determined under

§ 1.597–2 (a) and (c).

(v) New PB is treated as having acquired

the assets it acquired from PB for $100

million, the amount of liabilities assumed. In

allocating basis among these assets, New PB

treats the Agency note and the loans

outstanding (which are covered by Loss

Guarantees) as Class II assets. For the

purpose of allocating basis, the fair market

value of the Agency note is deemed to equal

its adjusted issue price immediately before

the transfer, $25 million. The fair market

value of the loans is deemed not to be less

than the guaranteed value of $50 million.

(vi) New P is treated as having acquired its

assets for no consideration. Thus its basis in

its assets immediately after the transfer is

zero. New PB and New P are not treated as

a single entity. Section 1.597–5(e)(3).

Example 3. Taxable Transfer of previously

disaffiliated Institution. (i) Corporation X, the

common parent of a consolidated group,

owns all the stock of Institution M, an

insolvent Institution with no Consolidated

Subsidiaries. On April 30, 1996, M has $4

million of deposit liabilities, $1 million of

other liabilities, and assets with an adjusted

basis of $4 million and a fair market value

of $3 million. On May 1, 1996, Agency places

M in receivership. X elects under § 1.597–

4(g) to disaffiliate M. Accordingly, as of May

1, 1996, new corporation M is not a member

of the X consolidated group. On May 1, 1996,

Agency causes M to transfer all of its assets

and liabilities to Bridge Bank MB. Under

§ 1.597–4(e), MB and M are thereafter treated

as a single entity which has $5 million of

liabilities, an account receivable for future

FFA with a basis of $1 million, and other

assets with a basis of $4 million. Section

1.597–4(g)(4).

(ii) During May 1996, MB earns $25,000 of

interest income and accrues $20,000 of

interest expense on depositor accounts and

there is no net change in deposits other than

the additional $20,000 of interest expense

accrued on depositor accounts. MB pays

$5,000 of wage expenses and has no other

items of income or expense.

(iii) On June 1, 1996, Agency causes MB to

issue 100 percent of its stock to corporation

Y. In connection with the stock issuance,

Agency provides an Agency Obligation for $2

million and no other FFA.

(iv) The stock issuance results in a Taxable

Transfer. Section 1.597–5(b). MB is treated as

receiving the Agency Obligation immediately

prior to the Taxable Transfer. Section 1.597–

5(c)(1). MB has $1 million of basis in its

account receivable for FFA. This receivable

is treated as satisfied, offsetting $1 million of

the $2 million of FFA provided by Agency

in connection with the Taxable Transfer. The

status of the remaining $1 million of FFA as

includible income is determined as of the

end of the taxable year under § 1.597–2(c).

However, under § 1.597–2(b), MB obtains a

$2 million basis in the Agency Obligation

received as FFA.

(v) Under § 1.597–5(c)(2), in the Taxable

Transfer, Old Entity MB is treated as selling,

to New Entity MB, all of Old Entity MB’s

assets, having a basis of $6,020,000 (the

original $4 million of asset basis as of April

30, 1996, plus $20,000 net cash from May

1996 activities, plus $2 million in the Agency

Obligation received as FFA), for $5,020,000,

the amount of Old Entity MB’s liabilities

assumed by New Entity MB pursuant to the

Taxable Transfer. Therefore, Old Entity MB

recognizes, in the aggregate, a loss of $1

million from the Taxable Transfer.

(vi) Because this $1 million loss causes Old

Entity MB’s deductions to exceed its gross

income (determined without regard to FFA)

by $1 million, Old Entity MB must include

in its income the $1 million of FFA not offset

by the FFA receivable. Section 1.597–2(c).

(As of May 1, 1996, Old Entity MB’s

liabilities ($5,000,000) did not exceed MB’s

$5 million adjusted basis of its assets. For the

taxable year, MB’s deductions of $1,025,000

($1,000,000 loss from the Taxable Transfer,

$20,000 interest expense and $5,000 of wage

expense) exceeded its gross income

(disregarding FFA) of $25,000 (interest

income) by $1,000,000. Thus, under § 1.597–

2(c), MB includes in income the entire

$1,000,000 of FFA not offset by the FFA

receivable.)

(vii) Therefore, Old Entity MB’s taxable

income for the taxable year ending on the

date of the Taxable Transfer is $0.

(viii) Residual Entity M is also deemed to

engage in a deemed sale of its assets to New

Entity M under § 1.597–5(b)(3), but there are

no tax consequences as M has no assets or

liabilities at the time of the deemed sale.

(ix) Under § 1.597–5(d)(1), New Entity MB

is treated as purchasing Old Entity MB’s

assets for $5,020,000, the amount of New

Entity MB’s liabilities. Of this, $2,000,000 is

allocated to the $2 million Agency

Obligation, and $3,020,000 is allocated to the

other assets New Entity MB is treated as

purchasing in the Taxable Transfer.

Example 4. Loss Sharing. Institution N

acquires assets and assumes liabilities of

another Institution in a Taxable Transfer.

Among the assets transferred are three

parcels of real estate. In the hands of the

transferring Institution, these assets had book

values of $100,000 each. In connection with

the Taxable Transfer, Agency agrees to

reimburse Institution N for 80 percent of any

loss (based on the original book value)

realized on the disposition or charge-off of

the three properties. This arrangement

constitutes a Loss Guarantee. Thus, in

allocating basis, Institution N treats the three

parcels as Class II assets. By virtue of the

arrangement with the Agency, Institution N

is assured that the parcels will not be worth

less to it than $80,000 each, because even if

the properties are worthless, Agency will

reimburse 80 percent of the loss. Although

Institution could obtain payments under the

Loss Guarantee if the properties are worth

more, it is not guaranteed that it will realize

more than $80,000. Accordingly, $80,000 is

the highest guaranteed value of the three

parcels. Institution N will allocate basis to

the Class II assets up to their fair market

value. For this purpose, the fair market value

of the three parcels is not less than $80,000

each. Section 1.597–5(d)(2)(ii); § 1.597–

5(c)(3)(ii).

§ 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
66104 Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations

Agency is within the sole discretion of

the Commissioner. In determining

whether tax would be borne by Agency,

the Commissioner will disregard

indemnity, tax-sharing, or similar

obligations of Agency, an Institution, or

its Consolidated Subsidiaries. Collection

of the several income tax liability under

§ 1.1502–6 from members of an

Institution’s consolidated group other

than the Institution or its Consolidated

Subsidiaries is not affected by this

section. Income tax will continue to be

subject to collection except as

specifically limited in this section. This

section does not apply to taxes other

than income taxes.

(b) Amount of tax attributable to FFA

or gain on a Taxable Transfer. For

purposes of paragraph (a) of this section,

the amount of income tax in a taxable

year attributable to the inclusion of FFA

or gain from a Taxable Transfer in the

income of an Institution (or a

Consolidated Subsidiary) is the excess

of the actual income tax liability of the

Institution (or the consolidated group in

which the Institution is a member); over

the income tax liability of the Institution

(or the consolidated group in which the

Institution is a member) determined

without regard to FFA or gain or loss on

the Taxable Transfer.

(c) Reporting of uncollected tax. A

taxpayer must specify on the front page

of Form 1120 (U.S. Corporate Income

Tax Return), to the left of the space

provided for ‘‘Total Tax,’’ the amount of

income tax for the taxable year that is

potentially not subject to collection

under this section. If an Institution is a

subsidiary member of a consolidated

group, the amount specified as not

subject to collection is zero.

(d) Assessments of tax to offset

refunds. Income tax that is not collected

under this section will be assessed and,

thus, used to offset any claim for refund

made by or on behalf of the Institution,

the Consolidated Subsidiary or any

other corporation with several liability

for the tax.

(e) Collection of taxes from Acquiring

or a New Entity—(1) Acquiring. No

income tax liability (including the

several liability for taxes under

§ 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 § 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.

§ 1.597–7 Effective date.

(a) FIRREA effective date. Section 597,

as amended by section 1401 of the

Financial Institutions Reform, Recovery,

and Enforcement Act of 1989 (FIRREA),

Public Law 101–73, is generally

effective for any FFA received or

accrued by an Institution on or after

May 10, 1989, and for any transaction in

connection with which such FFA is

provided, unless the FFA is provided in

connection with an acquisition

occurring prior to May 10, 1989. See

§ 1.597–8 for rules regarding FFA

received or accrued on or after May 10,

1989, that relates to an acquisition that

occurred before May 10, 1989.

(b) Effective date of regulations.

Except as otherwise provided in this

section, §§ 1.597–1 through 1.597–6

apply to taxable years ending on or after

April 22, 1992. However, the provisions

of §§ 1.597–1 through 1.597–6 do not

apply to FFA received or accrued for

taxable years ending on or after April

22, 1992, in connection with an Agency

assisted acquisition within the meaning

of Notice 89–102 (1989–2 C.B. 436; see

§ 601.601(d)(2)) (which does not include

a transfer to a Bridge Bank), that occurs

before April 22, 1992. Taxpayers not

subject to §§ 1.597–1 through 1.597–6

must comply with an interpretation of

the statute that is reasonable in light of

the legislative history and applicable

administrative pronouncements. For

this purpose, the rules contained in

Notice 89–102 apply to the extent

provided in the Notice.

(c) Elective application to prior years

and transactions—(1) In general. Except

as limited in this paragraph (c), an

election is available to apply §§ 1.597–

1 through 1.597–6 to taxable years prior

to the general effective date of these

regulations. A consolidated group may

elect to apply §§ 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 §§ 1.597–1 through 1.597–

6 to all taxable years to which section

597, as amended by FIRREA, applies for

which it is not a member of a

consolidated group. The election is

irrevocable.

(2) Election unavailable in certain

cases—(i) Statute of limitations closed.

The election cannot be made if the

period for assessment and collection of

tax has expired under the rules of

section 6501 for any taxable year in

which §§ 1.597–1 through 1.597–6

would affect the determination of the

electing entity’s or group’s income,

deductions, gain, loss, basis, or other

items.

(ii) No section 338 election under

Notice 89–102. The election cannot be

made with respect to an Institution if,

under Notice 89–102, it was a Target

with respect to which a qualified stock

purchase was made, a timely election

under section 338 was not made, and on

April 22, 1992, a timely election under

section 338 could not be made.

(iii) Inconsistent treatment of

Institution that would be New Entity. If,

under § 1.597–5(b), an Institution would

become a New Entity before April 22,

1992, the election cannot be made with

respect to that Institution unless

elections are made by all relevant

persons such that §§ 1.597–1 through

1.597–6 apply both before and after the

deemed sale under § 1.597–5. However,

this requirement does not apply if,

under §§ 1.597–1 through 1.597–6, the

Institution would not have Continuing

Equity prior to the deemed sale.

(3) Expense reimbursements. Notice

89–102, 1989–2 C.B. 436, provides that

reimbursements paid or accrued

pursuant to an expense reimbursement

or indemnity arrangement are not

included in income but the taxpayer

may not deduct, or otherwise take into

account, the item of cost or expense to

which the reimbursement or indemnity

payment relates. With respect to an

Agency assisted acquisition within the

meaning of Notice 89–102 that occurs

before April 22, 1992, a taxpayer that

elects to apply these regulations

retroactively under this paragraph (c)

may continue to account for these items

under the rules of Notice 89–102.

(4) Procedural rules—(i) Manner of

making election. An Institution or

consolidated group makes the election

provided by this paragraph (c) by

attaching a written statement to, and

including it as a part of, the taxpayer’s

or consolidated group’s first annual

income tax return filed on or after

March 15, 1996. The statement must

contain the following legend at the top

of the page: ‘‘THIS IS AN ELECTION

UNDER § 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 § 1.597–7(c), IF THE
Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations 66105

LIMITATIONS PERIOD WOULD

EXPIRE EARLIER WITHOUT SUCH

EXTENSION, FOR ANY ITEMS

AFFECTED IN ANY TAXABLE YEAR

BY THE FILING OF THIS ELECTION,’’

and a declaration that either

‘‘AMENDED RETURNS WILL BE FILED

FOR ALL TAXABLE YEARS AFFECTED

BY THE FILING OF THIS ELECTION

WITHIN 180 DAYS OF MAKING THIS

STATEMENT, UNLESS SUCH

REQUIREMENT IS WAIVED IN

WRITING BY THE DISTRICT

DIRECTOR OR HIS DELEGATE’’ or

‘‘ALL RETURNS PREVIOUSLY FILED

ARE CONSISTENT WITH THE

PROVISIONS OF §§ 1.597–1 THROUGH

1.597–6,’’ and be signed by an

individual who is authorized to make

the election under this paragraph (c) on

behalf of the taxpayer. An election with

respect to a consolidated group must be

made by the common parent of the

group, not Agency, and applies to all

members of the group.

(ii) Effect of elective disaffiliation. To

make the affirmative election described

in § 1.597–4(g)(5) for an Institution

placed in Agency receivership in a

taxable year ending before April 22,

1992, the consolidated group must send

the affected Institution the statement

described in § 1.597–4(g)(5) on or before

May 31, 1996. Notwithstanding the

requirements of paragraph (c)(4)(i) of

this section, a consolidated group

sending such a statement is deemed to

make the election described in, and to

agree to the conditions contained in,

this paragraph (c). The consolidated

group must nevertheless attach the

statement described in paragraph

(c)(4)(i) of this section to its first annual

income tax return filed on or after

March 15, 1996.

(d) Reliance on prior guidance—(1)

Notice 89–102. Taxpayers may rely on

Notice 89–102, 1989–2 C.B. 436, to the

extent they acted in reliance on that

Notice prior to April 22, 1992. Such

reliance must be reasonable and

transactions with respect to which

taxpayers rely must be consistent with

the overriding policies of section 597, as

expressed in the legislative history.

(2) Notice FI–46–89—(i) In general.

Notice FI–46–89 was published in the

Federal Register on April 23, 1992 (57

FR 14804). Taxpayers may rely on the

provisions of §§ 1.597–1 through 1.597–

6 of that notice to the extent they acted

in reliance on those provisions prior to

December 21, 1995. Such reliance must

be reasonable and transactions with

respect to which taxpayers rely must be

consistent with the overriding policies

of section 597, as expressed in the

legislative history, as well as the

overriding policies of notice FI–46–89.

(ii) Taxable Transfers. Any taxpayer

described in this paragraph (d) that,

under notice FI–46–89, would be a New

Entity or Acquiring with respect to a

Taxable Transfer on or after April 22,

1992, and before December 21, 1995,

may apply the rules of that notice with

respect to such transaction.

PART 301—PROCEDURE AND

ADMINISTRATION

Par. 3. The authority citation for part

301 is amended by adding entries in

numerical order to read as follows:

Authority: 26 U.S.C. 7805 * * *

Section 301.7507–1 also issued under

26 U.S.C. 597.

Section 301.7507–9 also issued under

26 U.S.C. 597. * * *

Par. 4. Section 301.7507–1 is

amended by adding paragraph (b)(4) to

read as follows:

§ 301.7507–1 Banks and trust companies

covered.

* * * * *

(b) * * *

(4) The term ceased to do business

means the bank no longer accepts

deposits or makes loans and discounts,

and is winding up its affairs and is in

the process of liquidating its assets to

pay depositors. A bank will not be

considered to have ceased to do

business on account of a transaction in

which the bank—

(i) Transfers assets and liabilities to a

Bridge Bank in a transfer described in

§ 1.597–4 of this chapter;

(ii) Transfers assets and liabilities to

any person in a transaction to which

section 381(a) applies or in which the

transferee receives property with a

transferred basis;

(iii) Transfers assets or liabilities to

any person in a transaction in which

Federal Financial Assistance (as defined

in section 597) is provided to any party

to the transaction, unless all the Federal

Financial Assistance is deposit

insurance under § 301.7507–9(d); or

(iv) Transfers assets or liabilities to

any person in a transaction similar to

any transaction described in paragraphs

(b)(4) (i) through (iii) of this section.

This paragraph (b)(4) applies to taxable

years ending on or after April 22, 1992.

Par. 5. Section 301.7507–9 is

amended by adding a sentence to the

end of paragraph (d) to read as follows:

§ 301.7507–9 Termination of immunity.

* * * * *

(d) * * * For taxable years ending on

or after April 22, 1992, deposit

insurance does not include Federal

Financial Assistance (as defined in

section 597) and other payments

described in section 597(a) prior to its

amendment by the Financial

Institutions Reform, Recovery, and

Enforcement Act of 1989 and, therefore,

such payments must be taken into

account to determine whether a bank’s

assets are sufficient to meet claims of

depositors.

* * * * *

PART 602—OMB CONTROL NUMBERS

UNDER THE PAPERWORK

REDUCTION ACT

Par. 6. The authority citation for part

602 continues to read as follows:

Authority: 26 U.S.C. 7805.

Par. 7. In § 602.101, paragraph (c) is

amended by adding entries in numerical

order to the table to read as follows:

§ 602.101 OMB Control numbers.

* * * * *

(c) * * *

CFR part or section where

identified and described

Current

OMB control No.

* * * * *

1.597–2 ..................................... 1545–1300

1.597–4 ..................................... 1545–1300

1.597–6 ..................................... 1545–1300

1.597–7 ..................................... 1545–1300

* * * * *

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Approved: December 4, 1995.

Cynthia G. Beerbower,

Assistant Secretary of the Treasury

[FR Doc. 95–30827 Filed 12–20–95; 8:45 am]

BILLING CODE 4830–01–U

26 CFR Parts 1, 31, 35a, 301, and 602

[TD 8637]

RIN 1545–AT76

Backup Withholding, Statement

Mailing Requirements, and Due

Diligence

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final and temporary

regulations.

SUMMARY: This document provides final

rules on backup withholding under

sections 3406(a)(1) (A), (C), and (D) of

the Internal Revenue Code of 1986

(Code) when a payee fails to provide a

taxpayer identification number in the

required manner to a person required to

make an information return, when a

payee is subject to notified payee