48618 Federal Register / Vol. 82, No. 201 / Thursday, October 19, 2017 / Rules and Regulations 

AIRAC date State City Airport FDC No. FDC date Subject 

7–Dec–17 ..... SC Anderson ................ Anderson Rgnl ........................ 7/7115 9/26/17 RNAV (GPS) RWY 17, Amdt 1A. 

7–Dec–17 ..... FL Tampa ..................... Tampa Intl ............................... 7/7377 9/26/17 RNAV (GPS) RWY 1L, Amdt 2B. 

7–Dec–17 ..... OK Elk City ................... Elk City Rgnl Business ............ 7/7415 9/26/17 Takeoff Minimums and Obstacle 

DP, Amdt 1. 

7–Dec–17 ..... IN Connersville ............ Mettel Field .............................. 7/7481 10/3/17 VOR–A, Amdt 1A. 

7–Dec–17 ..... AZ Tucson .................... Tucson Intl ............................... 7/7560 9/26/17 RNAV (RNP) Y RWY 29R, OrigD. 

7–Dec–17 ..... AZ Tucson .................... Tucson Intl ............................... 7/7573 9/26/17 RNAV (GPS) RWY 21, Orig-A. 

7–Dec–17 ..... IL Chicago ................... Chicago O’Hare Intl ................. 7/7608 9/28/17 RNAV (GPS) RWY 15, Amdt 2E. 

7–Dec–17 ..... NY Schenectady ........... Schenectady County ............... 7/7666 9/26/17 RNAV (GPS) RWY 28, Orig-D. 

7–Dec–17 ..... TX Houston .................. George Bush Intercontinental/ 

Houston.

7/7831 10/3/17 GLS RWY 8L, Amdt 1A. 

7–Dec–17 ..... TX Houston .................. George Bush Intercontinental/ 

Houston.

7/7833 10/3/17 GLS RWY 8R, Amdt 1A. 

7–Dec–17 ..... TX Houston .................. George Bush Intercontinental/ 

Houston.

7/7834 10/3/17 GLS RWY 9, Amdt 1A. 

7–Dec–17 ..... TX Houston .................. George Bush Intercontinental/ 

Houston.

7/7837 10/3/17 GLS RWY 26L, Amdt 1A. 

7–Dec–17 ..... TX Houston .................. George Bush Intercontinental/ 

Houston.

7/7838 10/3/17 GLS RWY 26R, Amdt 1A. 

7–Dec–17 ..... FL Titusville .................. Space Coast Rgnl ................... 7/7946 10/2/17 RNAV (GPS) RWY 9, Amdt 1A. 

7–Dec–17 ..... PA Coatesville .............. Chester County G O Carlson .. 7/7990 9/26/17 ILS OR LOC RWY 29, Amdt 7. 

7–Dec–17 ..... PA Coatesville .............. Chester County G O Carlson .. 7/7996 9/26/17 RNAV (GPS) RWY 29, Orig. 

7–Dec–17 ..... PA Coatesville .............. Chester County G O Carlson .. 7/7997 9/26/17 RNAV (GPS) RWY 11, Orig. 

7–Dec–17 ..... MA Provincetown .......... Provincetown Muni .................. 7/8468 9/27/17 RNAV (GPS) RWY 25, Orig-B. 

7–Dec–17 ..... MA Provincetown .......... Provincetown Muni .................. 7/8469 9/27/17 NDB RWY 25, Amdt 2B. 

7–Dec–17 ..... KS Manhattan ............... Manhattan Rgnl ....................... 7/8555 9/26/17 RNAV (GPS) RWY 21, Amdt 1. 

7–Dec–17 ..... KS Manhattan ............... Manhattan Rgnl ....................... 7/8586 9/26/17 VOR/DME–F, Amdt 1. 

7–Dec–17 ..... KS Manhattan ............... Manhattan Rgnl ....................... 7/8589 9/26/17 RNAV (GPS) RWY 3, Amdt 1. 

7–Dec–17 ..... KS Manhattan ............... Manhattan Rgnl ....................... 7/8593 9/26/17 ILS OR LOC/DME RWY 3, 

AMDT 7A. 

7–Dec–17 ..... MS Madison .................. Bruce Campbell Field .............. 7/8620 9/26/17 RNAV (GPS) RWY 17, Amdt 1B. 

7–Dec– 17 .... MS Madison .................. Bruce Campbell Field .............. 7/8624 9/26/17 RNAV (GPS) RWY 35, Orig-B. 

7–Dec–17 ..... CA Susanville ............... Susanville Muni ....................... 7/9026 9/27/17 RNAV (GPS) RWY 29, Amdt 1A. 

7–Dec–17 ..... LA Slidell ...................... Slidell ....................................... 7/9663 10/2/17 RNAV (GPS) RWY 36, Orig-C. 

[FR Doc. 2017–22503 Filed 10–18–17; 8:45 am] 

BILLING CODE 4910–13–P 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[TD 9825] 

RIN 1545–BJ08 

Treatment of Transactions in Which 

Federal Financial Assistance Is 

Provided 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Final regulations. 

SUMMARY: This document contains final 

regulations under section 597 of the 

Internal Revenue Code (Code). These 

final regulations amend existing 

regulations that address the federal 

income tax treatment of transactions in 

which federal financial assistance (FFA) 

is provided to banks and domestic 

building and loan associations, and they 

clarify the federal income tax 

consequences of those transactions to 

banks, domestic building and loan 

associations, and related parties. These 

regulations affect banks, domestic 

building and loan associations, and 

related parties. 

DATES:

Effective Date: These regulations are 

effective on October 19, 2017. 

Applicability date: These regulations 

apply on or after October 19, 2017, 

except with respect to FFA provided 

pursuant to an agreement entered into 

before such date. In the latter case, 

§§ 1.597–1 through 1.597–7 as 

contained in 26 CFR part 1, revised 

April 1, 2017, will continue to apply 

unless the taxpayer elects pursuant to 

§ 1.597–7(c) of these regulations to 

apply §§ 1.597–1 through 1.597–6 of 

these regulations on a retroactive basis. 

The election to apply §§ 1.597–1 

through 1.597–6 of these regulations on 

a retroactive basis cannot be made if the 

period for assessment and collection of 

federal income 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. 

FOR FURTHER INFORMATION CONTACT: 

Russell G. Jones, (202) 317–5357, or Ken 

Cohen, (202) 317–5367 (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 of 1995 (44 U.S.C. 

3507(d)) under OMB control number 

1545–1300. The collections of 

information in these final regulations 

are in §§ 1.597–2(c)(4), 1.597–4(g)(5), 

1.597–6(c), and 1.597–7(c)(3). The 

collections of information in these 

regulations are necessary for the proper 

performance of the function of the IRS 

by providing relevant information 

concerning the deferred FFA account 

and the amount of income tax 

potentially not subject to collection. The 

collections also inform the IRS and 

certain financial institutions that certain 

elections in these regulations have been 

made. 

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. 


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Federal Register / Vol. 82, No. 201 / Thursday, October 19, 2017 / Rules and Regulations 48619 

Books and records relating to a 

collection of information must be 

retained as long as their contents may 

become material in the administration 

of any internal revenue law. Generally, 

tax returns and tax return information 

are confidential, as required by section 

6103. 

Background 

On May 20, 2015, the Treasury 

Department and the IRS published a 

notice of proposed rulemaking (REG– 

140991–09) in the Federal Register (80 

FR 28872), proposing to modify and 

clarify the existing regulations under 

§§ 1.597–1 through 1.597–7 concerning 

the treatment of certain transactions in 

which FFA is provided to banks and 

domestic building and loan associations 

(Institutions) and related parties. For 

purposes of section 597 and the 

regulations promulgated under that 

section, FFA generally includes any 

money or property provided by an 

‘‘Agency’’ (such as the Federal Deposit 

Insurance Corporation) to an Institution 

or to a direct or indirect owner of stock 

in an Institution. Among other changes, 

the proposed regulations provided 

guidance regarding the determination of 

the fair market value of assets covered 

by a Loss Guarantee, the ownership of 

assets subject to a Loss Guarantee, and 

the transfer of property to an Agency by 

an Institution’s non-consolidated 

affiliate. (The ‘‘Explanation of 

Provisions’’ in the notice of proposed 

rulemaking contained a detailed 

description of the proposed changes to 

the existing regulations.) The notice of 

proposed rulemaking also requested 

comments from the public and provided 

instructions for requesting a public 

hearing. 

The Treasury Department and the IRS 

received no comments on the proposed 

regulations, and no public hearing was 

requested or held. This Treasury 

decision thus adopts the proposed 

regulations with only non-substantive, 

clarifying changes. For example, the 

final regulations clarify that, with 

respect to any election provided under 

the final regulations that is available for 

a consolidated group to make, the agent 

for the group, within the meaning of 

§ 1.1502–77, must make the election. 

Like the proposed regulations, these 

final regulations amend and restate all 

of §§ 1.597–2 through 1.597–7 in order 

to make the reading of the regulations 

more user-friendly. However, unlike the 

proposed regulations, rather than 

restating all of § 1.597–1, these final 

regulations expressly list the changes to 

the definitions in § 1.597–1. This change 

to the proposed regulations is merely for 

the sake of clarity and no substantive 

change is intended. These final 

regulations make no changes to § 1.597– 

8. 

Special Analyses 

Certain IRS regulations, including this 

one, are exempt from the requirements 

of Executive Order 12866, as 

supplemented and reaffirmed by 

Executive Order 13653. Therefore, a 

regulatory impact assessment is not 

required. It is hereby certified that the 

collection of information contained in 

these regulations will not have a 

significant economic impact on a 

substantial number of small entities. 

This certification is based on the fact 

that the regulations apply only to 

transactions involving banks or 

domestic building and loan 

associations, which tend to be larger 

businesses. Therefore, a regulatory 

flexibility analysis is not required under 

the Regulatory Flexibility Act (5 U.S.C. 

chapter 6). Pursuant to section 7805(f) of 

the 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, and no 

comments were received. 

Drafting Information 

The principal author of these 

regulations is Russell G. Jones of the 

Office of Associate Chief Counsel 

(Corporate). However, other personnel 

from the Treasury Department and the 

IRS participated in their development. 

List of Subjects in 26 CFR Part 1 

Income taxes, Reporting and 

recordkeeping requirements. 

Adoption of Amendments to the 

Regulations 

Accordingly, 26 CFR part 1 is 

amended as follows: 

PART 1—INCOME TAXES 

■ Paragraph 1. The authority citation 

for part 1 continues to read in part as 

follows: 

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

■ Par. 2. In § 1.597–1, paragraph (b) is 

amended by: 

■ a. Adding the definitions ‘‘Agency 

Receivership’’ and ‘‘Average 

Reimbursement Rate’’ in alphabetical 

order. 

■ b. Revising the definitions of 

‘‘Consolidated Subsidiary’’ and 

‘‘Continuing Equity’’. 

■ c. Adding the definitions ‘‘Covered 

Asset’’ and ‘‘Expected Value’’ in 

alphabetical order. 

■ d. Revising the definition of ‘‘Loss 

Guarantee’’. 

■ e. Adding the definitions ‘‘Loss Share 

Agreement’’ and ‘‘Third-Party Price’’ in 

alphabetical order. 

The additions and revisions read as 

follows: 

§ 1.597–1 Definitions. 

* * * * * 

(b) * * * 

Agency Receivership. An Institution 

or entity is under Agency Receivership 

if an Agency is acting as receiver for 

such Institution or entity. 

Average Reimbursement Rate. The 

term Average Reimbursement Rate 

means the percentage of losses (as 

determined under the terms of the Loss 

Share Agreement) that would be 

reimbursed by an Agency or a 

Controlled Entity if every asset subject 

to a Loss Share Agreement were 

disposed of for the Third-Party Price. 

The Average Reimbursement Rate is 

determined at the time of the Taxable 

Transfer and is not adjusted for any 

changes in Third-Party Price over the 

life of any asset subject to the Loss 

Share Agreement or the prior 

disposition of any asset subject to the 

Loss Share Agreement. 

* * * * * 

Consolidated Subsidiary. The term 

Consolidated Subsidiary means a 

corporation that both: 

(i) Is a member of the same 

consolidated group as an Institution; 

and 

(ii) Would be a member of the 

affiliated group that would be 

determined under section 1504(a) if the 

Institution were the common parent 

thereof. 

Continuing Equity. An Institution has 

Continuing Equity for any taxable year 

if, on the last day of the taxable year, the 

Institution is not a Bridge Bank, in 

Agency Receivership, or treated as a 

New Entity. 

* * * * * 

Covered Asset. The term Covered 

Asset means an asset subject to a Loss 

Guarantee. The fair market value of a 

Covered Asset equals the asset’s 

Expected Value. 

Expected Value. The term Expected 

Value means the sum of the Third-Party 

Price for a Covered Asset and the 

amount that an Agency or a Controlled 

Entity would pay under the Loss 

Guarantee if the asset actually were sold 

for the Third-Party Price. For purposes 

of the preceding sentence, if an asset is 

subject to a Loss Share Agreement, the 

amount that an Agency or a Controlled 

Entity would pay under a Loss 

Guarantee with respect to the asset is 


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48620 Federal Register / Vol. 82, No. 201 / Thursday, October 19, 2017 / Rules and Regulations 

determined by multiplying the amount 

of loss that would be realized under the 

terms of the Loss Share Agreement if the 

asset were disposed of at the ThirdParty Price by the Average 

Reimbursement Rate. 

* * * * * 

Loss Guarantee. The term Loss 

Guarantee means an agreement 

pursuant to which an 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 an 

Agency or a Controlled Entity at a 

specified price, a Loss Share Agreement, 

or a similar arrangement. 

Loss Share Agreement. The term Loss 

Share Agreement means an agreement 

pursuant to which an Agency or a 

Controlled Entity agrees to reimburse 

the guaranteed party a percentage of 

losses realized. 

* * * * * 

Third-Party Price. The term ThirdParty Price means the amount that a 

third party would pay for an asset 

absent the existence of a Loss 

Guarantee. 

■ Par. 3. Section 1.597–2 is revised to 

read as follows: 

§ 1.597–2 Taxation of FFA. 

(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 an Agency provides in a 

taxable year to a direct or indirect 

shareholder of the Institution, to the 

extent the money or property is 

transferred to the Institution pursuant to 

an agreement with an 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 an 

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 an 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 (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 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 Code (other than net operating and 

capital loss carryovers) of the 

consolidated group of which the 

Institution is a member on the last day 

of the Institution’s taxable year over the 

group’s gross income (determined 

without regard to FFA); and 

(iii) The excess of the amount of any 

net operating loss carryover of the 

Institution (or in the case of a carryover 

from a consolidated return year of the 

Institution’s current consolidated group, 

the net operating loss carryover of the 

group) to the taxable year over the 

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

of this section. 

(4) Deferred FFA—(i) Maintenance of 

account. An Institution must establish a 

deferred FFA account commencing in 

the first taxable year in which it receives 

FFA that is not currently included in 

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

of this section to its deferred FFA 

account. The Institution must decrease 

the balance of its deferred FFA account 

by the amount of deferred FFA included 

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

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

paragraphs (d)(4) and (d)(5)(i)(B) of this 

section for other adjustments that 

decrease the deferred FFA account.) If, 

under paragraph (c)(3) of this section, 

FFA is not currently included in income 

in a taxable year, the Institution 

thereafter must maintain its deferred 

FFA account on a FIFO (first in, first 

out) basis (for example, for purposes of 

the first sentence of paragraph (c)(4)(iv) 

of this section). 

(ii) Deferred FFA recapture. In any 

taxable year in which an Institution has 

a balance in its deferred FFA account, 

it must include in income an amount 

equal to the lesser of the amount 

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

section or the balance in its deferred 

FFA account. 

(iii) Annual recapture amount—(A) 

Institutions without Continuing Equity— 

(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 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 


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Federal Register / Vol. 82, No. 201 / Thursday, October 19, 2017 / Rules and Regulations 48621 

(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 

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 

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 federal 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 

(or §§ 1.1502–15A, 1.1502–21A, and 

1.1502–22A, as appropriate) do not limit 

the use of the attributes of the 

Institution to the extent, if any, that the 

inclusion of FFA (including recaptured 

FFA) in income results in taxable 

income or alternative minimum taxable 

income (determined without regard to 

this paragraph (c)(5)) for the taxable 

year. This paragraph (c)(5) does not 

apply to any limitation under section 

382 or 383 or § 1.1502–15, § 1.1502–21, 

or § 1.1502–22 (or § 1.1502–15A, 

§ 1.1502–21A, or § 1.1502–22A, as 

appropriate) that arose in connection 

with or prior to a corporation becoming 

a Consolidated Subsidiary of the 

Institution. 

(6) Operating rules—(i) Bad debt 

reserves. For purposes of paragraphs 

(c)(2), (3), and (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 Code to the extent and at the time 

it is included in income under this 

paragraph (c). 

(d) Transfers of money or property to 

an Agency, and Covered Assets—(1) 

Transfers of property to an Agency. 

Except as provided in paragraph 

(d)(4)(iii) of this section, the transfer of 

property to an Agency or a Controlled 

Entity is a taxable sale or exchange in 

which the Institution is treated as 

realizing an amount equal to the 

property’s fair market value. 

(2) FFA with respect to Covered Assets 

other than on transfer to an Agency—(i) 

FFA provided pursuant to a Loss 

Guarantee with respect to a Covered 

Asset is included in the amount realized 

with respect to the Covered Asset. 

(ii) If an Agency makes a payment to 

an Institution pursuant to a Loss 

Guarantee with respect to a Covered 

Asset owned by an entity other than the 

Institution, the payment will be treated 

as made directly to the owner of the 

Covered Asset and included in the 

amount realized with respect to the 

Covered Asset when the Covered Asset 

is sold or charged off. The payment will 

be treated as further transferred through 

chains of ownership to the extent 

necessary to reflect the actual receipt of 

such payment. Any such transfer, if a 

deemed distribution, will not be a 

preferential dividend for purposes of 

sections 561, 562, 852, or 857. 

(iii) For the purposes of this 

paragraph (d)(2), references to an 

amount realized include amounts 

obtained in whole or partial satisfaction 

of loans, amounts obtained by virtue of 

charging off or marking to market a 

Covered Asset, and other amounts 

similarly related to property, whether or 

not disposed of. 

(3) Treatment of FFA received in 

exchange for property. FFA included in 

the amount realized for property under 

this paragraph (d) is not includible in 

income under paragraph (a)(1) of this 

section. The amount realized is treated 

in the same manner as if realized from 

a person other than an 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 federal 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 an Agency or a Controlled 

Entity, the amount of money and the 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 the fair 

market value of any property that an 

Agency or a Controlled Entity provides 

in exchange. 

(ii) Deposit insurance. This paragraph 

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

an Agency with respect to deposit 

insurance. 

(iii) Treatment of an interest held by 

an 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 an Agency 

or a Controlled Entity nor when 

acquired from an Agency or a 

Controlled Entity by the issuer. 

(B) Dispositions to persons other than 

issuer. On the date an Agency or a 

Controlled Entity transfers an interest 

described in § 1.597–3(b) to a holder 

other than the issuer, an Agency, or a 


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Controlled Entity, the issuer is treated 

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

having transferred to an Agency an 

amount of money equal to the sum of 

the amount of money and the fair 

market value of property that was paid 

by the new holder as consideration for 

the interest. 

(iv) Affiliated groups. For purposes of 

this paragraph (d), an Institution is 

treated as having made any transfer to 

an Agency or a Controlled Entity that 

was made by any other member of its 

affiliated group. The affiliated group 

must make appropriate basis 

adjustments or other adjustments to the 

extent the member transferring money 

or other property is not the member that 

received FFA. 

(5) Manner of making adjustments to 

FFA—(i) Reduction of FFA and deferred 

FFA. An Institution adjusts its FFA 

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

reducing in the following order and in 

an aggregate amount not greater than the 

adjustment— 

(A) The amount of any FFA that is 

otherwise includible in income for the 

taxable year (before application of 

paragraph (c) of this section); and 

(B) The balance (but not below zero) 

in the deferred FFA account, if any, 

maintained under paragraph (c)(4) of 

this section. 

(ii) Deduction of excess amounts. If 

the amount of the adjustment exceeds 

the sum of the amounts described in 

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

Institution may deduct the excess to the 

extent the deduction does not exceed 

the amount of FFA included in income 

for prior taxable years reduced by the 

amount of deductions allowable under 

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

years. 

(iii) Additional adjustments. Any 

adjustment to FFA in excess of the sum 

of the amounts described in paragraphs 

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

treated— 

(A) By an Institution other than a New 

Entity or an Acquiring, as a deduction 

of the amount in excess of FFA received 

that is required to be transferred to an 

Agency under section 11(g) of the 

Federal Deposit Insurance Act (12 

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

(B) By a New Entity or an Acquiring, 

as an adjustment to the purchase price 

paid in the Taxable Transfer (see 

§ 1.338–7). 

(e) Examples. The following examples 

illustrate the provisions of this section: 

Example 1. Timing of inclusion of FFA in 

income. (i) Institution M, a calendar-year 

taxpayer without Continuing Equity because 

it is in Agency Receivership, is not a member 

of a consolidated group and has not been 

acquired in a Taxable Transfer. On January 

1, 2018, 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 2018. The Agency provides $30 

million of FFA to M in 2018. The amount of 

this FFA that M must include in income in 

2018 is limited by paragraph (c)(2) of this 

section to $20 million, the amount by which 

M’s liabilities ($120 million) exceed the total 

adjusted basis of its assets ($100 million) at 

the beginning of the taxable year. Pursuant to 

paragraph (c)(4)(i) of this section, M must 

establish a deferred FFA account for the 

remaining $10 million. 

(ii) If the Agency instead lends M the $30 

million, M’s indebtedness to the Agency is 

disregarded and the results are the same as 

in paragraph (i) of this Example 1 under 

section 597(c), paragraph (b) of § 1.597–1, 

and paragraph (b) of § 1.597–3. 

Example 2. Transfer of property to an 

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 2018, M’s remaining equity is $0 

and M has a deferred FFA account of $10 

million. The Agency does not provide any 

FFA to M in 2018. During the year, M 

transfers property not subject to a Loss 

Guarantee to the 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 

2018. 

(ii) Under paragraph (d)(1) of this section, 

M is treated as selling the property for $1 

million, its fair market value, thus 

recognizing a $4 million loss ($5 million¥$1 

million). In addition, because M did not 

receive any consideration from the Agency, 

under paragraph (d)(4) of this section M has 

an adjustment to FFA of $1 million, the 

amount by which the fair market value of the 

transferred property ($1 million) exceeds the 

consideration M received from the Agency 

($0). Because no FFA is provided to M in 

2018, this adjustment reduces the balance of 

M’s deferred FFA account to $9 million ($10 

million¥$1 million) under paragraph 

(d)(5)(i)(B) of this section. Because M’s $4 

million loss causes M’s deductions to exceed 

its gross income by $4 million in 2018 and 

M has no remaining equity, under paragraph 

(c)(4)(iii)(A) of this section M must include 

$4 million of deferred FFA in income and 

must decrease the remaining $9 million 

balance of its deferred FFA account by the 

same amount, leaving a balance of $5 

million. 

Example 3. Loss Guarantee. Institution Q, 

a calendar-year taxpayer, holds a Covered 

Asset (Asset Z). Q’s adjusted basis in Asset 

Z is $10,000. Q sells Asset Z to an unrelated 

third party for $4,000. Pursuant to the Loss 

Guarantee, an Agency pays Q $6,000 

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

the sale of Asset Z is $10,000 ($4,000 from 

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

under paragraph (d)(2) of this section. Q 

realizes no gain or loss on the sale 

($10,000¥$10,000 = $0), and therefore 

includes none of the $6,000 of FFA it 

receives pursuant to the Loss Guarantee in 

income under paragraph (d)(3) of this 

section. 

■ Par. 4. Section 1.597–3 is revised to 

read as follows: 

§ 1.597–3 Other rules. 

(a) Ownership of assets. For all federal 

income tax purposes, an Agency is not 

treated as the owner of assets subject to 

a Loss Guarantee, yield maintenance 

agreement, or cost to carry or cost of 

funds reimbursement agreement, 

regardless of whether it otherwise 

would be treated as the owner under 

general federal income tax principles. 

(b) Debt and equity interests received 

by an Agency. Debt instruments, stock, 

warrants, or other rights to acquire stock 

of an Institution (or any of its affiliates) 

that an Agency or a Controlled Entity 

receives in connection with a 

transaction in which FFA is provided 

are not treated as debt, stock, or other 

equity interests of or in the issuer for 

any purpose of the Internal Revenue 

Code while held by an Agency or a 

Controlled Entity. On the date an 

Agency or a Controlled Entity transfers 

an interest described in this paragraph 

(b) to a holder other than an 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 an Agency modifies or exchanges an 

Agency Obligation provided as Net 


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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) [Reserved] 

(f) Losses and deductions with respect 

to Covered Assets. Prior to the 

disposition of a Covered Asset, the asset 

cannot be charged off, marked to a 

market value, depreciated, amortized, or 

otherwise treated in a manner that 

supposes an actual or possible 

diminution of value below the asset’s 

fair market value. See § 1.597–1(b). 

(g) Anti-abuse rule. The regulations 

under section 597 must be applied in a 

manner consistent with the purposes of 

section 597. Accordingly, if, in 

structuring or engaging in any 

transaction, a principal purpose is to 

achieve a federal income 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. 

■ Par. 5. Section 1.597–4 is revised to 

read as follows: 

§ 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 

(Code) and is subject to all Code 

provisions that generally apply to 

corporations, including those relating to 

methods of accounting and to 

requirements for filing returns, even if 

an Agency owns stock of the Institution. 

(c) No section 382 ownership change. 

The imposition of Agency Control, the 

cancellation of Institution stock by an 

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 federal income tax purposes 

and must file a single combined federal 

income tax return. The Bridge Bank is 

responsible for filing all federal income 

tax returns and statements for this single 

entity and is the agent of each 

associated Residual Entity to the same 

extent as if the Bridge Bank were the 

agent for a consolidated group, within 

the meaning of § 1.1502–77, 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 

an 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) 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. 


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(2) Consequences of election. If the 

election under this paragraph (g) is 

made with respect to an Institution, the 

following consequences occur 

immediately before the subsidiary 

Institution to which the election applies 

is placed in Agency Receivership (or, in 

the case of a deemed election under 

paragraph (g)(6) of this section, 

immediately before the consolidated 

group is deemed to make the election) 

and in the following order— 

(i) All adjustments of the Institution 

and its Consolidated Subsidiaries under 

section 481 are accelerated; 

(ii) Deferred intercompany gains and 

losses and intercompany items with 

respect to the Institution and its 

Consolidated Subsidiaries are taken into 

account and the Institution and its 

Consolidated Subsidiaries take into 

account any other items required under 

the regulations under section 1502 for 

members that become nonmembers 

within the meaning of § 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)–2, 1.1502–35(f), and 1.1502– 

36 for rules applicable when a member 

of a consolidated group is entitled to a 

worthless stock deduction with respect 

to stock of another member of the 

group.) In all other cases, the 

consolidated group will be treated as 

owning stock of a nonmember 

corporation until such stock is disposed 

of or becomes worthless under rules 

otherwise applicable. 

(3) Toll charge. The amount described 

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

the Institution’s liabilities over the 

adjusted bases of its assets immediately 

before the Institution is placed in 

Agency Receivership (or, in the case of 

a deemed election under paragraph 

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

the consolidated group is deemed to 

make the election). In computing this 

amount, the adjusted bases of an 

Institution’s assets are reduced by the 

amount of the Institution’s reserves for 

bad debts under section 585 or 593, 

other than supplemental reserves under 

section 593. For purposes of this 

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

as a single entity that includes the assets 

and liabilities of its Consolidated 

Subsidiaries, with appropriate 

adjustments to prevent duplication. The 

amount described in this paragraph 

(g)(3) for alternative minimum tax 

purposes is determined using 

alternative minimum tax basis, 

deductions, and all other items required 

to be taken into account. In computing 

the increase in the group’s taxable 

income or alternative minimum taxable 

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

and §§ 1.1502–15, 1.1502–21, and 

1.1502–22 (or §§ 1.1502–15A, 1.1502– 

21A, and 1.1502–22A, as appropriate) 

do not limit the use of the attributes of 

the Institution and its Consolidated 

Subsidiaries to the extent, if any, that 

the inclusion of the amount described in 

this paragraph (g)(3) in income would 

result in the group having taxable 

income or alternative minimum taxable 

income (determined without regard to 

this sentence) for the taxable year. The 

preceding sentence does not apply to 

any limitation under section 382 or 383 

or § 1.1502–15, § 1.1502–21, or 

§ 1.1502–22 (or § 1.1502–15A, § 1.1502– 

21A, or § 1.1502–22A, as appropriate) 

that arose in connection with or prior to 

a corporation becoming a Consolidated 

Subsidiary of the Institution. 

(4) Treatment of Institutions after 

disaffiliation—(i) In general. If the 

election under this paragraph (g) is 

made with respect to an Institution, 

immediately after the Institution is 

placed in Agency Receivership (or, in 

the case of a deemed election under 

paragraph (g)(6) of this section, 

immediately after the consolidated 

group is deemed to make the election), 

the Institution and each of its 

Consolidated Subsidiaries are treated for 

federal income tax purposes as new 

corporations that are not members of the 

electing group’s affiliated group. Each 

new corporation retains the TIN of the 

corresponding disaffiliated corporation 

and is treated as having received the 

assets and liabilities of the 

corresponding disaffiliated corporation 

in a transaction to which section 351 

applies (and in which no gain was 

recognized under section 357(c) or 

otherwise). Thus, the new corporation 

has no net operating or capital loss 

carryforwards. An election under this 

paragraph (g) does not terminate the 

single entity treatment of a Bridge Bank 

and its Residual Entities provided in 

paragraph (e) of this section. 

(ii) FFA. A new Institution is treated 

as having a non-interest bearing, 

nontransferable account receivable for 

future FFA with a basis equal to the 

amount described in paragraph (g)(3) of 

this section. If a disaffiliated Institution 

has a deferred FFA account at the time 

of its disaffiliation, the corresponding 

new Institution succeeds to and takes 

into account that deferred FFA account. 

(iii) Filing of consolidated returns. If 

a disaffiliated Institution has 

Consolidated Subsidiaries at the time of 

its disaffiliation, the corresponding new 

Institution is required to file a 

consolidated federal income tax return 

with the subsidiaries in accordance with 

the regulations under section 1502. 

(iv) Status as Institution. If an 

Institution is disaffiliated under this 

paragraph (g), the resulting new 

corporation is treated as an Institution 

for purposes of the regulations under 

section 597 regardless of whether it is a 

bank or domestic building and loan 

association within the meaning of 

section 597. 

(v) Loss carrybacks. To the extent a 

carryback of losses would result in a 

refund being paid to a fiduciary under 

section 6402(k), an Institution or 

Consolidated Subsidiary with respect to 

which an election under this paragraph 

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

of this section) applies is allowed to 

carry back losses as if the Institution or 

Consolidated Subsidiary had continued 

to be a member of the consolidated 

group that made the election. 

(5) Affirmative election—(i) Original 

Institution—(A) Manner of making 

election. Except as otherwise provided 

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

consolidated group makes the election 

provided by this paragraph (g) by 

sending a written statement by certified 

mail to the affected Institution on or 

before 120 days after its placement in 

Agency Receivership. The statement 

must contain the following legend at the 

top of the page: ‘‘THIS IS AN ELECTION 

UNDER § 1.597–4(g) TO EXCLUDE THE 

INSTITUTION AND CONSOLIDATED 

SUBSIDIARIES REFERENCED IN THIS 

STATEMENT FROM THE AFFILIATED 

GROUP,’’ and must include the names 

and TINs 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 


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Federal Register / Vol. 82, No. 201 / Thursday, October 19, 2017 / Rules and Regulations 48625 

Receivership during the consistency 

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

of this section. (Failure to satisfy the 

requirement in the preceding sentence, 

however, does not invalidate the 

election with respect to any subsidiary 

Institution placed in Agency 

Receivership during the consistency 

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

of this section.) The consolidated group 

must retain a copy of the statement sent 

to any affected or subsidiary Institution 

(and the accompanying certified mail 

receipt) as proof that it mailed the 

statement to the affected Institution, and 

the consolidated group must make the 

statement and receipt available for 

inspection by the Commissioner upon 

request. The consolidated group must 

include an election statement as part of 

its first federal 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. 

The agent for the group, within the 

meaning of § 1.1502–77, takes all 

actions required under this paragraph 

(g)(5)(i)(A) to make the election 

provided under this paragraph (g)(5) for 

the consolidated group. An Agency 

cannot make the election provided 

under this paragraph (g)(5) under the 

authority of section 6402(k) or 

otherwise. 

(B) Consistency limitation on 

affirmative elections. A consolidated 

group may make an affirmative election 

under this paragraph (g)(5) with respect 

to a subsidiary Institution placed in 

Agency Receivership only if the group 

made, or is deemed to have made, the 

election under this paragraph (g) with 

respect to every subsidiary Institution of 

the group placed in Agency 

Receivership within five years 

preceding the date the subject 

Institution was placed in Agency 

Receivership. 

(ii) Effect on Institutions placed in 

receivership simultaneously or 

subsequently. An election under this 

paragraph (g), other than under 

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

applies to the Institution with respect to 

which the election is made or deemed 

made (the original 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, 2018, 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, 2018, M is placed 

in Agency Receivership and the Agency 

begins liquidating M. X does not make an 

election under paragraph (g) of this section. 

M remains a member of the X consolidated 

group after May 1, 2018 under paragraph 

(f)(1) of this section. 

Example 2. Effect of Bridge Bank on 

consolidation—(i) Additional facts. On May 

1, 2018, M is placed in Agency Receivership 

and the Agency causes M to transfer all of its 

assets and deposit liabilities to Bridge Bank 

MB. 

(ii) Consequences without an election to 

disaffiliate. M recognizes no gain or loss from 

the transfer and MB succeeds to M’s basis in 

the transferred assets, M’s items described in 

section 381(c) (subject to the conditions and 

limitations specified in section 381(c)), and 

TIN under paragraph (d)(1) of this section. (If 

M had a deferred FFA account, MB would 

also succeed to that account under paragraph 

(d)(1) of this section.) MB continues M’s 

taxable year and succeeds to M’s status as a 

member of the X consolidated group after 

May 1, 2018 under paragraphs (d)(1) and (f) 

of this section. MB and M are treated as a 

single entity for federal income tax purposes 

under paragraph (e) of this section. 

(iii) Consequences with an election to 

disaffiliate. If, on July 1, 2018, X makes an 

election under paragraph (g) of this section 

with respect to M, the following 

consequences are treated as occurring 

immediately before M was placed in Agency 

Receivership. M must include $1 million ($5 

million of liabilities ¥$4 million of adjusted 

basis) in income as of May 1, 2018 under 

paragraph (g)(2) and (3) of this section. M is 

then treated as a new corporation that is not 

a member of the X consolidated group and 

that has assets (including a $1 million 

account receivable for future FFA) with a 

basis of $5 million and $5 million of 

liabilities received from disaffiliated 

corporation M in a section 351 transaction. 

New corporation M retains the TIN of 

disaffiliated corporation M under paragraph 

(g)(4) of this section. Immediately after the 

disaffiliation, new corporation M is treated as 

transferring its assets and deposit liabilities 

to Bridge Bank MB. New corporation M 

recognizes no gain or loss from the transfer 

and MB succeeds to M’s TIN and taxable year 

under paragraph (d)(1) of this section. Bridge 

Bank MB is treated as a single entity that 

includes M and has $5 million of liabilities, 

an account receivable for future FFA with a 

basis of $1 million, and other assets with a 

basis of $4 million under paragraph (d)(1) of 

this section. 

■ Par. 6. Section 1.597–5 is revised to 

read as follows: 

§ 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 an Agency or 

a Controlled Entity has any financial 

obligation (for example, pursuant to a 

Loss Guarantee or Agency Obligation); 

or 

(ii) A deemed transfer of assets 

described in paragraph (b) of this 

section. 

(2) Scope. This section provides rules 

governing Taxable Transfers. Rules 

applicable to both actual and deemed 

asset acquisitions are provided in 

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 


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paragraph (b), an Institution (including 

a Bridge Bank or a Residual Entity) or 

a Consolidated Subsidiary of the 

Institution (the Old Entity) is treated as 

selling all of its assets in a single 

transaction and is treated as a new 

corporation (the New Entity) that 

purchases all of the Old Entity’s assets 

at the close of the day immediately 

preceding the occurrence of an event 

described in paragraph (b)(2) of this 

section. However, such an event results 

in a deemed transfer of assets under this 

paragraph (b) only if it occurs— 

(i) In connection with a transaction in 

which FFA is provided; 

(ii) While the Institution is a Bridge 

Bank; 

(iii) While the Institution has a 

positive balance in a deferred FFA 

account (see § 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 

Institution or Consolidated Subsidiary— 

(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 an 

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 an 

Agency provides to the New Entity or 

the 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 the Acquiring in the Taxable 

Transfer. 

(2) Amount realized in a Taxable 

Transfer. In a Taxable Transfer 

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

section, the amount realized is 

determined under section 1001(b) by 

reference to the consideration paid for 

the assets. In a Taxable Transfer 

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

section, the amount realized is the sum 

of the grossed-up basis of the stock 

acquired in connection with the Taxable 

Transfer (excluding stock acquired from 

the Old or New Entity), plus the amount 

of liabilities assumed or taken subject to 

in the deemed transfer, plus other 

relevant items. The grossed-up basis of 

the acquired stock equals the acquirers’ 

basis in the acquired stock divided by 

the percentage of the Old Entity’s stock 

(by value) attributable to the acquired 

stock. 

(3) Allocation of amount realized—(i) 

In general. The amount realized under 

paragraph (c)(2) of this section is 

allocated among the assets transferred in 

the Taxable Transfer in the same 

manner as amounts are allocated among 

assets under § 1.338–6(b) and (c)(1) and 

(2). 

(ii) Modifications to general rule. This 

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

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

of this section. Agency Obligations and 

Covered Assets in the hands of the New 

Entity or the Acquiring are treated as 

Class II assets. Stock of a Consolidated 

Subsidiary is treated as a Class II asset 

to the extent the fair market value of the 

Consolidated Subsidiary’s Class I and 

Class II assets (see § 1.597–1(b)) exceeds 

the amount of its liabilities. The fair 

market value of an Agency Obligation is 

deemed to equal its adjusted issue price 

immediately before the Taxable 

Transfer. 

(d) Treatment of a New Entity and an 

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 § 1.1060–1(c)(1). All 

assets transferred in related transactions 

pursuant to an option included in an 

agreement between the transferor and 

the Acquiring in the Taxable Transfer 

are included in the group of assets 

among which the consideration paid is 

allocated for purposes of determining 

the New Entity’s or the Acquiring’s 

basis in each of the assets. The purchase 

price for assets acquired in a Taxable 

Transfer described in paragraph (a)(1)(ii) 

of this section is the sum of the grossedup basis of the stock acquired in 

connection with the Taxable Transfer 

(excluding stock acquired from the Old 

or New Entity), plus the amount of 

liabilities assumed or taken subject to in 

the deemed transfer, plus other relevant 

items. The grossed-up basis of the 

acquired stock equals the acquirers’ 

basis in the acquired stock divided by 

the percentage of the Old Entity’s stock 

(by value) attributable to the acquired 

stock. FFA provided in connection with 

a Taxable Transfer is not included in the 

New Entity’s or the 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 the 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 

§ 1.338–6(b) and (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 an Agency’s agreement to 

provide Loss Guarantees, yield 

maintenance payments, cost to carry or 

cost of funds reimbursement payments, 

or expense reimbursement or indemnity 

payments. A New Entity’s basis in assets 

it receives from its shareholders is 

determined under general federal 

income tax principles and is not 

governed by this paragraph (d). 

(iii) Allowance and recapture of 

additional basis in certain cases. The 

basis of Class I and Class II assets equals 

their fair market value. See § 1.597–1(b). 

If the fair market value of the Class I and 

Class II assets exceeds the purchase 

price for the acquired assets, the excess 

is included ratably as ordinary income 

by the New Entity or the Acquiring over 

a period of six taxable years beginning 

in the year of the Taxable Transfer. The 

New Entity or the 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 the Acquiring 

files its first post-transfer federal income 


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Federal Register / Vol. 82, No. 201 / Thursday, October 19, 2017 / Rules and Regulations 48627 

tax return or the due date of that return 

(including extensions), the New Entity 

or the Acquiring must adjust its basis in 

its acquired assets to reflect the 

adjustment. In making adjustments to 

the New Entity’s or the 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) Covered Assets. If, immediately 

after a Taxable Transfer, an asset is not 

subject to a Loss Guarantee but the New 

Entity or the Acquiring has the right to 

designate specific assets that will be 

subject to the Loss Guarantee, the New 

Entity or the 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 the 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 

the Acquiring must make appropriate 

adjustments in subsequent taxable years 

if the designation is made after the New 

Entity or the Acquiring files its first 

post-transfer federal income tax return 

or the due date of that return (including 

extensions) has passed. 

(e) Special rules applicable to Taxable 

Transfers that are deemed asset 

acquisitions—(1) Taxpayer 

Identification Numbers. Except as 

provided in paragraph (e)(3) of this 

section, the New Entity succeeds to the 

TIN of the Old Entity in a deemed sale 

under paragraph (b) of this section. 

(2) Consolidated Subsidiaries—(i) In 

general. A Consolidated Subsidiary that 

is treated as selling its assets in a 

Taxable Transfer under paragraph (b) of 

this section is treated as engaging 

immediately thereafter in a complete 

liquidation to which section 332 

applies. The consolidated group of 

which the Consolidated Subsidiary is a 

member does not take into account gain 

or loss on the sale, exchange, or 

cancellation of stock of the Consolidated 

Subsidiary in connection with the 

Taxable Transfer. 

(ii) Certain minority shareholders. 

Shareholders of the Consolidated 

Subsidiary that are not members of the 

consolidated group that includes the 

Institution do not recognize gain or loss 

with respect to shares of Consolidated 

Subsidiary stock retained by the 

shareholder. The shareholder’s basis for 

that stock is not affected by the Taxable 

Transfer. 

(3) Bridge Banks and Residual 

Entities—(i) In general. A Bridge Bank 

or Residual Entity’s sale of assets to a 

New Entity under paragraph (b) of this 

section is treated as made by a single 

entity under § 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 that is deemed 

to acquire the assets of a Residual Entity 

is a member of the selling consolidated 

group after the deemed sale. The group’s 

basis or excess loss account in the stock 

of the New Entity that is deemed to 

acquire the assets of the Residual Entity 

is the group’s basis or excess loss 

account in the stock of the Bridge Bank 

immediately before the deemed sale, as 

adjusted for the results of the sale. 

(4) Certain returns. If an Old Entity 

without Continuing Equity is not a 

subsidiary of a consolidated group at the 

time of the Taxable Transfer, the 

controlling Agency must file all federal 

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. 

For purposes of these examples, an 

Institution’s loans are treated as if they 

were a single asset. However, in 

applying these regulations, the fair 

market value of each loan (including, for 

purposes of a Covered Asset, the ThirdParty Price and the Expected Value) 

must be determined separately. 

Example 1. Branch sale resulting in 

Taxable Transfer. (i) Institution M is a 

calendar-year taxpayer in Agency 

Receivership. M is not a member of a 

consolidated group. On January 1, 2018, 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 2018 and, except as 

otherwise described in this paragraph (i), M 

receives no FFA. On September 30, 2018, the 

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, the Agency provides $121 

million in cash to N. 

(ii) The transaction is a Taxable Transfer in 

which M receives $121 million of Net Worth 

Assistance under paragraph (a)(1) of this 

section. (M is treated as directly receiving the 

$121 million of Net Worth Assistance 

immediately before the Taxable Transfer 

under paragraph (c)(1) of this section.) M 

transfers branches having a basis of $1 

million and is treated as transferring $121 

million in cash (the Net Worth Assistance) to 

N in exchange for N’s assumption of $120 

million of liabilities. Thus, M realizes a loss 

of $2 million on the transfer. The amount of 

the FFA M must include in its income in 

2018 is limited by paragraph (c) of § 1.597– 

2 to $102 million, which is the sum of the 

$100 million excess of M’s liabilities ($200 

million) over the total adjusted basis of its 

assets ($100 million) at the beginning of 2018 

and the $2 million excess for the taxable year 

(which results from the Taxable Transfer) of 

M’s deductions (other than carryovers) over 

its gross income other than FFA. M must 

establish a deferred FFA account for the 

remaining $19 million of FFA under 

paragraph (c)(4) of § 1.597–2. 

(iii) N, as the Acquiring, must allocate its 

$120 million purchase price for the assets 

acquired from M among those assets. Cash is 

a Class I asset. The branch assets are in 

Classes III and IV. N’s adjusted basis in the 

cash is its amount, that is, $121 million 

under paragraph (d)(2) of this section. 

Because this amount exceeds N’s purchase 

price for all of the acquired assets by $1 

million, N allocates no basis to the other 

acquired assets and, under paragraph (d)(2) 

of this section, must recapture the $1 million 

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

six consecutive taxable years beginning with 

2018 (subject to acceleration for certain 

events). 

Example 2. Stock issuance by Bridge Bank 

causing Taxable Transfer. (i) On April 1, 

2018, Institution P is placed in Agency 

Receivership and the Agency causes P to 

transfer assets and liabilities to Bridge Bank 

PB. On August 31, 2018, the assets of PB 

consist of $20 million in cash, loans 

outstanding with an adjusted basis of $50 

million and a Third-Party Price of $40 

million, and other non-financial assets 

(primarily branch assets and equipment) with 

an adjusted basis of $5 million. PB has 

deposit liabilities of $95 million and other 

liabilities of $5 million. P, the Residual 

Entity, holds real estate with an adjusted 

basis of $10 million and claims in litigation 

having a zero basis. P retains no deposit 

liabilities and has no other liabilities (except 

its liability to the Agency for having caused 

its deposit liabilities to be satisfied). 

(ii) On September 1, 2018, the Agency 

causes PB to issue 100 percent of its common 

stock for $2 million cash to X. On the same 

day, the Agency issues a $25 million note to 


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PB. The note bears a fixed rate of interest in 

excess of the applicable Federal rate in effect 

for September 1, 2018. The Agency provides 

Loss Guarantees guaranteeing PB a value of 

$50 million for PB’s loans outstanding. 

(iii) The stock issuance is a Taxable 

Transfer in which PB is treated as selling all 

of its assets to a new corporation, New PB, 

under paragraph (b)(1) of this section. PB is 

treated as directly receiving $25 million of 

Net Worth Assistance (the issue price of the 

Agency Obligation) immediately before the 

Taxable Transfer under paragraph (c)(2) of 

§ 1.597–3 and paragraph (c)(1) of this section. 

The amount of FFA PB must include in 

income is determined under paragraphs (a) 

and (c) of § 1.597–2. PB in turn is deemed to 

transfer the note (with a basis of $25 million) 

to New PB in the Taxable Transfer, together 

with $20 million of cash, all its loans 

outstanding (with a basis of $50 million) and 

its other 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; thus, PB realizes no gain or loss on the 

transfer to New PB. 

(iv) Residual Entity P also is treated as 

selling all its assets (consisting of real estate 

and claims in litigation) for $0 (the amount 

of consideration received by P) to a new 

corporation (New P) in a Taxable Transfer 

under paragraph (b)(3) of this section. (P’s 

only liability is to the Agency and a liability 

to the Agency is not treated as a debt under 

paragraph (b) of § 1.597–3.) P’s basis in its 

assets is $10 million; thus, P realizes a $10 

million loss on the transfer to New P. The 

combined return filed by PB and P for 2018 

will reflect a total loss on the Taxable 

Transfer of $10 million ($0 for PB and $10 

million for P) under paragraph (e)(3) of this 

section. That return also will reflect FFA 

income from the Net Worth Assistance, 

determined under paragraphs (a) and (c) of 

§ 1.597–2. 

(v) New PB is treated as having acquired 

the assets it acquired from PB for $100 

million, the amount of liabilities assumed. In 

allocating basis among these assets, New PB 

treats the Agency note and the loans 

outstanding (which are Covered Assets) as 

Class II assets. For the purpose of allocating 

basis, the fair market value of the Agency 

note is deemed to equal its adjusted issue 

price immediately before the transfer ($25 

million), and the fair market value of the 

loans is their Expected Value, $50 million 

(the sum of the $40 million Third-Party Price 

and the $10 million that the Agency would 

pay if PB sold the loans for $40 million) 

under paragraph (b) of § 1.597–1. 

Alternatively, if the Third-Party Price for the 

loans were $60 million, then the fair market 

value of the loans would be $60 million, and 

there would be no payment from the Agency. 

(vi) New P is treated as having acquired its 

assets for no consideration. Thus, its basis in 

its assets immediately after the transfer is 

zero. New PB and New P are not treated as 

a single entity under paragraph (e)(3) of this 

section. 

Example 3. Taxable Transfer of previously 

disaffiliated Institution. (i) Corporation X, the 

common parent of a consolidated group, 

owns all the stock of Institution M, an 

insolvent Institution with no Consolidated 

Subsidiaries. On April 30, 2018, M has $4 

million of deposit liabilities, $1 million of 

other liabilities, and assets with an adjusted 

basis of $4 million. On May 1, 2018, M is 

placed in Agency Receivership. X elects 

under paragraph (g) of § 1.597–4 to 

disaffiliate M. Accordingly, as of May 1, 

2018, new corporation M is not a member of 

the X consolidated group. On May 1, 2018, 

the Agency causes M to transfer all of its 

assets and liabilities to Bridge Bank MB. 

Under paragraphs (e) and (g)(4) of § 1.597–4, 

MB and M are thereafter treated as a single 

entity which has $5 million of liabilities, an 

account receivable for future FFA with a 

basis of $1 million, and other assets with a 

basis of $4 million. 

(ii) During May 2018, 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, 2018, the Agency causes 

MB to issue 100 percent of its stock to 

Corporation Y. In connection with the stock 

issuance, the Agency provides an Agency 

Obligation for $2 million and no other FFA. 

(iv) The stock issuance results in a Taxable 

Transfer under paragraph (b) of this section. 

MB is treated as receiving the Agency 

Obligation immediately prior to the Taxable 

Transfer under paragraph (c)(1) of this 

section. MB has $1 million of basis in its 

account receivable for FFA. This receivable 

is treated as satisfied, offsetting $1 million of 

the $2 million of FFA provided by the 

Agency in connection with the Taxable 

Transfer. The status of the remaining $1 

million of FFA as includible income is 

determined as of the end of the taxable year 

under paragraph (c) of § 1.597–2. However, 

under paragraph (b) of § 1.597–2, MB obtains 

a $2 million basis in the Agency Obligation 

received as FFA. 

(v) Under paragraph (c)(2) of this section, 

in the Taxable Transfer, Old Entity MB is 

treated as selling, to New Entity MB, all of 

Old Entity MB’s assets, having a basis of 

$6,020,000 (the original $4 million of asset 

basis as of April 30, 2018, plus $20,000 net 

cash from May 2018 activities, plus the $2 

million Agency Obligation received as FFA), 

for $5,020,000, the amount of Old Entity 

MB’s liabilities assumed by New Entity MB 

pursuant to the Taxable Transfer. Therefore, 

Old Entity MB recognizes, in the aggregate, 

a loss of $1 million from the Taxable 

Transfer. 

(vi) Because this $1 million loss causes Old 

Entity MB’s deductions to exceed its gross 

income (determined without regard to FFA) 

by $1 million, Old Entity MB must include 

in its income the $1 million of FFA not offset 

by the FFA receivable under paragraph (c) of 

§ 1.597–2. (As of May 1, 2018, Old Entity 

MB’s liabilities ($5 million) did not exceed 

MB’s $5 million adjusted basis of its assets. 

For the taxable year, MB’s deductions of 

$1,025,000 ($1 million loss from the Taxable 

Transfer, $20,000 interest expense and 

$5,000 of wage expense) exceeded its gross 

income (disregarding FFA) of $25,000 

(interest income) by $1 million. Thus, under 

paragraph (c) of § 1.597–2, MB includes in 

income the entire $1 million of FFA not 

offset by the FFA receivable.) 

(vii) Therefore, Old Entity MB’s taxable 

income for the taxable year ending on the 

date of the Taxable Transfer is $0. 

(viii) Residual Entity M is also deemed to 

engage in a deemed sale of its assets to New 

Entity M under paragraph (b)(3) of this 

section, but there are no federal income tax 

consequences as M has no assets or liabilities 

at the time of the deemed sale. 

(ix) Under paragraph (d)(1) of this section, 

New Entity MB is treated as purchasing Old 

Entity MB’s assets for $5,020,000, the amount 

of New Entity MB’s liabilities. Of this, $2 

million is allocated to the $2 million Agency 

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

other assets New Entity MB is treated as 

purchasing in the Taxable Transfer. 

Example 4. Loss Guarantee. On January 1, 

2018, Institution N acquires assets and 

assumes liabilities of another Institution in a 

Taxable Transfer. In exchange for assuming 

$1,100,000 of the transferring Institution’s 

liabilities, N acquires Net Worth Assistance 

of $200,000, loans with an unpaid principal 

balance of $1 million, and two foreclosed 

properties each having a book value of 

$100,000 in the hands of the transferring 

Institution. In connection with the Taxable 

Transfer, an Agency guarantees N a price of 

$800,000 on the disposition or charge-off of 

the loans and a price of $80,000 on the 

disposition or charge-off of each of the 

foreclosed properties. This arrangement 

constitutes a Loss Guarantee. The Third-Party 

Price is $500,000 for the loans and $50,000 

for each of the foreclosed properties. For 

basis allocation purposes, the loans and 

foreclosed properties are Class II assets 

because they are Covered Assets, and N must 

allocate basis to such assets equal to their fair 

market value under paragraphs (c)(3)(ii) and 

(d)(2)(ii) and (iii) of this section. The fair 

market value of the loans is their Expected 

Value, $800,000 (the sum of the $500,000 

Third-Party Price and the $300,000 that the 

Agency would pay if N sold the loans for 

$500,000)). The fair market value of each 

foreclosed property is its Expected Value, 

$80,000 (the sum of the $50,000 Third-Party 

Price and the $30,000 that the Agency would 

pay if N sold the foreclosed property for 

$50,000)) under paragraph (b) of § 1.597–1. 

Accordingly, N’s basis in the loans and in 

each of the foreclosed properties is $800,000 

and $80,000, respectively. Because N’s 

aggregate basis in the cash, loans, and 

foreclosed properties ($1,160,000) exceeds 

N’s purchase price ($1,100,000) by $60,000, 

N must include $60,000 in income ratably 

over six years under paragraph (d)(2)(iii) of 

this section. 

Example 5. Loss Share Agreement. (i) The 

facts are the same as in Example 4 of this 

paragraph (f) except that, in connection with 

the Taxable Transfer, the Agency agrees to 

reimburse Institution N in an amount equal 

to zero percent of any loss realized (based on 

the $1 million unpaid principal balance of 

the loans and the $100,000 book value of 

each of the foreclosed properties) on the 

disposition or charge-off of the Covered 


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Federal Register / Vol. 82, No. 201 / Thursday, October 19, 2017 / Rules and Regulations 48629 

Assets up to $200,000; 50 percent of any loss 

realized between $200,000 and $700,000; and 

95 percent of any additional loss realized. 

This arrangement constitutes a Loss 

Guarantee that is a Loss Share Agreement. 

Thus, the Covered Assets are Class II assets, 

and N allocates basis to such assets equal to 

their fair market value under paragraphs 

(c)(3)(ii) and (d)(2)(ii) and (iii) of this section. 

Because the Third-Party Price for all of the 

Covered Assets is $600,000 ($500,000 for the 

loans and $50,000 for each of the foreclosed 

properties), the Average Reimbursement Rate 

is 33.33% ((($200,000 × 0%) + ($400,000 × 

50%) + ($0 × 95%))/$600,000). The Expected 

Value of the loans is $666,667 ($500,000 

Third-Party Price + $166,667 (the amount of 

the loss if the loans were disposed of for the 

Third-Party Price × 33.33%)), and the 

Expected Value of each foreclosed property 

is $66,667 ($50,000 Third-Party Price + 

$16,667 (the amount of the loss if the 

foreclosed property were sold for the ThirdParty Price × 33.33%)) under paragraph (b) of 

§ 1.597–1. For purposes of allocating basis, 

the fair market value of the loans is $666,667 

(their Expected Value), and the fair market 

value of each foreclosed property is $66,667 

(its Expected Value) under paragraph (b) of 

§ 1.597–1. 

(ii) At the end of 2018, the Third-Party 

Price for the loans drops to $400,000, and the 

Third-Party Price for each of the foreclosed 

properties remains at $50,000, The fair 

market value of the loans at the end of Year 

2 is their Expected Value, $600,000 ($400,000 

Third-Party Price + $200,000 (the amount of 

the loss if the loans were disposed of for the 

Third-Party Price × 33.33% (the Average 

Reimbursement Rate does not change)). Thus, 

if the loans otherwise may be charged off, 

marked to a market value, depreciated, or 

amortized, then the loans may be marked 

down to $600,000. The fair market value of 

each of the foreclosed properties remains at 

$66,667 ($50,000 Third-Party Price + $16,667 

(the amount of the loss if the foreclosed 

property were sold for the Third-Party Price 

× 33.33%)). Therefore, the foreclosed 

properties may not be charged off or 

depreciated in 2018. 

■ Par. 7. Section 1.597–6 is revised to 

read as follows: 

§ 1.597–6 Limitation on collection of 

federal income tax. 

(a) Limitation on collection where 

federal income tax is borne by an 

Agency. If an Institution without 

Continuing Equity (or any of its 

Consolidated Subsidiaries) is liable for 

federal income tax that is attributable to 

the inclusion in income of FFA or gain 

from a Taxable Transfer, the federal 

income tax will not be collected if it 

would be borne by an Agency. The final 

determination of whether the federal 

income tax would be borne by an 

Agency is within the sole discretion of 

the Commissioner. In determining 

whether federal income tax would be 

borne by an Agency, the Commissioner 

will disregard indemnity, tax-sharing, or 

similar obligations of an Agency, an 

Institution, or its Consolidated 

Subsidiaries. Collection of the several 

federal 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. Federal 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 federal income taxes. 

(b) Amount of federal income tax 

attributable to FFA or gain on a Taxable 

Transfer. For purposes of paragraph (a) 

of this section, the amount of federal 

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 

federal income tax liability of the 

Institution (or the consolidated group in 

which the Institution is a member) over 

the federal 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 federal 

income tax. A taxpayer must specify on 

a statement included with its Form 1120 

(U.S. Corporate Income Tax Return) the 

amount of federal 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 federal income tax 

to offset refunds. Federal 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 

federal income tax. 

(e) Collection of federal income taxes 

from an Acquiring or a New Entity—(1) 

Acquiring. No federal income tax 

liability (including the several liability 

for federal income taxes under § 1.1502– 

6) of a transferor in a Taxable Transfer 

will be collected from an Acquiring. 

(2) New Entity. Federal income tax 

liability (including the several liability 

for federal income 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 

federal income tax attributable to FFA. 

■ Par. 8. Section 1.597–7 is revised to 

read as follows: 

§ 1.597–7 Effective/applicability dates. 

(a) FIRREA effective date. Section 597, 

as amended by section 1401 of the 

Financial Institutions Reform, Recovery, 

and Enforcement Act of 1989 (Public 

Law 101–73, 103 Stat 183 (1989)) 

(FIRREA) is generally effective for any 

FFA received or accrued by an 

Institution on or after May 10, 1989, and 

for any transaction in connection with 

which such FFA is provided, unless the 

FFA is provided in connection with an 

acquisition occurring prior to May 10, 

1989. See § 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) Applicability date of §§ 1.597–1 

through 1.597–6. Sections 1.597–1 

through 1.597–6 apply on or after 

October 19, 2017, except with respect to 

FFA provided pursuant to a written 

agreement that is binding before October 

19, 2017, and that continues to be 

binding at all times after such date, in 

which case §§ 1.597–1 through 1.597–6 

as contained in 26 CFR part 1, revised 

April 1, 2017, will continue to apply 

unless the taxpayer elects to apply 

§§ 1.597–1 through 1.597–6 on a 

retroactive basis pursuant to paragraph 

(c) of this section. 

(c) Elective application to prior years 

and transactions—(1) In general. Except 

as limited in this paragraph (c), an 

election is available to apply §§ 1.597– 

1 through 1.597–6 to taxable years 

beginning prior to October 19, 2017. 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 agent for the 

group, within the meaning of § 1.1502– 

77, makes the election provided by this 

paragraph (c) for the consolidated 

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 provided by this 

paragraph (c) is irrevocable. 

(2) Election unavailable if statute of 

limitations closed. The election 

provided by this paragraph (c) cannot be 

made if the period for assessment and 

collection of federal income 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 


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48630 Federal Register / Vol. 82, No. 201 / Thursday, October 19, 2017 / Rules and Regulations 

group’s income, deductions, gain, loss, 

basis, or other items. 

(3) Manner of making election. An 

Institution or consolidated group makes 

the election provided by this paragraph 

(c) by including a written statement as 

a part of the taxpayer’s or consolidated 

group’s first annual federal income tax 

return filed on or after October 19, 2017. 

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 taxpayer 

identification number of the taxpayer or 

agent for the group 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 

LIMITATIONS PERIOD WOULD 

EXPIRE EARLIER WITHOUT SUCH 

EXTENSION, FOR ANY ITEMS 

AFFECTED IN ANY TAXABLE YEAR 

BY THE FILING OF THIS ELECTION,’’ 

and a declaration that either 

‘‘AMENDED RETURNS WILL BE FILED 

FOR ALL TAXABLE YEARS AFFECTED 

BY THE FILING OF THIS ELECTION 

WITHIN 180 DAYS OF MAKING THIS 

STATEMENT, UNLESS SUCH 

REQUIREMENT IS WAIVED IN 

WRITING BY THE INTERNAL 

REVENUE SERVICE’’ or ‘‘ALL 

RETURNS PREVIOUSLY FILED ARE 

CONSISTENT WITH THE PROVISIONS 

OF §§ 1.597–1 THROUGH 1.597–6.’’ An 

election with respect to a consolidated 

group must be made by the agent for the 

group, not an Agency, and applies to all 

members of the group. 

Kirsten Wielobob, 

Deputy Commissioner for Services and 

Enforcement. 

Approved: August 22, 2017. 

David J. Kautter, 

Assistant Secretary for Tax Policy. 

[FR Doc. 2017–21129 Filed 10–18–17; 8:45 am] 

BILLING CODE 4830–01–P 

DEPARTMENT OF VETERANS 

AFFAIRS 

38 CFR Part 8a 

RIN 2900–AP49 

Veterans’ Mortgage Life Insurance— 

Coverage Amendment 

AGENCY: Department of Veterans Affairs. 

ACTION: Final rule. 

SUMMARY: This document amends 

Department of Veterans Affairs (VA) 

regulations governing the Veterans’ 

Mortgage Life Insurance (VMLI) 

program in order to provide VMLIeligible individuals the option to lower 

their premiums by purchasing less than 

the minimum coverage amount required 

under current VA regulations. The final 

rule also amends current VA regulations 

to reflect that the statutory maximum 

amount of coverage available under the 

VMLI program was previously increased 

to $200,000, to define the term ‘‘eligible 

individual,’’ and to clarify that 

eligibility for VMLI coverage has been 

extended to include servicemembers as 

well as veterans. 

DATES: Effective October 19, 2017. 

FOR FURTHER INFORMATION CONTACT: 

Jeanne King, Department of Veterans 

Affairs Regional Office and Insurance 

Center (310/290B), 5000 Wissahickon 

Avenue, P.O. Box 8079, Philadelphia, 

PA 19101, (215) 842–2000, ext. 4839 

(this is not a toll-free number). 

SUPPLEMENTARY INFORMATION: The 

Veterans’ Mortgage Life Insurance 

(VMLI) program was established in 

1971, to provide mortgage protection 

insurance to service-disabled veterans 

who receive Specially Adapted Housing 

Grants from VA. Section 2106(g) of title 

38 of the United States Code mandates 

that the amount of VMLI in force shall 

be the amount necessary to pay the 

covered mortgage indebtedness in full, 

except as limited by section 2106(b) or 

‘‘regulations prescribed by the Secretary 

under this section.’’ Section 2106(b) 

currently limits the amount of VMLI 

available to $200,000. VA has 

prescribed a regulation to reduce the 

amount of VMLI coverage required. 

Until VA exercised this regulatory 

authority, program participants were 

required to carry an amount of 

insurance equal to the lesser of $200,000 

or the unpaid principal of their 

mortgage. This requirement caused 

some eligible individuals to forego any 

VMLI protection. Therefore, VA 

amended its regulations to permit 

program participants to carry VMLI in 

an amount less than both the $200,000 

statutory maximum and the amount 

necessary to pay the covered mortgage 

indebtedness in full. 

The comment period for the proposed 

rule ended on December 19, 2016, and 

VA received one comment. The 

commenter recommended that VA 

mandate a minimum amount of 

coverage that insureds should be 

required to purchase, in order to 

decrease the likelihood that the balance 

of the mortgage still owed after death 

would be burdensome for the insured’s 

survivors. VA believes that it is 

preferable for veterans to participate in 

the VMLI program to the extent they can 

financially, rather than potentially 

foregoing coverage entirely because they 

cannot afford the mandatory-minimum 

amount required by VA. If an eligible 

individual opts out of the program 

because the cost to carry a mandated 

minimum amount of coverage was too 

costly, his or her survivors could 

ultimately be forced to assume an even 

greater indebtedness than if the 

individual carried some VMLI coverage. 

Therefore, the final rule is being 

adopted as is without any changes, and 

provides that VMLI insureds may select 

a level of coverage that is most 

appropriate in addressing their own 

unique financial circumstances. 

The final rule amends the regulations 

to reflect that the maximum coverage 

amount is currently $200,000. It also 

provides a definition for the term 

‘‘eligible individual’’ and clarifies that 

both servicemembers and veterans are 

entitled to apply for coverage under the 

program. Additionally, the final rule 

provides for one technical change to 38 

CFR 8a.2(b)(8). 

Unfunded Mandates 

The Unfunded Mandates Reform Act 

of 1995 requires, at 2 U.S.C. 1532, that 

agencies prepare an assessment of 

anticipated costs and benefits before 

issuing any rule that may result in an 

expenditure by State, local, and tribal 

governments, in the aggregate, or by the 

private sector, of $100 million or more 

(adjusted annually for inflation) in any 

one year. This final rule would have no 

such effect on State, local, and tribal 

governments or on the private sector. 

Paperwork Reduction Act 

This final rule contains no provisions 

constituting a collection of information 

under the Paperwork Reduction Act of 

1995 (44 U.S.C. 3501–3521). 

Executive Orders 12866 and 13563 

Executive Orders 12866 and 13563 

direct agencies to assess all costs and 

benefits of available regulatory 

alternatives and, when regulation is 

necessary, to select regulatory 

approaches that maximize net benefits 

(including potential economic, 

environmental, public health and safety 

effects, and other advantages; 

distributive impacts; and equity). 

Executive Order 13563 (Improving 

Regulation and Regulatory Review) 

emphasizes the importance of 

quantifying both costs and benefits, 

reducing costs, harmonizing rules, and 

promoting flexibility. Executive Order 

12886 (Regulatory Planning and 

Review) defines a ‘‘significant 

regulatory action,’’ which requires 


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