Treatment of Transactions in Which Federal Financial Assistance Is Provided, 48618-48630 [2017-21129]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 82, Number 201 (Thursday, October 19, 2017)]
[Rules and Regulations]
[Pages 48618-48630]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-21129]


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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.

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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, Sec. Sec.  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 Sec.  
1.597-7(c) of these regulations to apply Sec. Sec.  1.597-1 through 
1.597-6 of these regulations on a retroactive basis. The election to 
apply Sec. Sec.  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 Sec. Sec.  1.597-1 through 1.597-6 
would affect the determination of the electing entity's or group's 
income, deductions, gain, loss, basis, or other items.

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 Sec. Sec.  1.597-2(c)(4), 
1.597-4(g)(5), 1.597-6(c), and 1.597-7(c)(3). The collections of 
information in these regulations are necessary for the proper 
performance of the function of the IRS by providing relevant 
information concerning the deferred FFA account and the amount of 
income tax potentially not subject to collection. The collections also 
inform the IRS and certain financial institutions that certain 
elections in these regulations have been made.
    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.

[[Page 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 Sec. Sec.  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 Sec.  1.1502-77, must make 
the election.
    Like the proposed regulations, these final regulations amend and 
restate all of Sec. Sec.  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 Sec.  1.597-1, these 
final regulations expressly list the changes to the definitions in 
Sec.  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 Sec.  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

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

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


0
Par. 2. In Sec.  1.597-1, paragraph (b) is amended by:
0
a. Adding the definitions ``Agency Receivership'' and ``Average 
Reimbursement Rate'' in alphabetical order.
0
b. Revising the definitions of ``Consolidated Subsidiary'' and 
``Continuing Equity''.
0
c. Adding the definitions ``Covered Asset'' and ``Expected Value'' in 
alphabetical order.
0
d. Revising the definition of ``Loss Guarantee''.
0
e. Adding the definitions ``Loss Share Agreement'' and ``Third-Party 
Price'' in alphabetical order.
    The additions and revisions read as follows:


Sec.  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

[[Page 48620]]

determined by multiplying the amount of loss that would be realized 
under the terms of the Loss Share Agreement if the asset were disposed 
of at the Third-Party Price by the Average Reimbursement Rate.
* * * * *
    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 Third-Party Price means the amount that 
a third party would pay for an asset absent the existence of a Loss 
Guarantee.

0
Par. 3. Section 1.597-2 is revised to read as follows:


Sec.  1.597-2   Taxation of 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 Sec.  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 Sec.  
1.597-5(c)(1) for additional rules regarding the inclusion of Net Worth 
Assistance in the income of an Institution.
    (b) Basis of property that is FFA. If FFA consists of property, the 
Institution's basis in the property equals the fair market value of the 
property (other than an Agency Obligation) or the issue price of the 
Agency Obligation (as determined under Sec.  1.597-3(c)(2)).
    (c) Timing of inclusion of certain FFA--(1) Scope. This paragraph 
(c) limits the amount of FFA an Institution must include in income 
currently under certain circumstances and provides rules for the 
deferred inclusion in income of amounts in excess of those limits. This 
paragraph (c) does not apply to a New Entity or 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

[[Page 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 Sec.  1.597-5(b).
    (v) Optional accelerated recapture of deferred FFA. An Institution 
that has a deferred FFA account may include in income the balance of 
its deferred FFA account on its timely filed (including extensions) 
original 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 Sec. Sec.  1.1502-
15, 1.1502-21, and 1.1502-22 (or Sec. Sec.  1.1502-15A, 1.1502-21A, and 
1.1502-22A, as appropriate) do not limit the use of the attributes of 
the Institution to the extent, if any, that the inclusion of FFA 
(including recaptured FFA) in income results in taxable income or 
alternative minimum taxable income (determined without regard to this 
paragraph (c)(5)) for the taxable year. This paragraph (c)(5) does not 
apply to any limitation under section 382 or 383 or Sec.  1.1502-15, 
Sec.  1.1502-21, or Sec.  1.1502-22 (or Sec.  1.1502-15A, Sec.  1.1502-
21A, or Sec.  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 Sec.  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 Sec.  
1.597-3(b) to a holder other than the issuer, an Agency, or a

[[Page 48622]]

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 Sec.  1.338-7).
    (e) Examples. The following examples illustrate the provisions of 
this section:

    Example 1. Timing of inclusion of FFA in income. (i) Institution 
M, a calendar-year taxpayer without Continuing Equity because it is 
in Agency Receivership, is not a member of a consolidated group and 
has not been acquired in a Taxable Transfer. On January 1, 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 Sec.  1.597-1, and paragraph (b) of Sec.  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.


0
Par. 4. Section 1.597-3 is revised to read as follows:


Sec.  1.597-3   Other rules.

    (a) Ownership of assets. For all 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 Sec.  
1.1275-5(b)) is determined by treating the obligation as bearing a 
fixed rate of interest equal to the rate in effect on the date of 
issuance under the obligation.
    (3) Adjustments to principal amount. Except as provided in Sec.  
1.597-5(d)(2)(iv), this paragraph (c)(3) applies if an Agency modifies 
or exchanges an Agency Obligation provided as Net

[[Page 48623]]

Worth Assistance (or a successor obligation). The issue price of the 
modified or new Agency Obligation is determined under paragraphs (c)(1) 
and (2) of this section. If the issue price is greater than the 
adjusted issue price of the existing Agency Obligation, the difference 
is treated as FFA. If the issue price is less than the adjusted issue 
price of the existing Agency Obligation, the difference is treated as 
an adjustment to FFA under Sec.  1.597-2(d)(4).
    (d) Successors. To the extent necessary to effectuate the purposes 
of the regulations under section 597, an entity's treatment under the 
regulations applies to its successor. A successor includes a transferee 
in a transaction to which section 381(a) applies or a Bridge Bank to 
which another Bridge Bank transfers deposit liabilities.
    (e) [Reserved]
    (f) Losses and deductions with respect to Covered Assets. Prior to 
the disposition of a Covered Asset, the asset cannot be charged off, 
marked to a market value, depreciated, amortized, or otherwise treated 
in a manner that supposes an actual or possible diminution of value 
below the asset's fair market value. See Sec.  1.597-1(b).
    (g) Anti-abuse rule. The regulations under section 597 must be 
applied in a manner consistent with the purposes of section 597. 
Accordingly, if, in structuring or engaging in any transaction, a 
principal purpose is to achieve a 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.

0
Par. 5. Section 1.597-4 is revised to read as follows:


Sec.  1.597-4   Bridge Banks and Agency Control.

    (a) Scope. This section provides rules that apply to a Bridge Bank 
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 Sec.  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.

[[Page 48624]]

    (2) Consequences of election. If the election under this paragraph 
(g) is made with respect to an Institution, the following consequences 
occur immediately before the subsidiary Institution to which the 
election applies is placed in Agency Receivership (or, in the case of a 
deemed election under paragraph (g)(6) of this section, immediately 
before the consolidated group is deemed to make the election) and in 
the following order--
    (i) All adjustments of the Institution and its Consolidated 
Subsidiaries under section 481 are accelerated;
    (ii) Deferred intercompany gains and losses and intercompany items 
with respect to the Institution and its Consolidated Subsidiaries are 
taken into account and the Institution and its Consolidated 
Subsidiaries take into account any other items required under the 
regulations under section 1502 for members that become nonmembers 
within the meaning of Sec.  1.1502-32(d)(4);
    (iii) The taxable year of the Institution and its Consolidated 
Subsidiaries closes and the Institution includes the amount described 
in paragraph (g)(3) of this section in income as ordinary income as its 
last item for that taxable year;
    (iv) The members of the consolidated group owning the common stock 
of the Institution include in income any excess loss account with 
respect to the Institution's stock under Sec.  1.1502-19 and any other 
items required under the regulations under section 1502 for members 
that own stock of corporations that become nonmembers within the 
meaning of Sec.  1.1502-32(d)(4); and
    (v) If the Institution's liabilities exceed the aggregate fair 
market value of its assets on the date the Institution is placed in 
Agency Receivership (or, in the case of a deemed election under 
paragraph (g)(6) of this section, on the date the consolidated group is 
deemed to make the election), the members of the consolidated group 
treat their stock in the Institution as worthless. (See Sec. Sec.  
1.337(d)-2, 1.1502-35(f), and 1.1502-36 for rules applicable when a 
member of a consolidated group is entitled to a worthless stock 
deduction with respect to stock of another member of the group.) In all 
other cases, the consolidated group will be treated as owning stock of 
a nonmember corporation until such stock is disposed of or becomes 
worthless under rules otherwise applicable.
    (3) Toll charge. The amount described in this paragraph (g)(3) is 
the excess of the Institution's liabilities over the adjusted bases of 
its assets immediately before the Institution is placed in Agency 
Receivership (or, in the case of a deemed election under paragraph 
(g)(6) of this section, immediately before the consolidated group is 
deemed to make the election). In computing this amount, the adjusted 
bases of an Institution's assets are reduced by the amount of the 
Institution's reserves for bad debts under section 585 or 593, other 
than supplemental reserves under section 593. For purposes of this 
paragraph (g)(3), an Institution is treated as a single entity that 
includes the assets and liabilities of its Consolidated Subsidiaries, 
with appropriate adjustments to prevent duplication. The amount 
described in this paragraph (g)(3) for alternative minimum tax purposes 
is determined using alternative minimum tax basis, deductions, and all 
other items required to be taken into account. In computing the 
increase in the group's taxable income or alternative minimum taxable 
income, sections 56(d)(1), 382, and 383 and Sec. Sec.  1.1502-15, 
1.1502-21, and 1.1502-22 (or Sec. Sec.  1.1502-15A, 1.1502-21A, and 
1.1502-22A, as appropriate) do not limit the use of the attributes of 
the Institution and its Consolidated Subsidiaries to the extent, if 
any, that the inclusion of the amount described in this paragraph 
(g)(3) in income would result in the group having taxable income or 
alternative minimum taxable income (determined without regard to this 
sentence) for the taxable year. The preceding sentence does not apply 
to any limitation under section 382 or 383 or Sec.  1.1502-15, Sec.  
1.1502-21, or Sec.  1.1502-22 (or Sec.  1.1502-15A, Sec.  1.1502-21A, 
or Sec.  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 Sec.  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

[[Page 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 Sec.  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 Sec.  1.1502-19(c)(1)(ii)(B)) a subsidiary Institution in 
contemplation of Agency Control or the receipt of FFA, the consolidated 
group is deemed to make the election described in this paragraph (g) 
with respect to the Institution on the date the deconsolidation occurs. 
A subsidiary Institution is conclusively presumed to have been 
deconsolidated in contemplation of Agency Control or the receipt of FFA 
if either event occurs within six months after the deconsolidation.
    (ii) Transfers to a Bridge Bank from multiple groups. On the day an 
Institution's transfer of deposit liabilities to a Bridge Bank results 
in the Bridge Bank holding deposit liabilities from both a subsidiary 
Institution and an Institution not included in the subsidiary 
Institution's consolidated group, each consolidated group of which a 
transferring Institution or the Bridge Bank is a subsidiary is deemed 
to make the election described in this paragraph (g) with respect to 
its subsidiary Institution. If deposit liabilities of another 
Institution that is a subsidiary member of any consolidated group 
subsequently are transferred to the Bridge Bank, the consolidated group 
of which the Institution is a subsidiary is deemed to make the election 
described in this paragraph (g) with respect to that Institution at the 
time of the subsequent transfer.
    (h) Examples. The following examples illustrate the provisions of 
this section:

    Facts. Corporation X, the common parent of a consolidated group, 
owns all the stock (with a basis of $4 million) of Institution M, an 
insolvent Institution with no Consolidated Subsidiaries. At the 
close of business on April 30, 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.


0
Par. 6. Section 1.597-5 is revised to read as follows:


Sec.  1.597-5   Taxable Transfers.

    (a) Taxable Transfers--(1) Defined. The term Taxable Transfer 
means--
    (i) A transaction in which an entity transfers to a transferee 
other than a Bridge Bank--
    (A) Any deposit liability (whether or not the Institution also 
transfers assets), if FFA is provided in connection with the 
transaction; or
    (B) Any asset for which 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

[[Page 48626]]

paragraph (b), an Institution (including a Bridge Bank or a Residual 
Entity) or a Consolidated Subsidiary of the Institution (the Old 
Entity) is treated as selling all of its assets in a single transaction 
and is treated as a new corporation (the New Entity) that purchases all 
of the Old Entity's assets at the close of the day immediately 
preceding the occurrence of an event described in paragraph (b)(2) of 
this section. However, such an event results in a deemed transfer of 
assets under this paragraph (b) only if it occurs--
    (i) In connection with a transaction in which FFA is provided;
    (ii) While the Institution is a Bridge Bank;
    (iii) While the Institution has a positive balance in a deferred 
FFA account (see Sec.  1.597-2(c)(4)(v) regarding the optional 
accelerated recapture of deferred FFA); or
    (iv) With respect to a Consolidated Subsidiary, while the 
Institution of which it is a Consolidated Subsidiary is under Agency 
Control.
    (2) Events. A deemed transfer of assets under this paragraph (b) 
results if the Institution or Consolidated Subsidiary--
    (i) Becomes a non-member (within the meaning of Sec.  1.1502-
32(d)(4)) of its consolidated group, other than pursuant to an election 
under Sec.  1.597-4(g);
    (ii) Becomes a member of an affiliated group of which it was not 
previously a member, other than pursuant to an election under Sec.  
1.597-4(g); or
    (iii) Issues stock such that the stock that was outstanding before 
the imposition of Agency Control or the occurrence of any transaction 
in connection with the provision of FFA represents 50 percent or less 
of the vote or value of its outstanding stock (disregarding stock 
described in section 1504(a)(4) and stock owned by 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 Sec.  1.597-2(a) and (c) for 
rules regarding the inclusion of FFA in income and Sec.  1.597-2(a)(1) 
for related rules regarding FFA provided to shareholders.) The Net 
Worth Assistance is treated as an asset of the transferor that is sold 
to the New Entity or 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 Sec.  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 Sec.  1.597-1(b)) exceeds the amount of its 
liabilities. The fair market value of an Agency Obligation is deemed to 
equal its adjusted issue price immediately before the Taxable Transfer.
    (d) Treatment of a New Entity and 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 Sec.  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 grossed-up basis of the stock acquired in connection with the 
Taxable Transfer (excluding stock acquired from the Old or New Entity), 
plus the amount of liabilities assumed or taken subject to in the 
deemed transfer, plus other relevant items. The grossed-up basis of the 
acquired stock equals the acquirers' basis in the acquired stock 
divided by the percentage of the Old Entity's stock (by value) 
attributable to the acquired stock. FFA provided in connection with a 
Taxable Transfer is not included in the New Entity's or 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 Sec.  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 Sec.  1.597-1(b). If the fair market value of the Class I 
and Class II assets exceeds the purchase price for the acquired assets, 
the excess is included ratably as ordinary income by the New Entity or 
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

[[Page 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 Sec.  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 Sec.  1.597-4(e). The New Entity deemed to acquire the assets of 
a Residual Entity under paragraph (b) of this section is not treated as 
a single entity with the Bridge Bank (or with the New Entity acquiring 
the Bridge Bank's assets) and must obtain a new TIN.
    (ii) Treatment of consolidated groups. At the time of a Taxable 
Transfer described in paragraph (a)(1)(ii) of this section, treatment 
of a Bridge Bank as a subsidiary member of a consolidated group under 
Sec.  1.597-4(f)(1) ceases. However, the New Entity that is deemed to 
acquire the assets of a Residual Entity is a member of the selling 
consolidated group after the deemed sale. The group's basis or excess 
loss account in the stock of the New Entity that is deemed to acquire 
the assets of the Residual Entity is the group's basis or excess loss 
account in the stock of the Bridge Bank immediately before the deemed 
sale, as adjusted for the results of the sale.
    (4) Certain returns. If an Old Entity without Continuing Equity is 
not a subsidiary of a consolidated group at the time of the Taxable 
Transfer, the controlling Agency must file all 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 Third-Party Price and the Expected 
Value) must be determined separately.

    Example 1.  Branch sale resulting in Taxable Transfer. (i) 
Institution M is a calendar-year taxpayer in Agency Receivership. M 
is not a member of a consolidated group. On January 1, 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 Sec.  1.597-2 to $102 
million, which is the sum of the $100 million excess of M's 
liabilities ($200 million) over the total adjusted basis of its 
assets ($100 million) at the beginning of 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 Sec.  
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

[[Page 48628]]

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 Sec.  1.597-3 and paragraph (c)(1) of this 
section. The amount of FFA PB must include in income is determined 
under paragraphs (a) and (c) of Sec.  1.597-2. PB in turn is deemed 
to transfer the note (with a basis of $25 million) to New PB in the 
Taxable Transfer, together with $20 million of cash, all its loans 
outstanding (with a basis of $50 million) and its other 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 Sec.  1.597-3.) P's basis 
in its assets is $10 million; thus, P realizes a $10 million loss on 
the transfer to New P. The combined return filed by PB and P for 
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 Sec.  
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 Sec.  1.597-1. Alternatively, if the Third-Party 
Price for the loans were $60 million, then the fair market value of 
the loans would be $60 million, and there would be no payment from 
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 Sec.  
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 
Sec.  1.597-4, MB and M are thereafter treated as a single entity 
which has $5 million of liabilities, an account receivable for 
future FFA with a basis of $1 million, and other assets with a basis 
of $4 million.
    (ii) During May 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 Sec.  1.597-2. 
However, under paragraph (b) of Sec.  1.597-2, MB obtains a $2 
million basis in the Agency Obligation received as FFA.
    (v) Under paragraph (c)(2) of this section, in the Taxable 
Transfer, Old Entity MB is treated as selling, to New Entity MB, all 
of Old Entity MB's assets, having a basis of $6,020,000 (the 
original $4 million of asset basis as of April 30, 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 Sec.  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 Sec.  1.597-2, MB includes in income the entire $1 million of 
FFA not offset by the FFA receivable.)
    (vii) Therefore, Old Entity MB's taxable income for the taxable 
year ending on the date of the Taxable Transfer is $0.
    (viii) Residual Entity M is also deemed to engage in a deemed 
sale of its assets to New Entity M under paragraph (b)(3) of this 
section, but there are no 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 Sec.  1.597-1. Accordingly, N's basis in the loans and in each of 
the foreclosed properties is $800,000 and $80,000, respectively. 
Because N's aggregate basis in the cash, loans, and foreclosed 
properties ($1,160,000) exceeds N's purchase price ($1,100,000) by 
$60,000, N must include $60,000 in income ratably over six years 
under paragraph (d)(2)(iii) of this section.
    Example 5.  Loss Share Agreement. (i) The facts are the same as 
in Example 4 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

[[Page 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 x 0%) + ($400,000 x 50%) + ($0 x 95%))/$600,000). The 
Expected Value of the loans is $666,667 ($500,000 Third-Party Price 
+ $166,667 (the amount of the loss if the loans were disposed of for 
the Third-Party Price x 33.33%)), and the Expected Value of each 
foreclosed property is $66,667 ($50,000 Third-Party Price + $16,667 
(the amount of the loss if the foreclosed property were sold for the 
Third-Party Price x 33.33%)) under paragraph (b) of Sec.  1.597-1. 
For purposes of allocating basis, the fair market value of the loans 
is $666,667 (their Expected Value), and the fair market value of 
each foreclosed property is $66,667 (its Expected Value) under 
paragraph (b) of Sec.  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 x 33.33% (the 
Average Reimbursement Rate does not change)). Thus, if the loans 
otherwise may be charged off, marked to a market value, depreciated, 
or amortized, then the loans may be marked down to $600,000. The 
fair market value of each of the foreclosed properties remains at 
$66,667 ($50,000 Third-Party Price + $16,667 (the amount of the loss 
if the foreclosed property were sold for the Third-Party Price x 
33.33%)). Therefore, the foreclosed properties may not be charged 
off or depreciated in 2018.

0
Par. 7. Section 1.597-6 is revised to read as follows:


Sec.  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 Sec.  1.1502-6 from members of an Institution's 
consolidated group other than the Institution or its Consolidated 
Subsidiaries is not affected by this section. 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 Sec.  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 Sec.  1.1502-6) of a 
transferor in a Taxable Transfer will be collected from a New Entity 
only if stock that was outstanding in the Old Entity remains 
outstanding as stock in the New Entity or is reacquired or exchanged 
for consideration.
    (f) Effect on section 7507. This section supersedes the application 
of section 7507, and the regulations thereunder, for the assessment and 
collection of federal income tax attributable to FFA.

0
Par. 8. Section 1.597-7 is revised to read as follows:


Sec.  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 Sec.  1.597-8 for 
rules regarding FFA received or accrued on or after May 10, 1989, that 
relates to an acquisition that occurred before May 10, 1989.
    (b) Applicability date of Sec. Sec.  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 Sec. Sec.  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 Sec. Sec.  
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 Sec. Sec.  1.597-1 through 1.597-6 to taxable years 
beginning prior to October 19, 2017. A consolidated group may elect to 
apply Sec. Sec.  1.597-1 through 1.597-6 for all members of the group 
in all taxable years to which section 597, as amended by FIRREA, 
applies. The agent for the group, within the meaning of Sec.  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 Sec. Sec.  1.597-1 through 1.597-6 to all 
taxable years to which section 597, as amended by FIRREA, applies for 
which it is not a member of a consolidated group. The election 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 Sec. Sec.  
1.597-1 through 1.597-6 would affect the determination of the electing 
entity's or

[[Page 48630]]

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 Sec.  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 Sec.  1.597-7(c), IF THE LIMITATIONS PERIOD 
WOULD EXPIRE EARLIER WITHOUT SUCH EXTENSION, FOR ANY ITEMS AFFECTED IN 
ANY TAXABLE YEAR BY THE FILING OF THIS ELECTION,'' and a declaration 
that either ``AMENDED RETURNS WILL BE FILED FOR ALL TAXABLE YEARS 
AFFECTED BY THE FILING OF THIS ELECTION WITHIN 180 DAYS OF MAKING THIS 
STATEMENT, UNLESS SUCH REQUIREMENT IS WAIVED IN WRITING BY THE INTERNAL 
REVENUE SERVICE'' or ``ALL RETURNS PREVIOUSLY FILED ARE CONSISTENT WITH 
THE PROVISIONS OF Sec. Sec.  1.597-1 THROUGH 1.597-6.'' An election 
with respect to a consolidated group must be made by the 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