Tax treatment of federal financial assistance provided to banks

Tax treatment of federal financial assistance

The Treasury Department and IRS today released for publication in the Federal Register proposed regulations (REG-140991-09) under section 597 as guidance for banks and building and loan associations (and related parties) that receive federal financial assistance (FFA) from an “agency”—generally defined as the Resolution Trust Corporation, the FDIC, or a similar instrumentality of the U.S. government.

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The proposed regulations [PDF 309 KB] are intended to modify and clarify the tax treatment of transactions in which FFA is provided to these entities.

Reason for proposed regulations

Section 597 was added to the Code in 1981 following the savings and loan crisis, and then was amended twice by subsequent legislation. Regulations under section 597 were promulgated in 1995 (referred to in today’s release as the “current regulations”).

The preamble to today’s release states that the Treasury Department and IRS have received suggestions for changes to the current regulations under section 597. Today’s release addresses these comments and other concerns not raised in comments.

Changes “of most significance” proposed

Today’s proposed regulations are intended to modify and clarify the treatment of certain transactions in which FFA is provided to banks and financial institutions (and related persons).

The proposed regulations:

  • Remove all references to the term “highest guaranteed value,” which under current regulations is used to determine an acquirer’s basis in an asset subject to a “loss guarantee” (a “covered asset”). Under the proposed regulations, an acquirer will determine its tax basis in a “covered asset” based on the asset’s “expected value,” which is generally equal to the sum of: (1) the fair market value of the asset (absent the existence of a “loss guarantee”); and (2) the amount the agency would pay if the asset were sold for its fair market value on the acquisition date. The regulations also provide a formula for purposes of determining the expected amount the agency will pay in the case of a loss share agreement with multiple tranches.
  • Expand Reg. section 1.597-2(d)(4)(iv) by providing that an institution is treated as having made any transfer to an agency that was made by any other member of its affiliated group, regardless of whether a consolidated return is filed.
  • Modify Reg. section 1.597-3(a) to clarify that the entity that actually holds a “covered asset” will be treated as the owner of the asset. As such, payments made to an institution related to a covered asset owned by another entity will be treated as made to the owner. The payment will then be treated as transferred through chains of ownership to the extent necessary to reflect the actual receipt of such payment. The proposed regulations also provide that the deemed transfer of FFA by a RIC or REIT to the institution, if a deemed distribution, will not be treated as a preferential dividend for purposes of section 561, 562, 852, or 857.
  • Clarify that, for purposes of the taxable transfer rules under Reg. section 1.597-5, the amount paid for assets subsequently acquired under an option is to be integrated into the overall purchase price.
The proposed regulations also include the following “non-substantive” changes to:
  • Facilitate e-filing
  • Remove outdated provisions relating to a 30-day election to be excluded from the consolidated group
  • Clarify the meaning of “consolidated subsidiary” for purposes of the section 597 regulations

Comments

Comments and requests for a public hearing are due by a date that is 90 days after the proposed regulations are published in the Federal Register, which is scheduled for Wednesday, May 20, 2015.

Specifically, Treasury and the IRS seek comments related to the following items:

  • Whether an institution that holds assets subject to a loss guarantee is to be permitted or required to “pool” those assets for valuation purposes—rather than value each asset separately—and how such pooling approach is to be implemented as well as other issues that may arise from pooling assets.
  • Whether the rules in the proposed regulations concerning consolidated subsidiaries are to be expanded to apply to either (1) an institution’s subsidiaries that are “includible corporations” under section 1504(b), but that are not members of the Institution’s consolidated group, or (2) an institution’s subsidiaries that are not “includible corporations” (such as REITs).

Treasury and the IRS also received comments and inquiries on (1) the basis-step-up and six-year-inclusion rules, (2) the treatment of debt or equity issued to agencies, and (3) the tax treatment of agency payments under loss share agreements. While the preamble acknowledges the complexities of these issues, Treasury and the IRS ultimately decided not to address these issues in today’s proposed regulations.

Effective date

The regulations will become effective on the date when final regulations are published in theFederal Register, except with respect to FFA provided pursuant to an agreement entered into before such date—and in that case, the current regulations will continue to apply unless the taxpayer elects to apply the final regulations on a retroactive basis.

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