IRS RELEASES PRELIMINARY GUIDANCE ON TAX TREATMENT OF FEDERAL FINANCIAL ASSISTANCE TO ACQUIRE FINANCIALLY TROUBLED THRIFTS.

Notice 89-102

TABLE OF CONTENTS

The Internal Revenue Service intends to provide comprehensive regulations on the tax consequences of transactions involving the receipt of financial assistance from Federal agencies and the acquisition of Financially Troubled Institutions pursuant to the provisions of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (P.L. 101-73) (the Act). The primary purpose of this Notice is to provide preliminary guidance with respect to the tax treatment of common transactions involving the receipt of Federal financial assistance and to solicit comments on the need for further guidance in areas not covered by this Notice. The rules provided in this Notice may be relied upon by taxpayers as an administrative pronouncement of the Internal Revenue Service. To the extent these rules are modified by subsequently issued regulations, it is expected that such differing provisions will be effective on a prospective basis only.

II. BACKGROUND

The Act was signed into law on August 9, 1989. Section 1401 of the Act repeals certain tax rules that were originally enacted in the Economic Recovery Tax Act of 1981 (the 1981 Act), extended by the Tax Reform Act of 1986, and re-extended and modified by the Technical and Miscellaneous Revenue Act of 1988 (TAMRA). These rules generally permitted the relevant supervisory authority to arrange mergers of Financially Troubled Institutions with healthy institutions at a tax- subsidized cost. The repeal of these provisions is effective for acquisitions occurring on or after May 10, 1989. The Act also clarifies the effective date of the TAMRA provisions as they apply to Agency assisted transactions involving financially troubled banks.

Prior to the effective date of the Act, sections 368(a)(3)(D) and 382(1)(5)(F) of the Internal Revenue Code provided special rules regarding the availability of tax-free reorganization status for, and the applicability of the loss limitation rules of section 382 following, certain Agency supervised restructurings of financial institutions described in section 581 or section 591. Section 597 generally provided that Agency assistance paid to or on behalf of a Financially Troubled Institution was excluded from gross income, but required the reduction of certain tax attributes in an aggregate amount equal to 50 percent of the amount of assistance received. Repeal of these prior law rules generally subjects such transactions to the generally applicable rules of sections 368 and 382, subject to the special rules described in this Notice, and generally requires that Federal financial assistance be accounted for as gross income, as described more fully below.

III. SCOPE

The notice is intended to provide specific guidance for the application of new section 597 to certain transactions, including taxable acquisitions of financially troubled institutions, that involve the receipt of Federal financial assistance. This Notice also provides guidance for the tax consequences of other aspects of certain acquisitive transactions, including the effect of the creation of an interim financial institution on the tax attributes of a Financially Troubled Institution, special rules for the application of sections 338, 382, and 1060, the application of the original issue discount provisions to Agency debt instruments, and the application of certain provisions of the consolidated return regulations.

This Notice does not address the tax treatment of insured deposit transfers. This Notice also does not address the tax treatment of transactions that do not involve the payment of Federal financial assistance by Agency to or on behalf of a financial institution, including transactions involving the voluntary supervisory conversion of solvent or marginally insolvent mutual institutions into stock institutions. The position of the Internal Revenue Service with respect to the treatment of the conversion of mutual institutions into stock form in cases not involving Federal financial assistance is published in Rev. Rul. 80-105, 1980-1 C.B. 78, and is not affected by this Notice. In the case of an institution that has been transferred to a Bridge Bank, Rev. Rul. 80-105 may apply only if the institution was a mutual institution before the transfer. This Notice also generally does not address the circumstances under which the reorganization provisions of the Code may be available to arrange tax-free acquisitions of Financially Troubled Institutions. The Internal Revenue Service will consider requests for private rulings on the tax consequences of Agency assisted acquisitions not described in this Notice.

IV. EFFECTIVE DATES

The guidance contained in this Notice is generally effective for Federal financial assistance received or accrued on or after May 10, 1989, in connection with Agency assisted acquisitions of Financially Troubled Institutions on or after May 10, 1989. However, in the case of Taxable Asset Acquisitions (or deemed asset acquisitions), the legislative history of the Act provides interim guidance relating to the repeal of section 597 upon which taxpayers who completed acquisitions or entered into binding contracts before September 8, 1989, are entitled to rely. See H. Rep. No. 101-54 (Part 2), 101st Cong., 1st Sess. 27 (1989); 135 Cong. Rec. No. 109 (Part 2) H5299 (daily ed. August 4, 1989) (Conference Report). For purposes of applying the effective date rules of the Act, the time of an acquisition is the time at which Acquiring (not Agency or Bridge Bank) acquires the assets and assumes the liabilities of Target. Accordingly Federal financial assistance received or accrued by a Bridge Bank that was formed prior to May 10, 1989 will be subject to new section 597 if such assistance is received or accrued on or after May 10, 1989. The time of an acquisition depends on all the facts and circumstances. If no acquisition has occurred on the date that Agency closes the institution, then an acquisition by Acquiring at a later date does not relate back to the date the institution was closed.

V. DEFINITIONS

Acquiring -- The term "Acquiring" refers to a corporation (other than Bridge Bank) that receives assets and assumes liabilities of a Target in an Agency assisted asset acquisition or the person that acquires control of a Target by reason of an Agency assisted stock acquisition.

Agency assisted -- An "Agency assisted" transaction is any transaction in which Federal financial assistance is provided to a party to the transaction.

Agency -- The term "Agency" means the Resolution Trust Corporation, the Federal Deposit Insurance Corporation, and any instrumentality, subsidiary, or any predecessor or successor of the foregoing, including the Federal Savings and Loan Insurance Corporation.

Bridge Bank -- The term "Bridge Bank" refers to (i) a national bank organized by Agency and chartered by the Comptroller of the Currency pursuant to section 11(n) of the Federal Deposit Insurance Act (12 U.S.C. 1821) or section 21A(b)(11)(A)(v) of the Federal Home Loan Bank Act (12 U.S.C. 1421 et. seq.) for the purpose of holding assets and liabilities of a Target and continuing the operation of Target's business pending its acquisition; or (ii) a Federal savings association organized by Agency and chartered by the Director of the Office of Thrift Supervision pursuant to section 21A(b)(11)(A)(iv) of the Federal Home Loan Bank Act for the purpose of holding assets and liabilities of a Target and continuing the operation of Target's business pending its acquisition.

Federal financial assistance -- The term "Federal financial assistance" has the same meaning as is provided in section 597(c) of the Code, which refers to any money or property provided by Agency with respect to a Financially Troubled Institution pursuant to section 406(f) of the National Housing Act, section 21A of the Federal Home Loan Bank Act, section 11(n) or 13(c) of the Federal Deposit Insurance Act, or "any other similar provision of law." Federal financial assistance includes, but is not limited to, Net Worth Assistance and amounts paid pursuant to Loss Guarantees, Yield Maintenance Agreements, or reimbursement arrangements.

Financially Troubled Institution -- The term "Financially Troubled Institution" refers to any financial institution that is transferred to a Bridge Bank or with respect to which Federal financial assistance is provided.

Loss Guarantee -- The term "Loss Guarantee" refers to an arrangement by Agency to guarantee Acquiring, Target, or any successor a certain price upon disposition of identified assets, a right to "put" assets at a specified price, or any similar arrangement.

Net Worth Assistance -- The term "Net Worth Assistance" refers to any money or property (including Net Worth Notes) that is provided by Agency at the time of the acquisition as an integral part of an acquisition of the stock or assets and liabilities of a Target. Agency's agreement to provide assistance in the form of Loss Guarantees, Yield Maintenance or expense reimbursements is not considered property provided by Agency.

Net Worth Note -- The term "Net Worth Note" refers to a fixed principal amount debt instrument that Agency provides as Net Worth Assistance. For this purpose, an Agency debt instrument will be considered to have a fixed principal amount notwithstanding an agreement to adjust the amount of the debt after its issuance.

Target -- The term "Target" refers to a Financially Troubled Institution or a Bridge Bank, the assets and liabilities or stock of which is acquired in an Agency assisted acquisition.

Taxable Asset Acquisition -- The term "Taxable Asset Acquisition" refers to a deemed or actual Agency assisted transfer of assets and liabilities of Target in a transaction in which Target recognizes gain or loss with respect to such assets.

Yield Maintenance Agreement -- The term "Yield Maintenance Agreement" refers to an arrangement or agreement by the Agency to guarantee a certain yield or income level with respect to assets covered by the agreement, or any similar arrangement, such as a cost of funds reimbursement arrangement.

VI. TAX CONSEQUENCES OF THE PAYMENT OF FEDERAL FINANCIAL ASSISTANCE

NEW SECTION 597

Under new section 597, the treatment of any transaction in which Federal financial assistance is provided with respect to a bank or domestic building and loan association will be determined under Treasury regulations, which are to be based on the general principle that, in the absence of the exclusion provided by prior law section 597, Federal financial assistance is gross income properly taken into account by the Financially Troubled Institution.

Pursuant to the authority granted to the Treasury Department by the Act, this Notice sets forth rules the Internal Revenue Service will apply in determining the tax consequences of the receipt of Federal financial assistance. Different rules apply in certain cases for Taxable Asset Acquisitions and for carryover basis and stock purchase acquisitions. The receipt (or deemed receipt) of Federal financial assistance will not be characterized as a contribution to capital even if Agency receives an equity interest in the Financially Troubled Institution.

OVERVIEW OF THE EFFECTS OF NEW SECTION 597

This section provides an overview of the treatment of Federal financial assistance under new section 597. The explanation in this section is necessarily general. If statements in this section are modified by statements in the more detailed sections that follow, the latter statements control.

The following rules apply to Federal financial assistance provided in connection with a Taxable Asset Acquisition. In the case of Net Worth Assistance, the Target generally will be required to account for such assistance as ordinary income recognized immediately before the acquisition. Such assistance is then treated as an asset in Target's hands with a basis equal to the income recognized. In the case of an arrangement to provide Federal financial assistance in the form of a Loss Guarantee, Agency's agreement to make such payments generally will be viewed as a component of the value of the assets covered by such an arrangement in allocating the amount realized by Target on the sale of its assets. Agency's agreement to make such payments will also be reflected in the value of assets transferred to Acquiring for purposes of allocating basis to such assets. When actually paid to Acquiring upon the disposition of covered assets, Loss Guarantee payments are taken into account by Acquiring as amounts realized (in whole or in part) on the disposition of such assets.

The foregoing and the guidance contained in this Notice assume, unless specifically stated to the contrary, that Acquiring is treated as the owner of the ass, covered by a Loss Guarantee. However, general Federal tax principles, based upon an analysis of the benefits and burdens of ownership, will apply to determine who is the owner of assets covered by a Loss Guarantee. Accordingly, property covered by a Loss Guarantee under which Agency, rather than Acquiring, has the benefits and burdens of ownership will be considered owned by Agency. Generally Acquiring, rather than Agency, will be deemed to own assets covered by a Loss Guarantee if the agreements with Agency do not limit the rights of Acquiring to all of the income from and all of the benefit of any increase in the value of the covered assets.

In the case of carryover basis and stock purchase acquisitions (unless the purchaser elects to treat the transaction as a Taxable Asset Acquisition), the following rules apply. Net Worth Assistance will be treated as ordinary income of Target received immediately prior to the acquisition. For purposes of the built-in gain and loss calculations under section 382(h)(3) of the Code and section 1.1502- 15 of the Income Tax Regulations, a Net Worth Note will be taken into account as an asset of Target with a fair market value and basis equal to its deemed issue price, determined as described below. Assets covered by a Loss Guarantee will be treated as having a fair market value at least equal to the amount of the Loss Guarantee, but the basis of such assets will not be affected by the existence of the Loss Guarantee. The effect of any Loss Guarantee on the value of covered assets is taken into account for purposes of determining the amount of any built-in gain or built-in loss at the time of the acquisition for purposes of section 382(h) of the Code and section 1.1502-15 of the Income Tax Regulations, and in determining worthlessness, in whole or in part, with respect to bad debts for purposes of sections 166, 585, 593 and 595. Any Federal financial assistance received pursuant to a Loss Guarantee will be treated as an amount realized from the sale or exchange of assets covered by such Loss Guarantee, provided the recipient is considered to be the owner of such assets.

As described below, there are exceptions to the general rule that Federal financial assistance must be accounted for by Target to the extent the assistance is in the nature of compensation to Acquiring for the use of money or services or, in the case of amounts paid pursuant to a yield maintenance or cost of funds reimbursement agreement, is in the nature of an income subsidy. For example, Acquiring rather than Target will be required to include in income interest accrued with respect to a Net Worth Note. Similarly, a Yield Maintenance Agreement is not taken into account by Target as income nor are anticipated income payments pursuant to such an agreement treated as a built-in gain item of Target, but such payments are accounted for as income to the recipient when properly accrued.

Target (or a successor corporation) must file a Federal income tax return for the taxable year including an Agency assisted acquisition, reporting any net tax liabilities attributable to the transaction. Section 7507 of the Code will not apply to a Target, or any other Financially Troubled Institution, to prevent the assessment or collection of Federal tax liabilities attributable to the receipt of Federal financial assistance. However, as provided below, pursuant to the exercise of regulatory authority granted by the Act, the Internal Revenue Service will not seek to collect any net tax liability resulting from a Taxable Asset Acquisition if, at the time of the acquisition, Target was not a member of an affiliated group making a consolidated return or was the common parent of such a group and such liability otherwise would be borne, directly or indirectly, by Agency. Furthermore, if a Target (whether or not a member of an affiliated group making a consolidated return) is acquired in a Taxable Asset Acquisition, no uncollected tax liability of the Target will be assessed against Acquiring as transferee of the Target. However, if a Target is acquired in an Agency assisted transaction that is not a Taxable Asset Acquisition, Target (or Target's successor) will have continued liability for any Federal tax liability, whether attributable to the receipt of Federal financial assistance or otherwise.

RULES FOR APPLICATION OF NEW SECTION 597 IN THE CASE OF TAXABLE ACQUISITION OF ASSETS OF TARGET

An Agency assisted acquisition of the liabilities and assets of Target by Acquiring that is a Taxable Asset Acquisition will be subject to the generally applicable rules of Federal taxation, including section 1060 of the Code, with modifications described below to take specific account of the treatment of Federal financial assistance provided in connection with the transaction. Accordingly, Target will recognize gain or loss on the sale of assets and Acquiring will have a cost basis in the assets received. Subject to the rules set forth below, Target and Acquiring must allocate the consideration among the assets sold in accordance with the requirements of section 1060 to determine Target's amount realized and Acquiring's basis.

TREATMENT OF TARGET

NET WORTH ASSISTANCE. Net Worth Assistance provided at the time of the acquisition in the form of cash or Net Worth Notes will be treated as having been paid to Target immediately before the acquisition of Target's assets by Acquiring. Such amounts will constitute ordinary income to Target. In the case of Net Worth Notes, the amount that constitutes income is the issue price of the instrument, determined in accordance with the principles of the original issue discount (OID) provisions of Code, as described in Section IX of this Notice. In the case of a subsequent, retroactive adjustment to the amount of a Net Worth Note to account for a discrepancy between the estimated and actual deficit in the net worth of Target, the adjustment will be given effect and reflected in Target's return for the taxable year including the acquisition as if the resulting terms were included in the original instrument, provided such adjustment is made within 180 days of the date of the acquisition. Adjustments made more than 180 days after the date of the acquisition will not affect Target.

EFFECT OF LOSS GUARANTEES. In the case of Target assets that are covered by a Loss Guarantee, Agency's agreement to make such payments will affect the value of the assets transferred. Thus, for purposes of allocating the amount realized among Target's assets in order to compute Target's gain or loss on the sale or deemed sale of its assets (whether Agency or Acquiring is the owner of such assets after the transfer), the fair market value of assets covered by a Loss Guarantee will be treated as not less than the guaranteed value, or in the case of assets subject to a "put," the highest price at which the assets can be put. (The existence of a Loss Guarantee will not, however, preclude assets from having a greater fair market value than the guaranteed value or "put" price.)

TREATMENT OF ACQUIRING

IN GENERAL. Subject to the rules set forth below, Acquiring's basis in the purchased assets generally is determined in accordance with the regulations under section 1060 of the Code. Federal financial assistance (whether provided to Target or Acquiring) does not increase Acquiring's basis in the Target assets and does not constitute consideration paid by Acquiring. In making the allocation under section 1.1060-1T(d) of the Income Tax Regulations, after reducing consideration by the amount of Class I assets (including the amount of any Net Worth Assistance provided in cash), Acquiring must allocate consideration first to any non-cash Net Worth Assistance and then to any group of assets covered or created by a Loss Guarantee, to the extent of value, as if such groups of assets constituted separate asset classes, before allocating consideration to Class II through Class IV assets.

NET WORTH ASSISTANCE. For purposes of allocating consideration among the assets acquired, the value of Net Worth Assistance provided as a Net Worth Note is the issue price (as provided below) of such debt. Acquiring is required to include interest with respect to a Net Worth Note in income as properly accrued. If Agency adjusts the amount of a Net Worth Note retroactively to account for errors or omissions in the value or existence of the assets transferred, such adjustment will be given effect and reflected in Acquiring's return for the taxable year including the acquisition, as if the resulting terms were included in the original instrument, provided the adjustment is made within 180 days of the date of the acquisition. However, an adjustment to the amount of a Net Worth Note to account for errors or omissions in the value or existence of the assets transferred that occurs more than 180 days following the acquisition date will be treated as creating a new, separate debt instrument evidencing a new obligation of Agency to provide assistance. The income consequences of such assistance are borne solely by Acquiring. Any other adjustment to account for a new obligation of Agency will be treated as creating a new, separate debt instrument, the consequences of which depend upon the circumstances of the issuance. For example, the amount of an upward adjustment to reflect Agency's obligation on account of the deferred payment of amounts due to Acquiring after exercise of a "put" right will be taken into account as a new debt instrument issued for property to which section 1274 applies.

LOSS GUARANTEE. For purposes of allocating basis to assets covered by a Loss Guarantee that are owned by Acquiring, such assets may not be treated as having a fair market value that is less then the guaranteed value or, in the case of assets subject to a "put," the highest price at which the assets can be put. Amounts paid to Acquiring pursuant to the Loss Guarantee will be treated as realized in exchange for assets covered by the Loss Guarantee. If, under general Federal tax principles, Agency is considered the owner of the assets covered by the Loss Guarantee, basis is allocated to Acquiring's right to receive proceeds from the assets, including payments pursuant to the Loss Guarantee, in an amount equal to the guaranteed value of the assets or, in the case of assets covered by a "put," the highest price at which the assets can be put. Amounts received by Acquiring with respect to such assets will be treated as a recovery of basis to the extent of basis. Amounts received by Acquiring in excess of basis will be treated as Federal financial assistance which must be accounted for as ordinary income.

YIELD MAINTENANCE AGREEMENT. Amounts received by Acquiring under a Yield Maintenance Agreement are treated as income from the asset or pool of assets to which such payments elate. Generally such amounts will constitute interest income. The right to receive such payments is not a separate asset to which basis may be allocated. Acquiring must include amounts payable pursuant to a Yield Maintenance Agreement in income when such amounts are properly accrued.

EXPENSE REIMBURSEMENTS AND INDEMNITY PAYMENTS. Expense reimbursements and indemnity payments refer to amounts received by (or on behalf of) Acquiring under an arrangement with Agency to reimburse Acquiring for certain costs or expenses incurred in or by reason of the transaction or in maintaining or disposing of acquired (or managed) assets. The right to receive such payments is not an asset to which basis may be allocated. Reimbursements paid or accrued pursuant to such an arrangement are not included in income but Acquiring may not deduct, or otherwise take into account (by, for example, including it in the basis of an asset), the item of cost or expense to which the expense reimbursement or indemnity payment relates.

COORDINATION WITH THE CONSOLIDATED RETURN REGULATIONS

If Target is a subsidiary within an affiliated group of corporations making a consolidated return, the tax consequences to the group of tax events affecting Target will be determined in accordance with the consolidated return regulations.

COLLECTION OF TAX LIABILITIES

Section 7507 of the Code will not apply to a Financially Troubled Institution or Bridge Bank to prevent the assessment or collection of Federal tax liabilities attributable to the receipt of Federal financial assistance. However, pursuant to the exercise of regulatory authority granted by the Act, Federal tax liability may be waived under certain circumstances, as described below. If substantially all of Target's assets are transferred in a Taxable Asset Acquisition and the Target was not includible in any consolidated return for the period that includes the acquisition date (or was the common parent of a group making a consolidated return), any net tax liability that results from a Taxable Asset Acquisition will not be assessed or collected if such net tax liability otherwise would be borne directly or indirectly by Agency. See 135 Cong. Rec. No. 109 (Part 2) H5299, (daily ed. August 4, 1989) (Conference Report). If Target is a subsidiary within an affiliated group of corporations making a consolidated return, the tax liability of the group, including any liability that results from a Taxable Asset Acquisition, will be assessed and collected from the group.

TRANSFEREE LIABILITY. If a Target is acquired in a Taxable Asset Acquisition, then no uncollected tax liability of the Target will be assessed against Acquiring as transferee of the Target.

RULES FOR APPLYING SECTION 597 IN CARRYOVER BASIS AND STOCK PURCHASE ACQUISITIONS

If Acquiring acquires (within a twelve-month period) stock of Target that meets the requirements of section 1504(a)(2) of the Code in an Agency assisted acquisition and if Acquiring is a corporation, Acquiring will be treated as eligible to make the election described in section 338(g) to treat such purchase as a Taxable Asset Acquisition. For this purpose the term "purchase" means any acquisition of stock that would constitute a "purchase" as defined in section 338(h)(3) of the Code, without regard to whether section 351 applies to the transaction. Accordingly, notwithstanding section 338(h)(3)(A)(ii), a "purchase" for purposes of this Notice may include a transaction to which section 351 applies. If Acquiring makes a section 338 election, the taxation of amounts received as Federal financial assistance (including the determination of the amount and allocation of basis in Target assets under the modified rules under section 1060) will be determined as described above for the treatment of Acquiring in a Taxable Asset Acquisition. All other aspects of the taxation of Acquiring and Target will be determined in accordance with the regulations under section 338 of the Code, except that the consistency rules of such section will not apply. If Target is a member of an affiliated group of corporations making a consolidated return, Acquiring will be permitted to join in an election described in section 338(h)(10).

In the case of any carryover basis or stock purchase transaction that is not treated as a Taxable Asset Acquisition, Federal financial assistance will be taxed in the following manner:

TREATMENT OF TARGET

NET WORTH ASSISTANCE. Net Worth Assistance will be taxed to Target as if Target had received such assistance immediately before the acquisition in the same manner as if Target had been acquired in a Taxable Asset Acquisition. Such Net Worth Assistance is treated as an asset of Target immediately before the acquisition with a basis equal to the amount of income recognized. The consequences to Target after the acquisition with respect to the receipt of Net Worth Assistance are the same as those described above with respect to Acquiring under Taxable Asset Acquisitions. The interest on a Net Worth Note will not be considered built-in gain for purposes of the built-in gain and loss calculations under section 382(h) of the Code and section 1.1502-15 of the Income Tax Regulations.

EFFECT OF LOSS GUARANTEE. In any case in which the fair market value of Target's assets is relevant for Federal income tax purposes, such as sections 166, 382, 585, 593 and 595 of the Code and section 1.1502-15 of the Income Tax Regulations, the value of assets covered by a Loss Guarantee must be determined in the same manner as the value of assets covered by a Loss Guarantee is determined in a Taxable Asset Acquisition. Accordingly, if, under general Federal tax principles, Target is considered the owner of such assets, the fair market value of assets covered by the Loss Guarantee will be treated as not less than the guaranteed value or highest "put" price of such assets, and such value is treated as the value of such assets immediately before the ownership change for purposes of the built-in gain and loss calculations under section 382(h) of the Code and section 1.1502-15 of the Income Tax Regulations. If Agency is considered the owner of such assets, the assets will be treated as having been sold by Target to Agency immediately before the ownership change for an amount equal to the lesser of Target's basis in such assets or the guaranteed value or highest "put" price applicable to such assets. Target must recognize as additional Federal financial assistance any amounts in excess of basis that it is treated as receiving from Agency pursuant to the Loss Guarantee. Receipt by Target of amounts paid pursuant to the Loss Guarantee will be treated as described above under "Rules for Application of New Section 597 in the Case of Taxable Acquisition of Assets of Target -- Treatment of Target -- Effect of Loss Guarantees."

YIELD MAINTENANCE AGREEMENT. Amounts received pursuant to a Yield Maintenance Agreement will be taxed the same as in a Taxable Asset Acquisition and will not constitute built-in gain for purposes of the calculations under section 382(h) of the Code and section 1.1502-15 of the Income Tax Regulations.

EXPENSE REIMBURSEMENTS AND INDEMNITY PAYMENTS. Indemnity payments and amounts received pursuant to an expense reimbursement arrangement will be treated in the manner described above under Taxable Asset Acquisitions.

TRANSFEREE LIABILITY

If a Target is acquired in an Agency assisted transaction that is not a Taxable Asset Acquisition, Target (or Acquiring as transferee) will have continued liability for any taxes of Target, whether attributable to the receipt of Federal financial assistance or otherwise.

VII. TREATMENT OF CREATION OF INTERIM FINANCIAL INSTITUTIONS

Pursuant to the exercise of the regulatory authority granted by the Act, the Internal Revenue Service will treat the transfer by Agency of the assets and liabilities of a Financially Troubled Institution to a Bridge Bank as a carryover basis transaction in which the Bridge Bank succeeds to and takes into account, as of the close of the day of any transfer, the items of the Financially Troubled Institution described in section 381(c). Accordingly, no gain or loss will be recognized to a Financially Troubled Institution on the transfer of its assets and liabilities to a Bridge Bank. In addition, such transaction will not be treated as an ownership change for purposes of section 382 of the Code.

A Bridge Bank will be treated as a corporation within the meaning of section 7701(a)(3) for all purposes of the Code, subject to generally applicable rules of Federal taxation, including filing requirements, except as otherwise provided in this Notice.

If a Financially Troubled Institution is a subsidiary member of an affiliated group making a consolidated return immediately before the transaction, the transfer of the Institutions's assets and liabilities to Bridge Bank will cause Bridge Bank to be treated as the transferor Institution's successor. Thus, Bridge Bank will continue as a member of the group and will succeed to the taxable year and taxpayer identification number of the transferor Institution. The group's basis (or excess loss account) in the stock of Bridge Bank will equal its basis (or excess loss account) in the stock of the transferor Institution. The Internal Revenue Service will provide special rules for adjusting the group's basis in the stock of the Bridge Bank and the transferor Institution if assets or liabilities are retained by the transferor Institution.

If a Financially Troubled Institution was a common parent, or was not a member, of an affiliated group of corporations making a consolidated return, the taxable year of the Financially Troubled Institution will not close on the transfer of its assets to a Bridge Bank (and the group, if any, will not terminate). In such a case, Bridge Bank is not required to obtain a new taxpayer identification number.

The rules described in the preceding two paragraphs assume that no assets of any other Financially Troubled Institution are transferred to the Bridge Bank. Special rules may apply in the case of the transfer of more than one Financially Troubled Institution into a Bridge Bank. The Internal Revenue Service invites comments with respect to such rules.

VIII. TREATMENT OF PRE-ACQUISITION FEDERAL FINANCIAL ASSISTANCE

In certain cases, Agency may be required to provide Federal financial assistance to a Financially Troubled Institution prior to arranging an acquisition. Such assistance frequently takes the form of direct payments of cash or notes or payment of cash or notes in exchange for certain assets of the institution. Such assistance may be received in a taxable year preceding the taxable year in which the Financially Troubled Institution is required to account for the consequences of its acquisition.

A Financially Troubled Institution generally must include Federal financial assistance in income when paid or accrued. Thus, Agency payments of cash or notes not in exchange for assets are treated as ordinary income to the Financially Troubled Institution with respect to which such amounts are paid. If Agency acquires assets from the Financially Troubled Institution in exchange for consideration and the amount of consideration is less than the Financially Troubled Institution's basis in such assets, the Financially Troubled Institution will be treated as recognizing a loss on the sale of such assets. If the amount of consideration exceeds the Financially Troubled Institution's basis in the assets, the Financially Troubled Institution will be treated as having sold the assets for an amount equal to their basis. Any amount in excess of such basis will be treated as Federal financial assistance includible as ordinary income.

If Agency intends to cause the later acquisition of a Financially Troubled Institution (or in the case of any Bridge Bank), the tax consequences of the pre-acquisition receipt or accrual of Federal financial assistance may be deferred as follows: If Agency provides Federal financial assistance to a Target that is not a member of an affiliated group of corporations making a consolidated return (or that is the common parent of such a group) the Target may elect to defer the payment of the net tax liability attributable to the assistance for a period not extending beyond the earlier of thirty-six months from the date such assistance is provided or the date on which the Target stock or assets and liabilities are acquired. For this purpose, the net tax liability attributable to Federal financial assistance equals the difference between the actual amount of the corporation's tax liability and a recomputed amount of tax liability that does not take into account the income attributable to the assistance.

The election described in the preceding paragraph will be made by filing with the Federal income tax return for the year at issue the following declaration: "THIS CERTIFIES THAT AN ELECTION IS BEING MADE UNDER NOTICE 89-102 TO DEFER THE PAYMENT OF THE NET TAX LIABILITY ATTRIBUTABLE TO FEDERAL FINANCIAL ASSISTANCE." The Target making the election must include with the certification a statement under oath or affirmation providing a description of the assistance received, the date of receipt, and any amounts deferred pursuant to the election. The election will be made with the income tax return for each taxable year in which the payment of tax liability attributable to the Federal financial assistance is deferred. The election will be noted on the Form 1120 on the line for total tax (line 31 on the Form 1120 for 1989) by filling in the space to the left of the total tax with "Election under Notice 89-102." The Target making the election will file such declaration in duplicate and will file such additional statements as the district director for the internal revenue district in which the taxpayer's returns were filed may require. Whether or not additional statements will be required, and the frequency thereof, will depend on the circumstances and the time that is available for assessment and collection. Failure of a Target to file any required statement will cause Target to be treated as no longer entitled to defer its net tax liability. The Target will immediately notify the district director of the termination of the period of deferral. As the period of deferral terminates, it will be the duty of the Target, without notice from the district director, to make payment of any taxes then due. The running of the period of limitations on the assessment and collection of any net tax liability attributable to the Federal financial assistance will be suspended during, and for 90 days beyond, the period which ends on the date Target notifies the district director of the termination of the deferral period. Nothing in the foregoing will relieve a Target from its obligation to file returns for each of its taxable years.

IX. RULES FOR APPLICATION OF OID RULES TO AGENCY OBLIGATIONS ACQUIRED IN CONNECTION WITH AGENCY-ASSISTED TRANSACTIONS

The original issue discount (OID) rules of the Code will apply to determine the value of Net Worth Notes and the amount of interest payable with respect to such Notes. For purposes of determining the issue price and amount of OID on a Net Worth Note, if any, the Note will be treated as a debt instrument described in section 1273(b)(2). The fact that the principal amount of a Net Worth Note may be determined by reference to the value of property received by Agency from Target does not affect the treatment of a Net Worth Note as "not issued for property." In addition, without regard to whether the Note was actually issued to Target or Acquiring, (i) Acquiring will be treated as the first holder of such instrument and (ii) the issue price will equal the present value of all payments under the debt instrument, discounted at the applicable Federal rate (AFR) on the date Acquiring acquired the debt instrument. For purposes of determining the AFR, the principles of section 1.1274-6 of the Proposed Income Tax Regulations will apply. In the case of a debt instrument calling for a variable rate of interest based on an index, the principles of section 1.1274-3(d)(1) of the Proposed Income Tax Regulations will apply for purposes of computing the amount of payments under the debt instrument.

X. COMMENTS REQUESTED

The Internal Revenue Service invites comments concerning the provisions of this Notice * * * he need for further guidance with respect to the tax consequences of transactions that involve Federal financial assistance. In particular, the Internal Revenue Service invites comments on the treatment of transactions that involve the transfer of assets and liabilities of more than one unrelated financial institution into a Bridge Bank.

Written comments should be sent to the Office of Assistant Chief Counsel (Financial Institutions & Products), Branch 1, P.O. BOX 7604 Ben Franklin Station Washington, D.C. 20044.

XI. PROCEDURAL INFORMATION

This notice serves as an "administrative pronouncement" as that term is described in section 1.6661-3(b)(2) of the regulations and may be relied upon to the same extent as a revenue ruling or a revenue procedure.

The collection of information contained in this Notice has been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under control number 1545-1141. The estimated average burden associated with the collection of information in this Notice is 30 minutes per respondent.

These estimates are an approximation of the average time expected to be necessary for a collection of information. They are based on such information as is available to the Internal Revenue Service. Individual respondents may require more or less time, depending on particular circumstances.

Comments concerning the accuracy of this burden estimate and suggestions for reducing this burden should be directed to the Internal Revenue Service, Washington, D.C. 20224, Attention: IRS Reports Clearance Officer T:FP; or the Office of Management and Budget, Paperwork Reduction Project (1545-1141), Washington, D.C. 20503.

XII. FOR FURTHER INFORMATION

For further information regarding this Notice, please call Bernita L. Thigpen of the Office of Assistant Chief Counsel (Financial Institutions and Products) ((202) 566-3516) or Vicki J. Hyche of the Office of Assistant Chief Counsel (Corporate) ((202) 566-3265) (not toll-free calls).