Temporary Regs Provide Transition Rule for Federal Assistance to Banks

 [4830-01]

 ACTION: Temporary regulation.

 SUMMARY: This document contains a temporary regulation that provides a transitional rule under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 for the tax treatment of Federal financial assistance received by certain banks and domestic building and loan associations. The temporary regulation affects payments under certain assistance agreements executed before May 10, 1989. The text of the temporary regulation set forth in this document also serves as the text of the proposed regulation cross-referenced in the notice of proposed rulemaking in the proposed rules section of this issue of the Federal Register.

 EFFECTIVE DATE: This temporary regulation is effective April 23, 1992 for assistance received or accrued on or after May 10, 1989 in connection with acquisitions before that date.

 FOR FURTHER INFORMATION CONTACT: Bernita L. Thigpen, 202-566-3297 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

BACKGROUND

This document adds new temporary regulation section 1.597-8T to 26 CFR part 1. The temporary regulation added by this document will remain in effect until superseded by later temporary or final regulations relating to these matters.

 Section 597 was substantially amended by section 1401(a)(3) of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (P.L. 101-73) ("FIRREA"). Prior to FIRREA, under section 597(a) a domestic building and loan association or a bank could exclude from gross income certain assistance payments made by either the Federal Savings and Loan Insurance Corporation or the Federal Deposit Insurance Corporation. FIRREA repealed this rule. FIRREA generally requires that Federal financial assistance be accounted for as gross income, as described more fully in Notice 89-102, 1989-2 C.B. 436.

 Section 1401(c)(3) of FIRREA provides that section 1401(a)(3) applies to Federal financial assistance received or accrued on or after May 10, 1989, unless the payment is pursuant to an acquisition that occurred prior to May 10, 1989. This temporary regulation explains how the effective date provision applies to situations in which Federal financial assistance is continuing to be paid for an acquisition that occurred prior to May 10, 1989. This temporary regulation also explains the consequences when a negotiated payment is received to terminate the right to future payments under an assistance agreement.

EXPLANATION OF PROVISIONS

 Section 1.597-8T(b)(1) of the temporary regulation sets forth the general rule that the tax consequences of assistance payments received or accrued on or after May 10, 1989, pursuant to an acquisition of a domestic building and loan association or a bank before May 10, 1989, are governed by the applicable pre-FIRREA version of section 597. In order for the general rule to apply, the payments must be made pursuant to an assistance agreement that was executed before May 10, 1989, and must be paid to a party to the agreement or such other party as the Commissioner may designate. In addition, the payments must otherwise be subject to a pre-FIRREA version of section 597. For example, this regulation does not apply to assistance paid in connection with an acquisition of a bank on or before November 10, 1988, because section 597 did not apply to banks until after that date.

 Under section 1.597-8T(b)(2) of the temporary regulation, if the parties agree to terminate a pre-May 10, 1989 assistance agreement in return for a lump sum or other payment that represents a prepayment of fixed or contingent obligations under the agreement, FIRREA will not apply to the payment if the payment is made to a party to the pre-May 10, 1989 assistance agreement (or such other party as the Commissioner may designate) and the assistance to which the payment relates would have qualified for pre-FIRREA treatment. In this circumstance, the lump sum or other payment is considered made pursuant to a pre-May 10, 1989 acquisition and assistance agreement, and the tax consequences of the payment are governed by the applicable pre-FIRREA version of section 597. For example, if section 597(c) prior to its amendment by FIRREA requires a taxpayer to reduce its tax attributes by 50 percent of an amount paid under an assistance agreement, the taxpayer must likewise reduce its tax attributes by 50 percent of the amount of any lump sum or other payment that represents a prepayment of obligations under the assistance agreement. Although the lump sum or other payment may result from a new agreement, the tax exempt character of the payment will not change to the extent new assistance is not provided. To the extent the payment represents compensation for a right that was not expressly provided by the original assistance agreement, the payment will be treated as new assistance subject to the provisions of FIRREA.

 Under section 1.597-8T(e), this temporary regulation is effective April 23, 1992 for assistance received or accrued on or after May 10, 1989 in connection with acquisitions before that date.

NEED FOR TEMPORARY REGULATIONS

 The provisions contained in this Treasury decision are needed immediately to provide guidance to the public with respect to current payments of Federal financial assistance for acquisitions of insolvent banks and domestic building and loan associations that occurred prior to May 10, 1989. Therefore, it is found impracticable and contrary to the public interest to issue this Treasury decision with prior notice under section 553(b) of title 5 of the United States Code.

SPECIAL ANALYSES

 It has been determined that these rules are not major rules as defined in Executive Order 12291. Therefore, a Regulatory Impact Analysis is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations, and, therefore, a final Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, the notice of proposed rulemaking for the regulation was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

DRAFTING INFORMATION

 The principal author of this regulation is Bernita L. Thigpen, Office of the Assistant Chief Counsel (Financial Institutions & Products), Internal Revenue Service. However, other personnel from the Service and Treasury Department participated in its development.

LIST OF SUBJECTS IN 26 CFR 1.591-1 THROUGH 1.601-1

 Banks, Banking, Income taxes, Reporting and recordkeeping requirements.

Treasury Decision 8406

ADOPTION OF AMENDMENTS TO THE REGULATIONS

Accordingly, 26 CFR part 1 is amended as follows:

PART 1 -- INCOME TAX; TAXABLE YEARS BEGINNING AFTER DECEMBER 31, 1953

Paragraph 1. The authority for part 1 is amended by adding the following citation:

Authority: Sec. 7805, 68A Stat. 917; 26 U.S.C. 7805 * * * section 1.597-8T also issued under 26 U.S.C. 597.

Par. 2. A new section 1.597-8T is added to read as follows:

SECTION 1.597-8T TRANSITIONAL RULES FOR FEDERAL FINANCIAL ASSISTANCE (TEMPORARY).

(a) SCOPE. This section provides transitional rules for the tax consequences of Federal financial assistance received or accrued on or after May 10, 1989, if the assistance payment relates to an acquisition that occurred before that date.

(b) TRANSITIONAL RULES. The tax consequences of any payment of Federal financial assistance received or accrued on or after May 10, 1989, are governed by the applicable provisions of section 597 that were in effect prior to the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") if either --

(1) The payment --

(i) Is pursuant to an acquisition of a bank or domestic building and loan association before May 10, 1989,

(ii) Is provided pursuant to an assistance agreement executed before May 10, 1989,

(iii) Is provided to a party to that agreement or to such other party as the Commissioner may determine appropriate by letter ruling or other written guidance, and

(iv) Would, if provided before May 10, 1989, have been governed by applicable provisions of section 597 that were in effect prior to FIRREA; or

(2) The payment --

(i) Represents a prepayment of (or a payment in lieu of) a fixed or contingent right to Federal financial assistance that would have satisfied the conditions of paragraphs (b)(1)(i), (ii) and (iv) of this section, and

(ii) Is provided to a party described in paragraph (b)(1)(iii) of this section.

(c) DEFINITION OF FEDERAL FINANCIAL ASSISTANCE. Federal financial assistance for purposes of this section has the meaning prescribed by section 597(c) as amended by FIRREA.

(d) EXAMPLES. The following examples illustrate the provisions of this section:

EXAMPLE 1. X corporation acquired Y, a domestic building and loan association on September 10, 1988. Pursuant to a written agreement executed at the time of the acquisition, Y received Federal financial assistance that included a note bearing a market rate of interest, the right to future payments if certain assets were sold at a loss, and the right to future payments if the income produced by certain assets was less than an agreed upon amount. On December 1, 1991, an agreement was executed in which Y relinquished its rights to Federal financial assistance under the September 10, 1988 agreement in return for a lump sum payment. The lump sum payment represented a prepayment of the principal and accrued but unpaid interest for the note, and the rights to the contingent future loss and income payments. The entire prepayment is excluded from the income of Y because it is a prepayment of Federal financial assistance and the assistance (i) would have been provided pursuant to an acquisition that occurred before May 10, 1989, would have been provided pursuant to an assistance agreement executed before May 10, 1989, and would, if it had been provided prior to May 10, 1989, have been governed by a pre-FIRREA version of section 597; and (ii) the prepayment is paid to a party to the assistance agreement.

EXAMPLE 2. The facts are the same as those in Example 1, except that the note bears an above market rate of interest and part of the lump sum represents a premium payment for the note. The portion of the lump sum allocable to the premium payment is also excluded from the income of Y because the payment represents the present value of the right to future Federal financial assistance in the form of interest.

EXAMPLE 3. The facts are the same as those in Example 1, except that a portion of the lump sum payment represents compensation for additional expenses Y may incur in the future because of termination of the September 10, 1988 agreement. The portion of the lump sum payment allocable to the compensation for additional expenses must be included in the income of Y because it is not a prepayment of Federal financial assistance provided for by a written agreement entered into prior to May 10, 1989.

EXAMPLE 4. The facts are the same as those in Example 1, except that instead of a new assistance agreement, the September 10, 1988 assistance agreement was modified on December 1, 1991. The modified agreement provided new Federal financial assistance in addition to the amounts previously agreed to. None of the new Federal financial assistance is governed by this regulation because the new assistance was not provided for by a written agreement entered into prior to May 10, 1989. The modification does not, however, affect the tax treatment of assistance provided for by the agreement prior to its modification.

(e) EFFECTIVE DATE. This section is effective April 23, 1992 for assistance received or accrued on or after May 10, 1989 in connection with acquisitions before that date.