[Code of Federal Regulations]
[Title 26, Volume 7]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.597-2]

[Page 373-377]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.597-2  Taxation of Federal financial assistance.

    (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 Agency provides in a taxable year to a 
direct or indirect shareholder of the Institution, to the extent money 
or property is transferred to the Institution pursuant to an agreement 
with 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 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 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 (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 Internal Revenue 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 Internal Revenue 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

[[Page 374]]

    (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 (c)(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 (c)(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 paragraph (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 (e.g., 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 Internal Revenue 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
    (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 Internal Revenue 
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 Internal Revenue 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

[[Page 375]]

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 
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, 
1.1502-21 or 1.1502-22 (or Sec. 1.1502-15A, 1.1502-21A or 1.1502-22A, 
as appropriate) that arose in connection with or prior to a corporation 
becoming a Consolidated Subsidiary of the Institution.
    (6) Operating rules--(i) Bad debt reserves. For purposes of 
paragraphs (c)(2), (c)(3) and (c)(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 Internal Revenue Code to the extent and at the time 
it is included in income under this paragraph (c).
    (d) Transfers of money or property to Agency, and property subject 
to a Loss Guarantee--(1) Transfers of property to Agency. The transfer 
of property to Agency or a Controlled Entity is a taxable sale or 
exchange in which the Institution is treated as realizing an amount 
equal to--
    (i) The property's fair market value; or
    (ii) For property subject to a Loss Guarantee, the greater of the 
property's fair market value or the guaranteed value or price at which 
the property can be put at the time of transfer.
    (2) FFA with respect to property covered by a Loss Guarantee other 
than on transfer to Agency. (i) FFA provided pursuant to a Loss 
Guarantee with respect to covered property is included in the amount 
realized with respect to the property to the extent the total amount 
realized does not exceed the greater of--
    (A) The property's fair market value; or
    (B) The guaranteed value or price at which the property can be put 
at the time of transfer.
    (ii) 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 covered property, 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

[[Page 376]]

a person other than 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 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 Agency or a Controlled Entity, the amount 
of money and 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 fair market value of property Agency or a Controlled Entity 
provides in exchange.
    (ii) Deposit insurance. This paragraph (d)(4) does not apply to 
amounts paid to Agency with respect to deposit insurance.
    (iii) Treatment of an interest held by 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 Agency or a Controlled Entity nor when 
acquired from Agency or a Controlled Entity by the issuer.
    (B) Dispositions to persons other than issuer. On the date Agency or 
a Controlled Entity transfers an interest described in Sec. 1.597-3(b) 
to a holder other than the issuer, Agency or a Controlled Entity, the 
issuer is treated for purposes of this paragraph (d)(4) as having 
transferred to 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) Consolidated groups. For purposes of this paragraph (d), an 
Institution will be treated as having made any transfer to Agency or a 
Controlled Entity that was made by any other member of its consolidated 
group. The consolidated group must make appropriate investment basis 
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 Acquiring, as a 
deduction of the amount in excess of FFA received that is required to be 
transferred to Agency under section 11(g) of the Federal Deposit 
Insurance Act (12 U.S.C. 1821(g)); or
    (B) By a New Entity or 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, 1997, 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 1997. Agency provides $30 million of FFA to M 
in 1997. The amount of this FFA

[[Page 377]]

that M must include in income in 1997 is limited by Sec. 1.597-2(c)(2) 
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 Sec. 1.597-2(c)(4)(i), M 
must establish a deferred FFA account for the remaining $10 million.
    (ii) If Agency instead lends M the $30 million, M's indebtedness to 
Agency is disregarded and the results are the same as in paragraph (i) 
of this Example 1. Section 597(c); Sec. Sec. 1.597-1(b) (defining FFA) 
and 1.597-3(b).
    Example 2. Transfer of property to 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 1998, M's remaining 
equity is $0 and M has a deferred FFA account of $10 million. Agency 
does not provide any FFA to M in 1998. During the year, M transfers 
property not covered by a Loss Guarantee to 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 1998.
    (ii) Under Sec. 1.597-2(d)(1), 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 Agency, under Sec. 1.597-2(d)(4) 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 Agency ($0). Because no FFA is provided to M in 1998, this 
adjustment reduces the balance of M's deferred FFA account to $9 million 
($10 million-$1 million). Section 1.597-2(d)(5)(i)(B). Because M's $4 
million loss causes M's deductions to exceed its gross income by $4 
million in 1998 and M has no remaining equity, under Sec. 1.597-
2(c)(4)(iii)(A) 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, 
sells an asset covered by a Loss Guarantee to an unrelated third party 
for $4,000. Q's adjusted basis in the asset at the time of sale and the 
asset's guaranteed value are both $10,000. Pursuant to the Loss 
Guarantee, Agency pays Q $6,000 ($10,000-$4,000). Q's amount realized 
from the sale of the asset is $10,000 ($4,000 from the third party and 
$6,000 from Agency). Section 1.597-2(d)(2). 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. 
Section 1.597-2(d)(3).

[T.D. 8641, 60 FR 66095, Dec. 21, 1995; 61 FR 12135, Mar. 25, 1996, as 
amended by T.D. 8677, 61 FR 33322, June 27, 1996; T.D. 8823, 64 FR 
36099, July 2, 1999; T.D. 8858, 65 FR 1237, Jan. 7, 2000; T.D. 8940, 66 
FR 9929, Feb. 13, 2001]