[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: 26CFR1.597-8]

[Page 390-391]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.597-8  Transitional rules for Federal financial assistance.

    (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--

[[Page 391]]

    (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.

[T.D. 8406, 57 FR 14795, Apr. 23, 1992. Redesignated and amended by T.D. 
8471, 58 FR 18149, Apr. 8, 1993]

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