Failed-bank assets should not retain carryover basis

Plain-English summary

A taxpayer acquired assets from a failed bank in a now-closed tax year and later sought to correct errors in applying section 597. The unresolved items included the assets' acquisition basis, post-acquisition loss-guarantee payments, and a six-year income inclusion. Chief Counsel explained that Congress expected the acquiring bank's purchase price to be allocated among the assets to reflect fair market value and to prevent the failed bank's losses from carrying over. A carryover-basis position would therefore conflict with section 597's purpose. Counsel recommended considering adjustments under the regulation's anti-abuse rule, although the specific settlement guidelines following that recommendation are not visible in the released text.

Ruling snapshot

• Question: What section 597 principles should guide settlement of a failed-bank asset acquisition that had been reported incorrectly?
• Outcome: advice given
• Key authorities: IRC § 597; Treas. Reg. §§ 1.597-3(g), 1.597-5(d)(2)(iii)

Full text (IRS public release)

ID:      CCA_2017022110223058
UILC:    597.05-01, 597.06-00, 597.12-00

Number: 201733014
Release Date: 8/18/2017
From:
Sent: Tuesday, February 21, 2017 10:22:30 AM
To:
Cc:
Bcc:
Subject: Your sec. 597 case


Good morning:

This responds to your request for our views regarding grounds for settlement of the
case we discussed, which involves a taxpayer that acquired the assets of a failed bank
in a prior taxable year that is now closed, and that improperly applied the rules under §
597 in computing items arising from the acquisition. The taxpayer has sought to correct
these errors, and seeks resolution with the Service that would affect its acquisition basis
in the assets, the treatment of post-acquisition loss guarantee payments received by
Agency, and the amount of the taxpayer’s six-year income inclusion under Treas. Reg.
§ 1.597-5(d)(2)(iii).

In terms of the applicable law, the legislative history underlying the current version of §
597 sets forth Congress’s concern that a failed institution’s net operating losses and
built-in losses on assets transferred to an acquiring bank would generally be eliminated,
and that the acquiring bank’s purchase price should be allocated among the various
assets acquired in the transaction to reflect the acquired assets’ fair market values. See
H.R. Rep. 101-54(II) (May 22, 1989) at p. 26-27. It would therefore be contrary to the
purpose of § 597 for an acquiring bank to hold the failed bank’s assets with a carryover
basis, as proposed by the taxpayer in this case. In this regard, Treas. Reg. § 1.597-3(g)
provides that “if, in structuring or engaging in any transaction, a principal purpose is to
achieve a tax result that is inconsistent with the purposes of section 597 and the
regulations thereunder, the Commissioner can make appropriate adjustments to
income, deductions and other items that would be consistent with those purposes.”

Accordingly, we recommend that you consider the following guidelines in resolving this
case:
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