Abandonment loss deduction denied for branching rights obtained in FSLIC-assisted thrift acquisition.

• Author: Klein, Kyle
• Position: Federal Savings and Loan Insurance Corp.

In Letter Ruling (TAM) 9933003, the IRS concluded that branching rights received in the acquisition of insolvent Federal savings and loan associations did not constitute "Federal financial assistance" under Sec. 597. Consequently, it ruled that the taxpayer improperly claimed Sec. 165(a) abandonment loss deductions in connection with the subsequent sale of the acquired branches. The ruling and its rationale suggest that the Service will vigorously contest taxpayers' efforts to claim deductions associated with branching rights and other intangible assets received as part of Federally assisted acquisitions of insolvent thrifts.

The taxpayer had acquired three insolvent Federal savings and loan associations in supervisory mergers approved by the Federal Home Loan Bank Board (FHLBB). The acquisitions were accomplished through an assistance agreement with the Federal Savings and Loan Insurance Corporation (FSLIC). The assistance agreement provided the taxpayer with "indemnification and/or financial assistance" in the acquisition of the insolvent thrifts. Following the acquisitions, the insolvent thrifts ceased to exist as separate entities and their historic businesses were conducted by the taxpayer as branches.

The taxpayer treated the excess of liabilities assumed in the acquisitions over the fair market value (FMV) of the assets acquired as core deposits and goodwill. The taxpayer amortized these amounts over various periods for financial accounting purposes, but initially claimed no deductions for Federal tax purposes.

The taxpayer subsequently sold the branches pursuant to sale agreements that contained noncompetition provisions covering various geographical areas within the state in which the branches were located. On its Federal income tax return for the year of the sales, the taxpayer did not allocate any of the acquired thrifts' excess liabilities to the branches' adjusted bases in computing gain from their sale. On IRS examination, however, the taxpayer claimed that a portion of the amount represented the FMV of the branching rights granted to the taxpayer in the acquisition. The taxpayer further contended that the branching rights had an FMV basis because they were FSLIC-provided Federal financial assistance under Sec. 597 (as in effect when the taxpayer acquired the insolvent thrifts). Accordingly, the taxpayer maintained that it should be permitted to deduct the branching rights' FMV under Sec. 165(a) when it sold the branches...