the institutions remained unprofitable since they continued pay out more in deposit interest than they earned on long-term fixed rate home mortgages. Congress responded to the continuing crisis by pursuing a policy of deregulation and tax incentives for mergers. The Economic Recovery Tax Act of 1981 (ERTA) included three provisions which promoted the acquisition of failing thrift institutions: Section 368(a)(3)(D) allowed the acquisition of an insolvent thrift to qualify as a tax-free "G" reorganization without regard to the continuity of interest rule, giving the acquiring institution a carryover basis in the assets of the acquired thrift; Section 382(l)(5)(F) permitted net operating loss (NOL) carryforwards of an insolvent thrift to be used without the general annual use limitation imposed by Section 382 on NOL carryforwards following an acquisition; and Section 597 provided that any assistance payments from a deposit insurance agency would be received tax-free and not require any downward adjustment in basis. The intention behind these actions was to encourage the private sector to bear the burdens of the costs of saving the troubled thrifts and to eliminate the uncertainty in the tax law concerning the consequences of capital infusions and mergers.
In spite of these measures, however, the thrift industry remained in trouble throughout the 1980s. Many invested heavily in commercial real estate in the Southwest, which deflated when oil prices plummeted. By 1987, the FSLIC reported an overall annual net loss of $6.6 billion and a reserve fund deficit of $13.7 billion. The FSLIC entered into many assistance agreements with troubled institutions in 1988, just before the special thrift tax provisions were scheduled to expire (on January 1, 1989). The large number of agreements made during the last few months of 1988 locked the government into paying assistance to many institutions.
In 1989, when considering the Finan...