§585 — Reserves for losses on loans of banks
15 cases·1 followed·4 distinguished·10 cited—7% support
Statute Text — 26 U.S.C. §585
Except as provided in subsection (c), a bank shall be allowed a deduction for a reasonable addition to a reserve for bad debts. Such deduction shall be in lieu of any deduction under section 166(a).
For purposes of this section—
The term “bank” means any bank (as defined in section 581).
The term “bank” also includes any corporation to which subparagraph (A) would apply except for the fact that it is a foreign corporation. In the case of any such foreign corporation, this section shall apply only with respect to loans outstanding the interest on which is effectively connected with the conduct of a banking business within the United States.
For purposes of subsection (a), the reasonable addition to the reserve for bad debts of any financial institution to which this section applies shall be an amount determined by the taxpayer which shall not exceed the addition to the reserve for losses on loans determined under the experience method as provided in paragraph (2).
The amount determined under this paragraph for a taxable year shall be the amount necessary to increase the balance of the reserve for losses on loans (at the close of the taxable year) to the greater of—
the amount which bears the same ratio to loans outstanding at the close of the taxable year as (i) the total bad debts sustained during the taxable year and the 5 preceding taxable years (or, with the approval of the Secretary, a shorter period), adjusted for recoveries of bad debts during such period, bears to (ii) the sum of the loans outstanding at the close of such 6 or fewer taxable years, or
the lower of—
the balance of the reserve at the close of the base year, or
if the amount of loans outstanding at the close of the taxable year is less than the amount of loans outstanding at the close of the base year, the amount which bears the same ratio to loans outstanding at the close of the taxable year as the balance of the reserve at the close of the base year bears to the amount of loans outstanding at the close of the base year.
For purposes of this paragraph, the base year shall be the last taxable year before the most recent adoption of the experience method, except that for taxable years beginning after 1987 the base year shall be the last taxable year beginning before 1988.
The Secretary shall define the term loan and prescribe such regulations as may be necessary to carry out the purposes of this section.
In the case of a large bank, this section shall not apply (and no deduction shall be allowed under any other provision of this subtitle for any addition to a reserve for bad debts).
For purposes of this subsection, a bank is a large bank if, for the taxable year (or for any preceding taxable year beginning after
December 31, 1986
)—
the average adjusted bases of all assets of such bank exceeded $500,000,000, or
such bank was a member of a parent-subsidiary controlled group and the average adjusted bases of all assets of such group exceeded $500,000,000.
Except as provided in paragraph (4), in the case of any bank which for its last taxable year before the disqualification year maintained a reserve for bad debts—
the provisions of this subsection shall be treated as a change in the method of accounting of such bank for the disqualification year,
such change shall be treated as having been made with the consent of the Secretary, and
the net amount of adjustments required by section 481(a) to be taken into account by the taxpayer shall be taken into account in each of the 4 taxable years beginning with the disqualification year with—
the amount taken into account for the 1st of such taxable years being the greater of 10 percent of such net amount or such higher percentage of such net amount as the taxpayer may elect, and
the amount taken into account in each of the 3 succeeding taxable years being equal to the applicable fraction (determined in accordance with the following table for the taxable year involved) of the portion of such net amount not taken into account under subclause (I).
| The applicable | |
| If the case of the— | fraction is— |
| 1st succeeding year | 2⁄9 |
| 2nd succeeding year | ⅓ |
| 3rd succeeding year | 4⁄9. |
In the case of a bank which is a financially troubled bank for any taxable year—
no adjustment shall be taken into account under subparagraph (A) for such taxable year, and
such taxable year shall be disregarded in determining whether any other taxable year is a taxable year for which an adjustment is required to be taken into account under subparagraph (A) or the amount of such adjustment.
Clause (i) shall not apply to the 1st taxable year referred to in subparagraph (A)(iii)(I) if the taxpayer elects a higher percentage in accordance with such subparagraph.
For purposes of clause (i), the term “financially troubled bank” means any bank if, for the taxable year, the nonperforming loan percentage of such bank exceeds 75 percent.
For purposes of clause (iii), the term “nonperforming loan percentage” means the percentage determined by dividing—
the sum of the outstanding balances of nonperforming loans of the bank as of the close of each quarter of the taxable year, by
the sum of the amounts of equity of the bank as of the close of each such quarter.
For purposes of this subparagraph—
The term “nonperforming loan” means any loan which is considered to be nonperforming by the primary Federal regulatory agency with respect to the bank.
The term “equity” means the equity of the bank as determined for Federal regulatory purposes.
In the case of a bank which is a member of a parent-subsidiary controlled group for the taxable year, the preceding sentence shall be applied with respect to such group.
For purposes of applying section 6655(e)(2)(A)(i) with respect to any installment, the determination under subparagraph (B) of whether an adjustment is required to be taken into account under subparagraph (A) shall be made as of the last day prescribed for payment of such installment.
If a bank makes an election under this paragraph for the disqualification year—
the provisions of this subsection shall not be treated as a change in the method of accounting of the taxpayer for purposes of section 481,
the taxpayer shall continue to maintain its reserve for loans held by the bank as of the 1st day of the disqualification year and charge against such reserve any losses resulting from loans held by the bank as of such 1st day, and
no deduction shall be allowed under this section (or any other provision of this subtitle) for any addition to such reserve for the disqualification year or any subsequent taxable year.
If the amount of the reserve referred to in subparagraph (B) as of the close of any taxable year exceeds the outstanding balance (as of such time) of the loans referred to in subparagraph (B), such excess shall be included in gross income for such taxable year.
For purposes of this subsection—
The term “parent-subsidiary controlled group” means any controlled group of corporations described in section 1563(a)(1). In determining the average adjusted bases of assets held by such a group, interests held by one member of such group in another member of such group shall be disregarded.
The term “disqualification year” means, with respect to any bank, the 1st taxable year beginning after December 31, 1986, for which such bank was a large bank if such bank maintained a reserve for bad debts for the preceding taxable year.
In the case of a parent-subsidiary controlled group, any election under this section shall be made separately by each member of such group.
Treasury Regulations
- Treas. Reg. §Treas. Reg. §1.585-1 Reserve for losses on loans of banks
- Treas. Reg. §Treas. Reg. §1.585-1(a) General rule.
- Treas. Reg. §Treas. Reg. §1.585-1(b) Application of section—(1) In general.
- Treas. Reg. §Treas. Reg. §1.585-1(i) §1.585-1(i)
- Treas. Reg. §Treas. Reg. §1.585-2 Addition to reserve
- Treas. Reg. §Treas. Reg. §1.585-2(a) In general—(1) Maximum addition.
- Treas. Reg. §Treas. Reg. §1.585-2(b) Percentage method—(1) In general—(i) Maximum addition.
- Treas. Reg. §Treas. Reg. §1.585-2(c) Experience method—(1) In general—(i) Maximum addition.
- Treas. Reg. §Treas. Reg. §1.585-2(d) Change in accounting method from specific charge-off method to reserve method of treating bad debts—(1) In general.
- Treas. Reg. §Treas. Reg. §1.585-2(e) Definitions—(1) Base year—(i) Percentage method.
- Treas. Reg. §Treas. Reg. §1.585-2(i) §1.585-2(i)
- Treas. Reg. §Treas. Reg. §1.585-3 Special rules
- Treas. Reg. §Treas. Reg. §1.585-3(a) Treatment of reserve.
- Treas. Reg. §Treas. Reg. §1.585-3(b) Accounting for reserve.
- Treas. Reg. §Treas. Reg. §1.585-4 Reorganizations and asset acquisitions
- Treas. Reg. §Treas. Reg. §1.585-4(a) In general.
- Treas. Reg. §Treas. Reg. §1.585-4(b) Base year and base year amounts of acquiring corporation—(1) Base year.
- Treas. Reg. §Treas. Reg. §1.585-5 Denial of bad debt reserves for large banks
- Treas. Reg. §Treas. Reg. §1.585-5(a) General rule.
- Treas. Reg. §Treas. Reg. §1.585-5(b) Large bank—(1) General definition.
- Treas. Reg. §Treas. Reg. §1.585-5(c) Average total assets—(1) In general.
- Treas. Reg. §Treas. Reg. §1.585-5(d) Definitions.
- Treas. Reg. §Treas. Reg. §1.585-5(i) §1.585-5(i)
- Treas. Reg. §Treas. Reg. §1.585-6 Recapture method of changing from the reserve method of section 585
- Treas. Reg. §Treas. Reg. §1.585-6(a) General rule.
15 Citing Cases
4BUF accounts for bail bonds may be Ídistinguished from reserve accounts for bad debts created by banks. Under sec. 585; certain entities are allowed to deduct additions to a reserve for bad debts.
585; certain entities are allowed to deduct additions to a reserve for bad debts. However, sec. 585 is a closed class, and petitioners are not acting in a capacity coveréd by that section. - 8 - Petitioners argue that a BUF account is analogous to the payment of insurance premiums; that is, petitioners are paying a set amount in order to be f
Section 581 provides a broad definition for the term “bank”, while section 585 provides for the reserves for losses on loans to banks.
section 1.585-2(c)(l), Income Tax Regs., is identical to the Black Motor formula. Petitioners seemingly would have us conclude from the foregoing that the word “experience” in section 448(d)(5) has the same meaning as the term “experience method” in section 585. We, however, do not agree that Congress’ use of the word “experience” in section 448(d)(5) necessarily shows congressional intent that the uncollectible amount be calculated under the Black Motor formula. Indeed, we think that it is more
Section 1361(b)(2) describes an “ineligible corporation” as: any corporation which is–- (A) a financial institution which uses the reserve method of accounting for bad debts described in section 585, (B) an insurance company subject to tax under subchapter L, (C) a corporation to which an election under section 936 applies, or (D) a DISC or former DISC.
Section 1361(b)(2) describes an “ineligible corporation” as: any corporation which is— (A) a financial institution which uses the reserve method of accounting for bad debts described in section 585, (B) an insurance company subject to tax under subchapter L, (C) a corporation to which an election under section 936 applies, or (D) a DISC or former DISC.
nce" was found to have the technical meaning advanced by petitioners. Moreover, section 448 does not define the word in that manner. In support of their contention petitioners cite section 585(b)(2),11 which describes "the experience method" that 11 Sec. 585, as amended by sec. 11801(c)(12) of the Omnibus Budget Reconciliation Act of 1990, Pub. L. 101-508, 104 Stat. 1388-527, provides in pertinent part as follows: SEC. 585. RESERVES FOR LOSSES ON LOANS OF BANKS. (a) Reserve for Bad Debts.-- (1)
nce" was found to have the technical meaning advanced by petitioners. Moreover, section 448 does not define the word in that manner. In support of their contention petitioners cite section 585(b)(2),11 which describes "the experience method" that 11 Sec. 585, as amended by sec. 11801(c)(12) of the Omnibus Budget Reconciliation Act of 1990, Pub. L. 101-508, 104 Stat. 1388-527, provides in pertinent part as follows: SEC. 585. RESERVES FOR LOSSES ON LOANS OF BANKS. (a) Reserve for Bad Debts.-- (1)
nce" was found to have the technical meaning advanced by petitioners. Moreover, section 448 does not define the word in that manner. In support of their contention petitioners cite section 585(b)(2),11 which describes "the experience method" that 11 Sec. 585, as amended by sec. 11801(c)(12) of the Omnibus Budget Reconciliation Act of 1990, Pub. L. 101-508, 104 Stat. 1388-527, provides in pertinent part as follows: SEC. 585. RESERVES FOR LOSSES ON LOANS OF BANKS. (a) Reserve for Bad Debts.-- (1)