Internal Revenue Code:Sec. 585. Reserves for losses on loans of banks
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TITLE 26 - INTERNAL REVENUE CODE
Subtitle A - Income Taxes
CHAPTER 1 - NORMAL TAXES AND SURTAXES
Subchapter H - Banking Institutions
PART I - RULES OF GENERAL APPLICA-
Statute
Sec. 585. Reserves for losses on loans of banks
(a) Reserve for bad debts
(1) In general
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).
(2) Bank
For purposes of this section -
(A) In general
The term ''bank'' means any bank (as defined in section 581).
(B) Banking business of United States branch of foreign
corporation
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.
(b) Addition to reserves for bad debts
(1) General rule
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).
(2) Experience method
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 -
(A) 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
(B) the lower of -
(i) the balance of the reserve at the close of the base
year, or
(ii) 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.
(3) Regulations; definition of loan
The Secretary shall define the term loan and prescribe such
regulations as may be necessary to carry out the purposes of this
section.
(c) Section not to apply to large banks
(1) In general
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).
(2) Large banks
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) -
(A) the average adjusted bases of all assets of such bank
exceeded $500,000,000, or
(B) 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.
(3) 4-year spread of adjustments
(A) In general
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 -
(i) the provisions of this subsection shall be treated as a
change in the method of accounting of such bank for the
disqualification year,
(ii) such change shall be treated as having been made with
the consent of the Secretary, and
(iii) 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 -
(I) 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
(II) 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).
---------------------------------------------------------------------
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The applicable
If the case of the - fraction is -
1st succeeding year 2/9
2nd succeeding year 1/3
3rd succeeding year 4/9.
-------------------------------
(B) Suspension of recapture for taxable year for which bank is
financially troubled
(i) In general
In the case of a bank which is a financially troubled bank
for any taxable year -
(I) no adjustment shall be taken into account under
subparagraph (A) for such taxable year, and
(II) 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.
(ii) Exception for elective recapture for 1st year
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.
(iii) Financially troubled bank
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.
(iv) Nonperforming loan percentage
For purposes of clause (iii), the term ''nonperforming loan
percentage'' means the percentage determined by dividing -
(I) the sum of the outstanding balances of nonperforming
loans of the bank as of the close of each quarter of the
taxable year, by
(II) the sum of the amounts of equity of the bank as of
the close of each such quarter.
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.
(v) Other definitions
For purposes of this subparagraph -
(I) Nonperforming loans
The term ''nonperforming loan'' means any loan which is
considered to be nonperforming by the primary Federal
regulatory agency with respect to the bank.
(II) Equity
The term ''equity'' means the equity of the bank as
determined for Federal regulatory purposes.
(C) Coordination with estimated tax payments
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.
(4) Elective cut-off method
If a bank makes an election under this paragraph for the
disqualification year -
(A) 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,
(B) 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
(C) 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.
(5) Definitions
For purposes of this subsection -
(A) Parent-subsidiary controlled group
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.
(B) Disqualification year
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.
(C) Election made by each member
In the case of a parent-subsidiary controlled group, any
election under this section shall be made separately by each
member of such group.
Sources
(Added Pub. L. 91-172, title IV, Sec. 431(a), Dec. 30, 1969, 83
Stat. 616; amended Pub. L. 94-455, title XIX, Sec. 1906(b)(13)(A),
Oct. 4, 1976, 90 Stat. 1834; Pub. L. 97-34, title II, Sec. 267(a),
Aug. 13, 1981, 95 Stat. 266; Pub. L. 99-514, title IX, Sec. 901(a),
(d)(1), Oct. 22, 1986, 100 Stat. 2375, 2378; Pub. L. 100-203, title
X, Sec. 10301(b)(2), Dec. 22, 1987, 101 Stat. 1330-429; Pub. L.
100-647, title I, Sec. 1009(a)(2), (3), Nov. 10, 1988, 102 Stat.
3445; Pub. L. 101-508, title XI, Sec. 11801(a)(26), (c)(12)(C)-(E),
Nov. 5, 1990, 104 Stat. 1388-521, 1388-527; Pub. L. 104-188, title
I, Sec. 1616(b)(6), Aug. 20, 1996, 110 Stat. 1856.)
Miscellaneous
AMENDMENTS
1996 - Subsec. (a)(2)(A). Pub. L. 104-188 struck out ''other than
an organization to which section 593 applies'' after ''section
581)''.
1990 - Subsec. (b)(1). Pub. L. 101-508, Sec. 11801(c)(12)(C),
substituted ''shall not exceed the addition to the reserve for
losses on loans determined under the experience method as provided
in paragraph (2).'' for ''shall not exceed the greater of -
''(A) for taxable years beginning before 1988 the addition to
the reserve for losses on loans determined under the percentage
method as provided in paragraph (2), or
''(B) the addition to the reserve for losses on loans
determined under the experience method as provided in paragraph
(3).''
Subsec. (b)(2). Pub. L. 101-508, Sec. 11801(a)(26), (c)(12)(D),
redesignated par. (3) as (2) and struck out former par. (2) which
related to use of percentage method for determining amount to add
to reserve for bad debts.
Subsec. (b)(3). Pub. L. 101-508, Sec. 11801(c)(12)(D), (E),
redesignated par. (4) as (3), substituted heading for one which
read: ''Regulations; definition of eligible loan, etc.'', and
amended text generally. Prior to amendment, text read as follows:
''The Secretary shall define the terms 'loan' and 'eligible loan'
and prescribe such regulations as may be necessary to carry out the
purposes of this section; except that the term 'eligible loan'
shall not include -
''(A) a loan to a bank (as defined in section 581),
''(B) a loan to a domestic branch of a foreign corporation to
which subsection (a)(2) applies,
''(C) a loan secured by a deposit (i) in the lending bank, or
(ii) in an institution described in subparagraph (A) or (B) if
the lending bank has control over withdrawal of such deposit,
''(D) a loan to or guaranteed by the United States, a
possession or instrumentality thereof, or a State or a political
subdivision thereof,
''(E) a loan evidenced by a security as defined in section
165(g)(2)(C),
''(F) a loan of Federal funds, and
''(G) commercial paper, including short-term promissory notes
which may be purchased on the open market.'' Former par. (3)
redesignated (2).
Subsec. (b)(4). Pub. L. 101-508, Sec. 11801(c)(12)(D),
redesignated par. (4) as (3).
1988 - Subsec. (c)(3)(A)(iii)(I). Pub. L. 100-647, Sec.
1009(a)(2)(B), substituted ''such higher percentage of such net
amount as the taxpayer may elect'' for ''such greater amount as the
taxpayer may designate''.
Subsec. (c)(3)(B)(ii). Pub. L. 100-647, Sec. 1009(a)(2)(C),
substituted ''elects a higher percentage'' for ''designates an
amount''.
Subsec. (c)(4). Pub. L. 100-647, Sec. 1009(a)(3), inserted at end
''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.''
Subsec. (c)(5)(C). Pub. L. 100-647, Sec. 1009(a)(2)(A), added
subpar. (C).
1987 - Subsec. (c)(3)(C). Pub. L. 100-203 substituted ''section
6655(e)(2)(A)(i)'' for ''section 6655(d)(3)''.
1986 - Subsec. (a). Pub. L. 99-514, Sec. 901(a)(1), amended
subsec. (a) generally. Prior to amendment, subsec. (a) read as
follows: ''This section shall apply to the following financial
institutions:
''(1) any bank (as defined in section 581) other than an
organization to which section 593 applies, and
''(2) any corporation to which paragraph (1) would apply except
for the fact that it is a foreign corporation, and 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.''
Subsec. (b)(1). Pub. L. 99-514, Sec. 901(d)(1), substituted
''subsection (a)'' for ''section 166(c)''.
Subsec. (c). Pub. L. 99-514, Sec. 901(a)(2), added subsec. (c).
1981 - Subsec. (b)(2). Pub. L. 97-34 defined ''allowable
percentage'' to mean 1.0 percent for taxable years beginning in
1982 and 0.6 percent for taxable years beginning after 1982,
previously so applicable for taxable years beginning after 1981 and
redefined ''base year'' by substituting the last taxable year
beginning before 1976 for taxable years beginning after 1975 but
before 1983, for the last taxable year beginning before 1976 for
taxable years after 1975 but before 1982; and the last taxable year
beginning before 1983 for taxable years beginning after 1982, for
the last taxable year beginning before 1982 for taxable years
beginning after 1981.
1976 - Subsec. (b)(3), (4). Pub. L. 94-455 struck out ''or his
delegate'' after ''Secretary''.
EFFECTIVE DATE OF 1996 AMENDMENT
Amendment by Pub. L. 104-188 applicable to taxable years
beginning after Dec. 31, 1995, see section 1616(c) of Pub. L.
104-188, set out as a note under section 593 of this title.
EFFECTIVE DATE OF 1988 AMENDMENT
Amendment by Pub. L. 100-647 effective, except as otherwise
provided, as if included in the provision of the Tax Reform Act of
1986, Pub. L. 99-514, to which such amendment relates, see section
1019(a) of Pub. L. 100-647, set out as a note under section 1 of
this title.
EFFECTIVE DATE OF 1987 AMENDMENT
Section 10301(c) of Pub. L. 100-203 provided that: ''The
amendments made by this section (amending this section and sections
6201, 6425, 6601, 6651, and 6655 of this title and repealing
section 6154 of this title) shall apply to taxable years beginning
after December 31, 1987.''
EFFECTIVE DATE OF 1986 AMENDMENT
Amendment by Pub. L. 99-514 applicable to taxable years beginning
after Dec. 31, 1986, see section 901(e) of Pub. L. 99-514, set out
as a note under section 166 of this title.
EFFECTIVE DATE OF 1981 AMENDMENT
Section 267(b) of Pub. L. 97-34 provided that: ''The amendment
made by subsection (a) (amending this section) shall apply to
taxable years beginning after 1981.''
EFFECTIVE DATE
Section 431(d) of Pub. L. 91-172 provided that: ''The amendments
made by subsections (a) (enacting this section and section 586 of
this title) and (c) (amending section 166 of this title) shall
apply to taxable years beginning after July 11, 1969.''
SAVINGS PROVISION
For provisions that nothing in amendment by Pub. L. 101-508 be
construed to affect treatment of certain transactions occurring,
property acquired, or items of income, loss, deduction, or credit
taken into account prior to Nov. 5, 1990, for purposes of
determining liability for tax for periods ending after Nov. 5,
1990, see section 11821(b) of Pub. L. 101-508, set out as a note
under section 29 of this title.
References
SECTION REFERRED TO IN OTHER SECTIONS
This section is referred to in sections 172, 265, 291, 593, 1277,
1361 of this title.
