26 USC 593 - Reserves for losses on loans

U.S Code last checked for updates: Nov 22, 2024

§ 593.

Reserves for losses on loans

(a)

Reserve for bad debts

(1)

In general

Except as provided in paragraph (2), in the case of—

(A)

any domestic building and loan association,

(B)

any mutual savings bank, or

(C)

any cooperative bank without capital stock organized and operated for mutual purposes and without profit,

there 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)

Organization must meet 60-percent asset test of section 7701(a)(19)

(b)

Addition to reserves for bad debts

(1)

In general

For purposes of subsection (a), the reasonable addition for the taxable year to the reserve for bad debts of any taxpayer described in subsection (a) shall be an amount equal to the sum of—

(A)

the amount determined to be a reasonable addition to the reserve for losses on nonqualifying loans, computed in the same manner as is provided with respect to additions to the reserves for losses on loans of banks under section 585(b)(2), plus

(B)

the amount determined by the taxpayer to be a reasonable addition to the reserve for losses on qualifying real property loans, but such amount shall not exceed the amount determined under paragraph (2) or (3), whichever is the larger, but the amount determined under this subparagraph shall in no case be greater than the larger of—

(i)

the amount determined under paragraph (3), or

(ii)

the amount which, when added to the amount determined under subparagraph (A), equals the amount by which 12 percent of the total deposits or withdrawable accounts of depositors of the taxpayer at the close of such year exceeds the sum of its surplus, undivided profits, and reserves at the beginning of such year (taking into account any portion thereof attributable to the period before the first taxable year beginning after December 31, 1951).

(2)

Percentage of taxable income method

(A)

In general

(B)

Reduction for amounts referred to in paragraph (1)(A)

(C)

Overall limitation on paragraph

(D)

Computation of taxable income

For purposes of this paragraph, taxable income shall be computed—

(i)

by excluding from gross income any amount included therein by reason of subsection (e),

(ii)

without regard to any deduction allowable for any addition to the reserve for bad debts,

(iii)

by excluding from gross income an amount equal to the net gain for the taxable year arising from the sale or exchange of stock of a corporation or of obligations the interest on which is excludable from gross income under section 103,

(iv)

by excluding from gross income dividends with respect to which a deduction is allowable by part VIII of subchapter B, reduced by an amount equal to 8 percent of the dividends received deduction for the taxable year, and

(v)

if there is a capital gain rate differential (as defined in section 904(b)(3)(D)) for the taxable year, by excluding from gross income the rate differential portion (within the meaning of section 904(b)(3)(E)) of the lesser of—

(I)

the net long-term capital gain for the taxable year, or

(II)

the net long-term capital gain for the taxable year from the sale or exchange of property other than property described in clause (iii).

(3)

Experience method

(c)

Treatment of reserves for bad debts

(1)

Establishment of reserves

(2)

Certain pre-1963 reserves

(3)

Charging of bad debts to reserves

(d)

Loans defined

For purposes of this section—

(1)

Qualifying real property loans

The term “qualifying real property loan” means any loan secured by an interest in improved real property or secured by an interest in real property which is to be improved out of the proceeds of the loan, but such term does not include—

(A)

any loan evidenced by a security (as defined in section 165(g)(2)(C));

(B)

any loan, whether or not evidenced by a security (as defined in section 165(g)(2)(C)), the primary obligor on which is—

(i)

a government or political subdivision or instrumentality thereof;

(ii)

a bank (as defined in section 581); or

(iii)

another member of the same affiliated group;

(C)

any loan, to the extent secured by a deposit in or share of the taxpayer; or

(D)

any loan which, within a 60-day period beginning in one taxable year of the creditor and ending in its next taxable year, is made or acquired and then repaid or disposed of, unless the transactions by which such loan was made or acquired and then repaid or disposed of are established to be for bona fide business purposes. For purposes of subparagraph (B)(iii), the term “affiliated group” has the meaning assigned to such term by section 1504(a); except that (i) the phrase “more than 50 percent” shall be substituted for the phrase “at least 80 percent” each place it appears in section 1504(a), and (ii) all corporations shall be treated as includible corporations (without any exclusion under section 1504(b)).

(2)

Nonqualifying loans

(3)

Loan

(4)

Treatment of interests in REMIC’s

(e)

Distributions to shareholders

(1)

In general

For purposes of this chapter, any distribution of property (as defined in section 317(a)) by a taxpayer having a balance described in subsection (g)(2)(A)(ii) to a shareholder with respect to its stock, if such distribution is not allowable as a deduction under section 591, shall be treated as made—

(A)

first out of its earnings and profits accumulated in taxable years beginning after December 31, 1951, (and, in the case of an S corporation, the accumulated adjustments account, as defined in section 1368(e)(1)) to the extent thereof,

(B)

then out of the balance taken into account under subsection (g)(2)(A)(ii) (properly adjusted for amounts charged against such reserves for taxable years beginning after December 31, 1987),

(C)

then out of the supplemental reserve for losses on loans, to the extent thereof,

(D)

then out of such other accounts as may be proper.

This paragraph shall apply in the case of any distribution in redemption of stock or in partial or complete liquidation of a taxpayer having a balance described in subsection (g)(2)(A)(ii), except that any such distribution shall be treated as made first out of the amount referred to in subparagraph (B), second out of the amount referred to in subparagraph (C), third out of the amount referred to in subparagraph (A), and then out of such other accounts as may be proper. This paragraph shall not apply to any transaction to which section 381 applies, or to any distribution to the Federal Savings and Loan Insurance Corporation (or any successor thereof) or the Federal Deposit Insurance Corporation in redemption of an interest in a taxpayer having a balance described in subsection (g)(2)(A)(ii), if such interest was originally received by any such entity in exchange for assistance provided under a provision of law referred to in section 597(c). This paragraph shall not apply to any distribution of all of the stock of a bank (as defined in section 581) to another corporation if, immediately after the distribution, such bank and such other corporation are members of the same affiliated group (as defined in section 1504) and the provisions of section 5(e) of the Federal Deposit Insurance Act (as in effect on December 31, 1995) or similar provisions are in effect.

(2)

Amounts charged to reserve accounts and included in gross income

(3)

Special rules

(A)

For purposes of paragraph (1)(B), additions to the reserve for losses on qualifying real property loans for the taxable year in which the distribution occurs shall be taken into account.

(B)

For purposes of computing under this section the amount of a reasonable addition to the reserve for losses on qualifying real property loans for any taxable year, any amount charged during any year to such reserve pursuant to the provisions of paragraph (2) shall not be taken into account.

(f)

Termination of reserve method

(g)

6-year spread of adjustments

(1)

In general

In the case of any taxpayer who is required by reason of subsection (f) to change its method of computing reserves for bad debts—

(A)

such change shall be treated as a change in a method of accounting,

(B)

such change shall be treated as initiated by the taxpayer and as having been made with the consent of the Secretary, and

(C)

the net amount of the adjustments required to be taken into account by the taxpayer under section 481(a)—

(i)

shall be determined by taking into account only applicable excess reserves, and

(ii)

as so determined, shall be taken into account ratably over the 6-taxable year period beginning with the first taxable year beginning after December 31, 1995.

(2)

Applicable excess reserves

(A)

In general

For purposes of paragraph (1), the term “applicable excess reserves” means the excess (if any) of—

(i)

the balance of the reserves described in subsection (c)(1) (other than the supplemental reserve) as of the close of the taxpayer’s last taxable year beginning before January 1, 1996, over

(ii)

the lesser of—

(I)

the balance of such reserves as of the close of the taxpayer’s last taxable year beginning before January 1, 1988, or

(II)

the balance of the reserves described in subclause (I), reduced in the same manner as under section 585(b)(2)(B)(ii) on the basis of the taxable years described in clause (i) and this clause.

(B)

Special rule for thrifts which become small banks

In the case of a bank (as defined in section 581) which was not a large bank (as defined in section 585(c)(2)) for its first taxable year beginning after December 31, 1995—

(i)

the balance taken into account under subparagraph (A)(ii) shall not be less than the amount which would be the balance of such reserves as of the close of its last taxable year beginning before such date if the additions to such reserves for all taxable years had been determined under section 585(b)(2)(A), and

(ii)

the opening balance of the reserve for bad debts as of the beginning of such first taxable year shall be the balance taken into account under subparagraph (A)(ii) (determined after the application of clause (i) of this subparagraph).

The preceding sentence shall not apply for purposes of paragraphs (5) and (6) or subsection (e)(1).

(3)

Recapture of pre-1988 reserves where taxpayer ceases to be bank

(4)

Suspension of recapture if residential loan requirement met

(A)

In general

In the case of a bank which meets the residential loan requirement of subparagraph (B) for the first taxable year beginning after December 31, 1995, or for the following taxable year—

(i)

no adjustment shall be taken into account under paragraph (1) for such taxable year, and

(ii)

such taxable year shall be disregarded in determining—

(I)

whether any other taxable year is a taxable year for which an adjustment is required to be taken into account under paragraph (1), and

(II)

the amount of such adjustment.

(B)

Residential loan requirement

(C)

Residential loan

(D)

Base amount

(E)

Controlled groups

(5)

Continued application of fresh start under section 585 transitional rules

In the case of a taxpayer to which paragraph (1) applied and which was not a large bank (as defined in section 585(c)(2)) for its first taxable year beginning after December 31, 1995:

(A)

In general

(B)

Treatment under elective cut-off method

For purposes of applying section 585(c)(4)—

(i)

the balance of the reserve taken into account under subparagraph (B) thereof shall be reduced by the balance taken into account by such taxpayer under paragraph (2)(A)(ii) of this subsection, and

(ii)

no amount shall be includible in gross income by reason of such reduction.

(6)

Suspended reserve included as section 381(c) items

(7)

Conversions to credit unions

In the case of a taxpayer to which paragraph (1) applied which becomes a credit union described in section 501(c) and exempt from taxation under section 501(a)—

(A)

any amount required to be included in the gross income of the credit union by reason of this subsection shall be treated as derived from an unrelated trade or business (as defined in section 513), and

(B)

for purposes of paragraph (3), the credit union shall not be treated as if it were a bank.

(8)

Regulations

(Aug. 16, 1954, ch. 736, 68A Stat. 205; Pub. L. 87–834, § 6(a), Oct. 16, 1962, 76 Stat. 977; Pub. L. 91–172, title IV, § 432(a), (b), Dec. 30, 1969, 83 Stat. 620, 622; Pub. L. 94–455, title XIX, § 1901(a)(84), Oct. 4, 1976, 90 Stat. 1778; Pub. L. 96–222, title I, § 104(a)(3)(C), Apr. 1, 1980, 94 Stat. 215; Pub. L. 97–34, title II, §§ 243, 245(b), (c), Aug. 13, 1981, 95 Stat. 255, 256; Pub. L. 99–514, title III, § 311(b)(2), title VI, § 671(b)(2), title IX, § 901(b)(1)–(3), (d)(2), Oct. 22, 1986, 100 Stat. 2219, 2317, 2378; Pub. L. 100–647, title I, §§ 1003(c)(3), 1006(t)(25)(B), Nov. 10, 1988, 102 Stat. 3384, 3426; Pub. L. 101–73, title XIV, § 1401(b)(3), Aug. 9, 1989, 103 Stat. 550; Pub. L. 101–508, title XI, § 11801(c)(12)(F), Nov. 5, 1990, 104 Stat. 1388–527; Pub. L. 104–188, title I, §§ 1616(a), (b)(7), 1704(t)(51), Aug. 20, 1996, 110 Stat. 1854, 1857, 1890; Pub. L. 105–34, title XVI, § 1601(f)(5)(A), Aug. 5, 1997, 111 Stat. 1091; Pub. L. 115–141, div. U, title IV, § 401(b)(24), Mar. 23, 2018, 132 Stat. 1203.)

cite as: 26 USC 593