Internal Revenue Service, Treasury § 1.593–1

(as defined in section out profit may, as an alternative to a 7701(a)(32)), or (iv) any other savings in- deduction from gross income under sec- stitution chartered and supervised as a tion 166(a) for specific debts which be- savings and or similar association come worthless in whole or in part, de- under Federal or State law; and duct amounts credited to a reserve for (2) Dividends paid or credited before bad debts in the manner and under the October 17, 1962, by any taxpayer which circumstances prescribed in this sec- (at the time of such payment or credit) tion and § 1.593–2. In the case of such an qualifies as (i) a mutual institution, the selection of either of not having capital represented the alternative methods for treating by shares, (ii) a cooperative bank with- bad debts may be made by thetaxpayer out capital stock organized and oper- in the return for its first taxable year ated for mutual purposes and without beginning after December 31,1951. The profit, or (iii) a domestic building and method selected shall be subject to the loan association (as defined in section approval of the Commissioner upon ex- 7701(a)(19) before amendment by sec- amination of the return. If the method tion 6(c) of the Revenue Act of 1962 (76 selected is approved, it must be fol- Stat. 982)). lowed in returns for subsequent years, [T.D. 6728, 29 FR 5855, May 5, 1964, as amend- unless permission is granted by the ed by T.D. 7154, 36 FR 24997, Dec. 28, 1971] Commissioner to change to another method. Application for permission to § 1.592–1 Repayment of certain change the method of treating bad by mutual savings , building debts shall be made at least 30 days and loan associations, and coopera- prior to the close of the taxable year tive banks. for which the change is to be effective. There is , under section (b) Addition to reserve. Except as oth- 592, from the gross income of a mutual erwise provided in § 1.593–2, the reason- savings bank not having capital stock able addition to a reserve for bad debts represented by shares, a domestic shall be any amount determined by the building and loan association, or a co- taxpayer which does not exceed the operative bank without capital stock lesser of: organized and operated for mutual pur- (1) The amount of its taxable income poses and without profit, amounts paid for the taxable year, computed without by such institutions during the taxable regard to section 593 and without re- year in repayment of loans made before gard to any section providing for a de- September 1, 1951, by the United States duction the amount of which is depend- or any agency or instrumentality ent upon the amount of taxable income thereof which is wholly owned by the (such as section 170, relating to chari- United States, or by any mutual fund table, etc., contributions and gifts), or established under the authority of the (2) The amount by which 12 percent laws of any State. For example, of the total deposits or withdrawable amounts paid by such institution in re- accounts of its depositors at the close payment of loans made by the Recon- of such year exceeds the sum of its sur- struction Finance Corporation before plus, undivided profits, and reserves at September 1, 1951, are deductible under the beginning of the taxable year. this section. Section 592 is not applica- (c) Adjustments to reserve. Bad debt ble, however, in the case of amounts losses sustained during the taxable paid in repayment of loans made by an year shall be charged against the bad agency or instrumentality not wholly debt reserve. Recoveries of debts owned by the United States. charged against the bad debt reserve during a prior taxable year in which § 1.593–1 Additions to reserve for bad the institution was subject to tax debts. under chapter 1 of the Internal Rev- (a) In general. A mutual savings bank enue Code of 1954 or under chapter 1 of not having capital stock represented the Internal Revenue Code of 1939 shall by shares, a domestic building and loan be credited to the bad debt reserve. The association, and a cooperative bank establishment of such reserve and all without capital stock organized and adjustments made thereto must be re- operated for mutual purposes and with- flected on the regular books of account

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of the institution at the close of the counts, as defined in subparagraph (3) taxable year, or as soon as practicable of this paragraph, shall be considered a thereafter. Minimum amounts credited liability. In the case of a building and in compliance with Federal or State loan association having permanent statutes, regulations, or supervisory nonwithdrawable capital stock rep- orders to reserve or similar accounts, resented by shares, the paid-in amount or additional amounts credited to such of such stock shall also be considered a reserve or similar accounts and permis- liability. Reserves for contingencies sive under such statutes, regulations, and other reserves, however, which are or orders, against which charges may mere appropriations of surplus, are not be made for the purpose of absorbing liabilities. losses sustained by an institution, will (3) Total deposits or withdrawable ac- be deemed to have been credited to the counts. The phrase total deposits or bad debt reserve. withdrawable accounts means the aggre- (d) Definitions. When used in this sec- gate of (i) amounts placed with an in- tion and in § 1.593–2: stitution for deposit or and (1) Institution. The term institution (ii) earnings outstanding on the books means either a mutual savings bank of account of the institution at the not having capital stock represented close of the taxable year which have by shares, a domestic building and loan been credited as dividends upon such association as defined in section accounts prior to the close of the tax- 7701(a)(19), or a cooperative bank with- able year, except that such term, in the out capital stock organized and oper- case of a building and loan association, ated for mutual purposes and without does not include permanent profit. nonwithdrawable capital stock rep- (2) Surplus, undivided profits, and re- resented by shares, or earnings cred- serves. (i) The phrase surplus, undivided ited thereon. profits, and reserves means the amount (e) Examples. The provisions of this by which the total assets of an institu- section may be illustrated by the fol- tion exceed the amount of the total li- lowing examples: abilities of such an institution. Example 1. (i) Institution X, which keeps (ii) For this purpose the term total as- its books on the basis of the calendar year, sets means the sum of money, plus the has surplus, reserves, and undivided profits aggregate of the adjusted basis of the of $800,000 as of January 1, 1955, and total de- property other than money, held by an posits or withdrawable accounts of $10,000,000 institution. Such adjusted basis for any as of December 31, 1955. During 1955 the insti- asset is its adjusted basis for deter- tution credits $30,000, as required by a Fed- mining gain upon sale or exchange for eral agency, to a Federal reserve Federal income tax purposes. (See sec- for the sole purpose of absorbing losses. Likewise, it credits $25,000, as permitted by tions 1011 through 1022, and the regula- State statute, to another reserve fund for tions thereunder. For special rules the purpose of absorbing losses. In 1955 Insti- with respect to adjustments to basis tution X charges $5,000 against its bad debt for prior taxable years during which reserve for losses sustained during the tax- the institution was exempt from tax, able year. see section 1016(a)(3) and the regula- (ii) The taxable income of Institution X for tions thereunder.) The determination the taxable year 1955, computed without re- of the total assets of any taxpayer gard to section 593 and without regard to any section providing for a deduction the amount shall conform to the method of ac- of which is dependent upon the amount of counting employed by such taxpayer in taxable income, is $200,000. determining taxable income and to the (iii) Upon the basis of the facts as stated in rules applicable in determining its subdivision (i) of this example, the amount earnings and profits. by which 12 percent of the total deposits or (iii) The term total liabilities means withdrawable accounts of Institution X at all liabilities of the taxpayer, which the close of taxable year 1955 exceeds the are fixed and determined, absolute and sum of such institution’s surplus, undivided profits, and reserves at the beginning of the not contingent, and includes those taxable year is $400,000 (12 percent of items which constitute liabilities in $10,000,000, minus $800,000). the sense of debts or obligations. The (iv) Institution X, therefore, may deduct, total deposits or withdrawable ac- for the taxable year 1955, as an addition to a

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reserve for bad debts, any amount it may de- from gross income. In making such de- termine that does not exceed the lesser of termination, there shall be taken into the amounts determined in subdivision (ii) account (a) surplus or bad debt reserves or (iii) of this example. That amount is $200,000 (as determined in subdivision (ii) of existing at the close of December 31, this example). Since under paragraph (c) of 1951 (i.e., the amount of surplus, undi- this section, the $30,000 credited to the re- vided profits, and reserves accumulated serve as required by the Federal agency and prior to January 1, 1952, and in exist- the $25,000 credited to the reserve as per- ence at the close of December 31, 1951), mitted by the State statute are regarded as amounts credited to a reserve for bad debts and (b) changes in the surplus, undi- account Institution X can credit an addi- vided profits, and reserves of the insti- tional $145,000 ($200,000 minus $55,000) to a tution from December 31, 1951, until general reserve for bad debts account at any the beginning of the taxable year. A de- time during the taxable year. duction for an addition to the reserve (v) The loss of $5,000 charged to the bad debt reserve during the taxable year does not for bad debts pursuant to this section affect the amount of the addition to the bad will be authorized only in those cases debt reserve provided for in paragraph (b) of where the institution proves to the sat- this section. It is of significance only in de- isfaction of the Commissioner that the termining the surplus, undivided profits, and bad debt experience of the institution reserves of Institution X as of January 1, warrants an addition to the reserve for 1956. Example 2. The taxable income of Institu- bad debts in excess of that provided in tion Y for the taxable year 1955, computed paragraph (b) of § 1.593–1. For defini- without regard to the deduction under sec- tions, see paragraph (d) of § 1.593–1. tion 593 and without regard to any section providing for a deduction the amount of § 1.593–3 Taxable years affected. which is dependent upon the amount of tax- able income, is determined to be $250,000. The Sections 1.593–1 and 1.593–2 apply only amount by which 12 percent of the total de- to taxable years beginning after De- posits or withdrawable accounts of Institu- cember 31, 1953, and ending after Au- tion Y at the close of the taxable year ex- gust 16, 1954, but before January 1, 1963, ceeds the sum of such institution’s surplus, and all references to sections of the undivided profits, and reserves at the begin- ning of the taxable year is $500,000. Institu- Code are to the Internal Revenue Code tion Y credits $250,000 to its bad debt reserve of 1954 before amendment by the Rev- in 1955. In 1957, it is determined that the cor- enue Act of 1962. Sections 1.593–4 rect taxable income of Institution Y for 1955, through 1.593–11 apply only to taxable computed without regard to any deduction years ending after December 31, 1962, under section 593 and without regard to any and all references to sections of the section providing for a deduction the amount of which is dependent upon the amount of Code are to the Internal Revenue Code taxable income, is $275,000 and not $250,000. of 1954 after amendment by the Rev- Assuming that Institution Y credits the ad- enue Act of 1962. ditional $25,000 to its bad debt reserve, $275,000 is allowable as a deduction from [T.D. 6728, 29 FR 5857, May 5, 1964] gross income for such institution for the tax- able year 1955. § 1.593–4 Organizations to which sec- tion 593 applies. § 1.593–2 Additions to reserve for bad The provisions of section 593 and debts where surplus, reserves, and undivided profits equal or exceed §§ 1.593–5 through 1.593–11 (except sub- 12 percent of deposits or section (f) of section 593 and § 1.593–10) withdrawable accounts. apply to any mutual savings bank not Where 12 percent of the total deposits having capital stock represented by or withdrawable accounts of an institu- shares, any domestic building and loan tion at the close of the taxable year is association, and any cooperative bank equal to or less than the sum of such without capital stock organized and institution’s surplus, undivided profits, operated for mutual purposes and with- and reserves at the beginning of the out profit. The term thrift institution, as taxable year, a reasonable addition to used in this section and §§ 1.593–5 the reserve for bad debts as determined through 1.593–11, refers to any such fi- under the general provisions of section nancial institution. For definition of 166(c) may be allowable as a deduction

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