Rev. Rul. 57-210

Advice has been requested whether loans made by banks under Title II of the National Housing Act, 48 Stat. 1246, at page 1248, as amended, 12 U.S.C. 1708, such loans known as Title II F.H.A. loans, are considered 100 percent Government insured loans for the purposes of Paragraph 4 of Mimeograph 6209, C.B. 1947-2, 26.

Regulations of the Federal Housing Administration for mutual mortgage insurance under section 203 of the National Housing Act, supra , covering loans made by banks under Title II of that Act, provide that upon default of payments by a mortgagor, the mortgagee at his election has the right to receive the guaranteed Government debentures for the full amount of the unpaid mortgage principal following foreclosure and conveyance of the property to the Federal Housing Commissioner, and that these debentures are accepted in payment of premiums by the Federal Housing Administration, the same as cash. A call was issued on March 31, 1954, by the Federal Housing Administration for redemption on July 1, 1954, at par plus accrued interest, of all of its callable debentures which includes Title II debentures.

Accordingly, it is held that mortgage loans made by banks under Title II of the National Housing Act, supra , as amended, known as Title II F.H.A. loans, are considered to be 100 percent Government guaranteed loans for the purposes of Paragraph 4, Mimeograph 6209, supra .

Paragraph 4 of Mimeograph 6209, supra , provides that Government insured loans should be eliminated from prior year accounts in computing percentages of past losses and also from current year loans in computing allowable deductions for additions to the reserve for bad debts. In applying these provisions it has been the practice of the Service to consider that eliminations are required only of Government insured or guaranteed loans which are 100 percent insured or guaranteed and not of loans which are Government insured or guaranteed to some extent but less than 100 percent.

Upon review, it is concluded that the term `Government insured loans,' as used in Paragraph 4 of Mimeograph 6209, supra , should not be construed to include only loans which are 100 percent Government insured or guaranteed. In its ordinarily understood sense and definition, the term refers to any loans which are Government insured or guaranteed, in whatever extent or percent. Hence, the eliminations provided for in the Mimeograph of such loans should be made accordingly, i.e. , in entirety if the loan is 100 percent Government insured or guaranteed, 90 percent if the loan is 90 percent Government insured or guaranteed, etc. Such application of these provisions of the Mimeograph accords with the general purpose of reserves for bad debts to which it relates.

With respect to returns filed for taxable years ended prior to the date of the publication of this Revenue Ruling where banks in computing allowable deductions for additions to their bad debt reserves did not eliminate certain Government insured loans because such loans were not 100 percent insured or guaranteed, it will be the administrative policy of the Revenue Service, under the authority of section 7805(b) of the Internal Revenue Code of 1954, not to disturb such treatment.