Rev. Rul. 70-180

Advice has been requested concerning the computation of a bank's reserve for bad debts for a short taxable year under the circumstances described below.

On June 30, 1968, a bank holding company acquired, in a transaction that did not constitute a reverse acquisition within the meaning of section 1.1502-75(d)(3) of the Income Tax Regulations, all the stock of a commercial bank entitled to compute its bad debt reserve additions under the provisions of Revenue Ruling 65-92, C.B. 1965-1, 112.

The holding company filed a consolidated return for the calendar year 1968. The bank filed a short period return for the period January 1, 1968 to June 30, 1968, and its taxable income for the period July 1, 1968 to December 31, 1968 was included in the consolidated return filed by the bank holding company for the calendar year 1968. The bank had a deficiency in its bad debt reserve on December 31, 1964, as defined by section 4 of Revenue Ruling 65-92.

Revenue Ruling 65-92 provides a uniform percentage for computing annual additions to reserves for bad debts by banks for taxable years ending after December 31, 1964. Section 4 thereof, in pertinent part, states that if the dollar balance of a bank's reserve, as of the close of its taxable year immediately preceding the year of change, is less than 2.4 percent of loans outstanding at such time, the amount of the difference ("deficiency") may be included in the bank's annual addition to the reserve in an amount not exceeding one-tenth of the deficiency, commencing with the year of change. Such amount need not be added in any specific taxable year but not more than one-tenth of the deficiency will be permitted in any one year.

Section 441(b) of the Internal Revenue Code of 1954 provides, in part, for the purpose of Subtitle A of the Code, that the term "taxable year" means "the period for which the return is made, if a return is made for a period of less than 12 months."

Section 1.1502-76(d) of the Income Tax Regulations states that any period of less than 12 months for which either a separate return or a consolidated return is filed under the provisions of that section shall be considered as a separate taxable year.

Accordingly, the separate short taxable year of the bank for the period January 1, 1968 to June 30, 1968 qualifies as a year for purposes of applying the rules set forth in Revenue Ruling 65-92, and a full one-tenth of the reserve deficiency is allowable to the bank as a deduction in the short taxable year.