Rev. Rul. 75-445

Advice has been requested whether, under the circumstances described below, a taxpayer that has computed additions to its bad debt reserve under section 585(b)(2) of the Internal Revenue Code of 1954 relating to the percentage method, may change to the experience method provided in section 585(b)(3).

The taxpayer is a bank as defined in section 581 of the Code. The taxpayer is on a calendar year basis and has consistently used the reserve method of accounting for bad debts. The taxpayer in 1973 and 1974 computed the annual addition to its reserve for bad debts by using the percentage method described in section 585(b)(2). In both 1973 and 1974 the percentage method resulted in a reserve addition that was less than the actual bad debt losses for those respective years. The taxpayer filed amended Federal income tax returns for 1973 and 1974 computing its bad debt reserve additions under the experience method described in section 585(b)(3).

Section 166(c) of the Code allows as a deduction in computing taxable income an addition to a reserve for bad debts.

Section 585 of the Code governs the treatment of the reserves for losses on loans of banks for taxable years beginning after July 11, 1969.

Section 585(b)(1) of the Code provides, in part, that for purposes of section 166(c), 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 that shall not exceed the greater of (A) the addition to the reserve for losses on loans determined under the percentage method, or (B) the addition to the reserve for losses on loans determined under the experience method.

The above sections of the Code indicate that financial institutions have optional methods of computing additions to the reserve for bad debts. There is nothing to preclude a taxpayer who has selected one of the methods within section 585 of the Code from changing to another method under section 585.

Accordingly, the taxpayer may amend its 1973 and 1974 Federal income tax returns to compute its bad debt reserve using the experience method under section 585(b)(3) of the Code. In addition, neither the percentage method nor the experience method described in section 585 is a method of accounting within the meaning of section 1.446-1(c) of the regulations. Therefore, the changing from the percentage method to the experience method or visa versa is not a change in method of accounting. Rather, the reserve method described in section 585 is a method of accounting within the meaning of section 1.446-1(c).