Rev. Rul. 75-372

Advice has been requested whether loans insured by a private mortgage insurance company, under the circumstances described below, are eligible loans under Rev. Rul. 68-630, 1968-2 C.B. 84, that may be taken into account in computing the taxpayer's annual addition to the reserve for bad debts.

The taxpayer is a bank as defined in section 581 of the Internal Revenue Code of 1954 that finances mobile home purchases. The terms of such loans vary from 3 to 12 years. The taxpayer is on a calendar year basis and in 1968 and 1969 computed the annual addition to its reserve for bad debts by using the uniform reserve ratio method described in Rev. Rul. 65-92, 1965-1 C.B. 112, as supplemented by Rev. Rul. 68-630.

In an effort to minimize losses that could result from the financing of mobile homes, the taxpayer contracted with an unrelated service company that, for a fee of approximately 3 percent of the loan contract, agreed to handle all of the work associated with finding, making, and servicing such loans and insuring the taxpayer with a private mortgage insurance company against losses from such loans.

Rev. Rul. 65-92 provides that "Government insured or guaranteed loans" must be excluded from the loan base to the extent so insured or guaranteed. Rev. Rul. 68-630 defines the term "Government insured or guaranteed loans", as used in Rev. Rul. 65-92, to include both direct loans to a Government as well as loans to a third party that are insured or guaranteed, directly or indirectly, by a Government.

It is held that the loans insured by the private mortgage insurance company are eligible loans, under the guidelines of Rev. Rul. 68-630, that may be taken into account in computing the taxpayer's annual addition to the reserve for bad debts in 1968 and 1969.

The holding in this Revenue Ruling is equally applicable for taxable years beginning after July 11, 1969, the effective date of section 585 of the Code, relating to reserves for losses on loans of banks.

Rev. Rul. 68-630 is amplified to provide that privately insured loans, described above, are eligible to be included by a taxpayer using the uniform reserve ratio method, in the loan base upon which annual additions to a reserve for bad debts are computed.