Rev. Rul. 79-123

ISSUE

May the taxpayer, who has computed its addition to the bad debt reserve for the current taxable year under the percentage of loans method provided by section 593(b)(3) of the Internal Revenue Code of 1954, subsequently change to either the percentage of taxable income method or the experience method provided by section 593(b)(2) and (4), respectively, for that same year without obtaining the Commissioner's consent?

FACTS

The taxpayer is a building and loan association within the meaning of section 7701(a)(19) of the Code. The taxpayer uses the accrual method of accounting and the reserve method of accounting for bad debts. For the tax year ended December 31, 1976, the taxpayer computed its addition to the bad debt reserve under the percentage of loans method provided by section 593(b)(3). During 1977 the taxpayer concluded that the computation of the addition to the bad debt reserve for 1976 would be more advantageous under the experience method provided by section 593(b)(4). The taxpayer filed an amended tax return for 1976 and computed its addition under the experience method.

LAW AND ANALYSIS

Section 166(c) of the Code allows a deduction for an addition to a reserve for bad debts in computing taxable income. Section 166(g) refers to section 593 for the computation of the addition to a bad debt reserve for building and loan associations.

Section 593 of the Code provides certain methods for a savings and loan association to compute an addition to its reserve for bad debts: (1) an experience method reserve addition with respect to nonqualifying loans plus, subject to certain limitations, a reserve for losses on qualifying real property loans; (2) a percentage of taxable income reserve addition that is reduced by a portion of the nonqualifying loan addition; (3) the percentage of loans method that is available to commercial banks under section 585(b)(2) that is also reduced by the nonqualifying loan addition; and (4) the experience method available to commercial banks under section 585(b)(3).

Section 1.593-6A(a)(1) of the Income Tax Regulations provides that the use of a particular method for computing the bad debt reserve addition in the return for the taxable year is not a binding election to apply such method either for such taxable year or for subsequent years. Thus, in the case of a subsequent adjustment described in paragraph (b)(2) of section 1.593-5 which has the effect of permitting an increase, or requiring a reduction, in the amount claimed in the return for a taxable year as an addition to the reserve for losses on qualifying real property loans, the amount of such addition may be recomputed under whichever method the taxpayer selects for the purpose of such recomputation, irrespective of the method initially applied for such taxable year.

Section 593 of the Code provides alternate methods of computing additions to the reserve for a building and loan association and the selection of one method is not a binding election either for that year of selection or for subsequent years.

HOLDING

The taxpayer may subsequently change from computing its addition to the bad debt reserve for the current taxable year under the percentage of loans method to either the percentage of taxable income method or the experience method without obtaining the consent of the Commissioner.