IRS MODIFIES EXPRESS DETERMINATION LETTER FOR BANKS MAKING BAD DEBT ELECTION.

Rev. Proc. 92-84

SECTION 1. PURPOSE

To make an election under section 1.166-2(d)(3) of the Income Tax Regulations, a bank must obtain an express determination from its supervisory authority, as defined in section 1.166-2(d)(3)(iii)(D) of the regulations, that the bank maintains and applies loan loss classification standards that are consistent with the regulatory standards of that supervisory authority. This revenue procedure provides a uniform express determination letter that is required to be used for such an express determination.

SEC. 2. BACKGROUND

01 Section 166(a) of the Internal Revenue Code generally allows a deduction for debts that become worthless, in whole or in part, within the taxable year. In lieu of the deduction under section 166(a), sections 585 and 593 of the Code permit certain taxpayers a deduction for a reasonable addition to a reserve for bad debts.

02 Pursuant to section 1.166-2(d)(1) of the regulations, debts of a corporation are conclusively presumed to be worthless, and thus the corporation may claim a bad debt deduction for them, if (1) the corporation is subject to supervision by Federal authorities, or by state authorities maintaining substantially equivalent standards, and (2) the corporation (A) is specifically ordered by its supervisory authority to charge off the debt, or (B) voluntarily charges off the debt and the supervisory authority confirms in writing in its first audit subsequent to the charge-off that it would have ordered the corporation to charge off the debt had there been an examination at the time of the charge-off.

03 Section 1.166-2(d)(3) permits a bank to make an election to establish a conclusive presumption of worthlessness for certain debts that have been charged off for regulatory purposes. For a bank to use the presumption, a bank's supervisory authority must make an express determination, in connection with its most recent examination involving the bank's loan review process, that the bank maintains and applies loan loss classification standards that are consistent with the regulatory standards of that supervisory authority.

SEC. 3. SCOPE

This revenue procedure applies to banks that make an election under section 1.166-2(d)(3) of the regulations.

SEC. 4. PROCEDURE

01 An express determination within the meaning of section 2.03 of this revenue procedure and section 1.166-2(d)(3) of the regulations is a letter that is provided by the bank's supervisory authority as defined in section 1.166-2(d)(3)(iii)(D), that is separate and distinct from the examination report, that is signed and dated by the examiner in charge, and that contains the following statement:

EXPRESS DETERMINATION LETTER FOR IRS REGULATION

SECTION 1.166-2(d)(3)

In connection with the most recent examination of [NAME OF BANK], by [NAME OF SUPERVISORY AUTHORITY], as of [EXAMINATION DATE], we reviewed the institution's loan review process as it relates to loan charge-offs. Based on our review, we concluded that the bank, as of that date, maintained and applied loan loss classification standards that were consistent with regulatory standards regarding loan charge-offs.

This statement is made on the basis of a review that was conducted in accordance with our normal examination procedures and criteria, including sampling of loans in accordance with those procedures and criteria. It does not in any way limit or preclude any formal or informal supervisory action (including enforcement actions) by this supervisory authority relating to the institution's loan review process or the level at which it maintains its allowance for loan and lease losses.

02 For purposes of the express determination, any immaterial individual deviations from regulatory standards will not preclude a finding that a bank maintains and applies loan loss classification standards that are consistent with regulatory standards.

SEC. 5. EFFECT ON OTHER REVENUE PROCEDURES

Rev. Proc. 92-18, 1992-10 I.R.B. 24, is modified, and as modified, is superseded.

SEC. 6. EFFECTIVE DATE

01 This revenue procedure is effective for any express determination made on or after October 1, 1992.

02 Notwithstanding section 5 of this revenue procedure, supervisory authorities may continue to issue to banks the uniform express determination letter published in Rev. Proc. 92-18 until November 30, 1992. Any bank that receives or has received such a letter may rely on that letter until its next examination involving the bank's loan review process.

DRAFTING INFORMATION

The principal authors of this revenue procedure are Bernita L. Thigpen and Carol A. Schwartz of the Office of Assistant Chief Counsel (Financial Institutions and Products). For further information regarding this revenue procedure, contact Ms. Thigpen or Ms. Schwartz on (202) 622-3920 (not a toll-free call).