Rev. Proc. 64-51

SECTION 1. PURPOSE.

The purpose of this Revenue Procedure is to provide an administrative procedure whereby taxpayers may expeditiously obtain consent to change their method of accounting for bad debts from the specific charge-off method to the reserve method. Taxpayers complying with the provisions hereof will be deemed to have obtained the consent of the Commissioner of Internal Revenue to change to the reserve method.

SEC. 2. BACKGROUND.

Under existing procedure, a taxpayer desiring to change his method of accounting for bad debts from the specific charge-off method to the reserve method is required under the provisions of section 1.446-1(e)(3) of the Income Tax Regulations to file an application on Form 3115, Application for Change in Accounting Method, with the Commissioner of Internal Revenue within the first ninety days of the taxable year in which the change is to be effected.

SEC. 3. APPLICATION.

Subject to the following conditions, a taxpayer desiring to change his method of accounting for bad debts from the specific charge-off method to the reserve method may do so by filing an application on Form 3115 with the District Director of Internal Revenue for the district in which the taxpayer files his return. Reference to this Revenue Procedure should be made a part of the application. The application shall be filed within the first ninety days of the taxable year in which the change is to be effected. Unless a letter is received by the taxpayer from the District Director denying permission because the Form 3115 is not timely filed, it may be assumed that the change has been granted, and the taxpayer must attach a copy of the application to the income tax return filed for the taxable year of the change.

SEC. 4. MANNER OF EFFECTING THE CHANGE.

.01 All taxpayers, other than commercial banks and mutual savings banks and other similar institutions as described in section 593 of the Internal Revenue Code of 1954 shall effect the change as follows:

(1) The amount of the initial reserve to be set up at the end of the year of change shall be an amount determined by dividing total net losses on bad debts for the five years preceding the taxable year of change by the sum of the amounts of outstanding trade receivables at the close of each of the five years, and then multiplying the amount of outstanding trade receivables at the close of the taxable year of change by the resulting decimal amount.

(2) The deduction for the amount of the reserve for the taxable year of change, determined under paragraph (1), above, is to be taken ratably over a period of ten years commencing with the taxable year of change. Thus, the bad debt deduction under section 166(c) of the Code for the taxable year of change will consist of the amount of debts determined to be wholly or partially worthless and charged off during such taxable year plus one-tenth of the amount of the reserve determined under paragraph (1), above. For each of the nine taxable years following the taxable year of change, the bad debt deduction will consist of the reasonable addition to the reserve for bad debts for each such year as provided by section 166(c) of the Code plus one-tenth of the amount determined to be the reserve under paragraph (1), above. The amount established as a bad debt reserve for the taxable year of change under paragraph (1), above, must be considered in determining the amount of subsequent additions to such reserve, even though the entire amount of the reserve may not have been deducted for Federal income tax purposes because of the requirement that it be deducted over a period of ten years. Receivables sold or to be sold shortly after the close of the taxable year of change shall not be included in the computation of the reserve for bad debts.

.02 Commercial banks shall effect the change as provided in section 3 of this Revenue Procedure, and may determine the amount of the reserve at the end of the year in accordance with the provisions of Mimeograph 6209, C.B. 1947-2, 26, as supplemented by Revenue Ruling 54-148, C.B. 1954-1, 60, in lieu of the manner indicated in paragraph .01(1), above.

.03 Mutual savings banks not having capital stock represented by shares, domestic building and loan associations, and cooperative banks without capital stock organized and operated for mutual purposes and without profit shall effect the change as provided in section 3 of this Revenue Procedure, and the amount of the reserve at the end of the year of change shall be determined in accordance with section 593 of the Code and sections 1.593-5, 1.593-6 and 1.593-7 of the regulations, in lieu of the manner indicated in paragraph .01(1), above.

SEC. 5. TAXPAYERS NOT COVERED BY THIS PROCEDURE.

This Revenue Procedure does not apply to taxpayers, except those described in sections 4.02 and 4.03, whose trade receivables include items of unrealized income for Federal income tax purposes. Such taxpayers shall file applications on Form 3115 with the Commissioner in accordance with section 1.446-1(e)(3) of the regulations. Taxpayers whose circumstances prevent them from using this Revenue Procedure in changing from the specific charge-off method to the reserve method may nevertheless make request for such change in accordance with the rules of such regulations.

SEC. 6. RECORDS.

The taxpayers must maintain adequate records so that the District Director may verify the data concerning the change.

SEC. 7. COMPLIANCE WITH CONDITIONS.

Taxpayers making a change from the specific charge-off method to the reserve method without complying with all the conditions of this Revenue Procedure will be deemed to have initiated the change without having obtained the consent of the Commissioner.

SEC. 8. EFFECTIVE DATE.

This Revenue Procedure shall be effective for taxable years beginning after December 31, 1964.

SEC. 9. INQUIRIES.

Inquiries in regard to this Revenue Procedure should refer to its number and be addressed to the Commissioner of Internal Revenue, Attention: T:R:C, Washington, D.C., 20224.