Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 64-48

1964-1 C.B. 104

Full Text

Rev. Rul. 64-48 /1/

Small business investment companies (SBIC) are allowed to establish bad debt reserve ceilings equal to ten percent of their outstanding loans as reasonable reserves under section 166(c) of the Internal Revenue Code of 1954. The ten-percent ceiling applies for a period of ten years beginning with 1959. When the ten-year period expires a SBIC's own loss experience will be used to determine the reasonableness of further additions to its reserve. After 1968 a new SBIC, or one that has not been in existence a sufficient number of years to provide adequate loss experience data for establishing reasonable bad debt reserves, will be permitted to use an average loss experience factor computed on an industry-wide basis until it has sufficient loss experience of its own.

In allowing a flat percentage as a reasonable reserve ceiling, consideration has been given to the fact that the SBIC industry has been in existence only since 1959 and has no available bad debt loss experience of its own which would afford an adequate basis for determining reasonable bad debt reserves. There is no similar industry which could provide the SBIC industry with comparable bad debt experience data.

The ten-percent ceiling was arrived at after a thorough study of the nature of the SBIC industry and the inherent risks involved in the type of loans made. The increasing amount of charge-offs under current business trends and a comparison of the principal features of the SBIC industry with those of other types of lending institutions were other factors considered.

The determination of the period of ten years as an appropriate length of time for the application of the ten-percent ceiling factor resulted from an analysis of the loan portfolio turnover of the SBIC industry.

/1/ Based on Technical Information Release 532, dated Dec. 24, 1963.