Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 66-82

1966-1 C.B. 155

Sec. 593

IRS Headnote

The permanent nonwithdrawable capital stock account of a domestic building and loan association is not a reserve or similar account within the meaning of section 1.593-7(a) of the Income Tax Regulations. Current earnings credited to such account, by way of stock dividends or otherwise, are not credited to a reserve for bad debts, and, therefore, are not deductible from gross income for Federal income tax purposes.

Full Text

Rev. Rul. 66-82

Advice has been requested whether current earnings credited to the `permanent reserve fund nonwithdrawable stock' (permanent nonwithdrawable capital stock account) of the taxpayer represents an addition to a reserve for bad debts within the meaning of section 593 of the Internal Revenue Code of 1954.

The taxpayer, a domestic building and loan association within the meaning of section 7701(a)(19) of the Code, has permanent nonwithdrawable capital stock represented by shares. During the taxable year the taxpayer paid a stock dividend on the permanent nonwithdrawable capital stock, which was charged, in part, against the current earnings account. Following the issuance of the stock dividend, the permanent nonwithdrawable capital stock account exceeded the amount actually paid in for stock in prior years.

Section 593 of the Code provides, in general, that a mutual savings bank not having capital stock represented by shares, a domestic building and loan association, and a cooperative bank without capital stock organized and operated for mutual purposes and without profit may, as an alternative to a deduction from gross income under section 166(a) of the Code for specific debts which become worthless in whole or in part, deduct amounts credited to a reserve for bad debts.

Section 1.593-7(a) of the Income Tax Regulations relates to the establishment and treatment of reserves for bad debts, and, in part, provides:

(2) Accounting for reserves .

(i) * * *

(ii) * * * Minimum amounts credited in compliance with * * * any  Federal or State statutes, regulations, or supervisory orders to reserve or similar accounts, or additional amounts credited to such reserve or similar accounts and permissive under such statutes, regulations, or orders, against which charges may be made for the purpose of absorbing losses sustained by the taxpayer, may also be credited to the reserve for losses on nonqualifying loans or the reserve for losses on qualifying real property loans * * *

The words `reserve or similar accounts,' as used in section 1.593-7(a)(2)(ii) of the regulations, relate only to reserve accounts maintained on the books of account of the taxpayer for the purpose of absorbing losses. The permanent nonwithdrawable capital stock account of the taxpayer is not one of its `reserve or similar accounts,' even though amounts appearing therein in excess of the paid-in amount of such stock represent a part of `surplus, undivided profits, and reserves.' All of the taxpayer's surplus, undivided profits, and reserves, as well as its capital, are at the risk of the taxpayer's business, but it does not follow that the total amount thereof has been credited to a reserve for bad debts within the scope of section 593 of the Code.

Accordingly, the permanent nonwithdrawable capital stock account of the taxpayer is not a reserve or similar account within the meaning of section 1.593-7(a) of the regulations. Current earnings credited to such account, by way of stock dividends or otherwise, are not credited to a reserve for bad debts, and therefore, are not deductible from gross income for Federal income tax purposes.