Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 70-35

1970-1 C.B. 154

IRS Headnote

A note evidencing a loan made by an insurance company, secured by a second mortgage that was eliminated by foreclosure of the first mortgage, qualifies as a "bill receivable" and is deductible as a bad debt under section 832(c)(6) of the Code; I.T. 2920 superseded.

Full Text

Rev. Rul. 70-35 /1/

The purpose of this Revenue Ruling is to update and restate, under the current statute and regulations, the position set forth in I.T. 2920, C.B. XIV-2, 255 (1935).

The question presented is whether the note received under the circumstances described below qualifies as a "bill receivable" within the meaning of section 832(c)(6) of the Internal Revenue Code of 1954.

The taxpayer is a domestic insurance company other than a life or mutual insurance company within the meaning of section 831 of the Code. It made a loan to an individual that was evidenced by a note secured by a second mortgage on real property. The individual defaulted on the first mortgage note on the real property and the taxpayer's equity under the second mortgage was eliminated by foreclosure of the first mortgage. The note received by the taxpayer in the instant case was determined to be worthless and was charged off at the close of the year.

The taxpayer properly treats income from notes such as the one here in issue as taxable income from its insurance business.

Section 832(c)(6) of the Code provides, in pertinent part, that in computing the taxable income of an insurance company subject to the tax imposed by section 831 of the Code, there shall be allowed as a deduction, debts in the nature of agency balances and bills receivable that become worthless within the taxable year. Since the loan in the instant case is the type of loan that the taxpayer ordinarily makes, the note should be treated as a bill receivable in accordance with generally accepted accounting practice.

Accordingly, the note in the instant case qualifies as a "bill receivable" and is deductible as a bad debt under section 832(c)(6) of the Code in the year in which it was ascertained to be worthless and charged off.

I.T. 2920 is hereby superseded, since the position stated therein is restated under the current law in this Revenue Ruling.

/1/ Prepared pursuant to Rev. Proc. 67-6, C.B. 1967-1, 576.