REVENUE RULE 93-69

1993-2 C.B. 75, 1993-33 I.R.B. 5.

Internal Revenue Service
Revenue Ruling

USE OF 10-YEAR NET OPERATING LOSS CARRYBACK PROVISION BY COMMERCIAL BANK

Published: October 25, 1993

§ 172. Net Operating Loss Deduction, 26 CFR 1.172-4: Net operating loss carrybacks and net operating loss carryovers.

(See Also § 585; 1.585-1.)

Use of 10-year net operating loss carryback provision by commercial bank. A commercial bank may not use the special 10-year net operating loss carryback provision of § 172(b)(1)(D) for the portion of its net operating loss that is attributable to a deduction for an addition to its bad debt reserve.

ISSUE

May a commercial bank use the 10-year net operating loss carryback provision of § 172(b)(1)(D) of the Internal Revenue Code for the portion of its net operating loss that is attributable to a deduction allowed under § 585(a)(1) for an addition to its bad debt reserve?

FACTS

X is a commercial bank that is not a large bank as defined by § 585(c)(2) of the Code. X accounts for its bad debts under the reserve method, as provided by § 585(a)(1), except to the extent that certain bad debts are only deductible using the specific charge-off method under § 166(a). In 1990, X had a net operating loss, a portion of which was attributable to a deduction for a reasonable addition to its reserve for bad debts under § 585(a)(1), and a portion of which was attributable to a bad debt deduction under § 166(a).

LAW AND ANALYSIS

§ 166(a) of the Code allows a deduction for debts that become worthless within the taxable year.

§ 172(b)(1)(A) of the Code provides the general rule that net operating losses are carried back 3 years and forward 15 years.

§ 172(b)(1)(D) of the Code provides an exception to the general rule of § 172(b)(1)(A). Under § 172(b)(1)(D), the portion of a net operating loss of a bank (as defined in § 585(a)(2)) for a taxable year attributable to a deduction allowed under § 166(a) is carried back 10 years and forward 5 years. This special carryback period only applies to net operating losses for taxable years beginning after December 31, 1986, and before January 1, 1994.

§ 585(a)(1) of the Code provides that, except as provided in § 585(c), a bank is allowed a deduction for a reasonable addition to a reserve for bad debts. This deduction is "in lieu of any deduction under § 166(a)."

§ 585(a)(2) of the Code provides, in general, that the term "bank" means any bank (as defined in § 581) other than an organization to which § 593 applies. § 593 applies to any domestic building and loan association, any mutual savings bank, or any cooperative bank without capital stock organized and operated for mutual purposes and without profit.

§ 585(c)(1) of the Code provides that § 585 does not apply to a "large bank" and that no deduction is allowed under any other provision for any addition to a reserve for bad debts.

§ 585(c)(2) of the Code provides that a bank is a "large bank" if, for the taxable year (or for any preceding taxable year beginning after December 31, 1986), the average adjusted bases of all assets of the bank exceeded $500,000,000, or the bank was a member of a parent-subsidiary controlled group and the average adjusted bases of all assets of the group exceeded $500,000,000.

Before enactment of the Tax Reform Act of 1986 (the "1986 Act"), all commercial banks were allowed to use either the specific charge-off method (§ 166(a) of the Code) or the reserve method (former § 166(c)) in computing their deductions for bad debts. The 1986 Act repealed the reserve method for large commercial banks (but not for organizations to which § 593 applies). See § 805(a) of the 1986 Act, 1986-3 (Vol. 1) C.B. 278. The 1986 Act also added to the Code § 172(b)(1)(L) (now § 172(b)(1)(D)), which permits the portion of a net operating loss of a commercial bank (but not an organization to which § 593 applies) attributable to a deduction allowed under § 166(a) to be carried back 10 years and forward 5 years for taxable years beginning after December 31, 1986, and before January 1, 1994. See § 903(b) of the 1986 Act, at 300.

The statutory changes made by the 1986 Act expressly provide that the 10-year carryback provision in § 172(b)(1)(D) of the Code only applies to losses that are attributable to deductions "allowed under § 166(a)." Deductions by a commercial bank (other than a large bank) for additions to its bad debt reserve are allowed under § 585(a)(1), not § 166(a). This is evident from § 585(a)(1), which states that a bank that is not a large bank "shall be allowed" a deduction for a reasonable addition to a reserve for bad debts and that such a deduction "shall be in lieu of" any deduction under § 166(a).

The 10-year carryback provision in § 172(b)(1)(D) of the Code was enacted to provide relief during a 7-year transition period (1987 through 1993) for large commercial banks that, under the 1986 Act, were precluded from using the reserve method for bad debts and were required to use the specific charge- off method under § 166(a). This special 10-year carryback provision does not apply to the portion of a net operating loss of a commercial bank (or an organization to which § 593 applies) that is attributable to a bad debt deduction computed using the reserve method allowed under § 585(a)(1) (or § 593(a)(1)). See First Alex Bankshares, Inc. v. U.S., No. CIV-92-981-A (W.D.Okla. Sept. 7, 1993).

Accordingly, X may not use the 10-year carryback provision of § 172(b)(1)(D) of the Code for the portion of its 1990 net operating loss that is attributable to the deduction for an addition to its bad debt reserve because that deduction is allowed under § 585(a)(1), not § 166(a). Instead, X is limited to using the generally applicable 3-year carryback provision of § 172(b)(1)(A) for this portion of its 1990 net operating loss. However, X may use the 10-year carryback provision of § 172(b)(1)(D) for the portion of its 1990 net operating loss that is attributable to the bad debt deduction allowed under § 166(a).

HOLDING

A commercial bank may not use the 10-year net operating loss carryback provision of § 172(b)(1)(D) of the Code for the portion of its net operating loss that is attributable to a deduction allowed under § 585(a)(1) for an addition to its bad debt reserve.

DRAFTING INFORMATION

The principal author of this revenue ruling is Sharon Hall, of the Office of Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this revenue ruling, contact Sharon Hall on (202) 622- 4930 (not a toll-free call).

Rev. Rul. 93-69, 1993-2 C.B. 75, 1993-33 I.R.B. 5.