26 USC 585 - Reserves for losses on loans of banks

Collapse to view only § 585. Reserves for losses on loans of banks

§ 581. Definition of bank
§ 582. Bad debts, losses, and gains with respect to securities held by financial institutions
[§ 583. Repealed.
§ 584. Common trust funds
§ 585. Reserves for losses on loans of banks
[§ 586. Repealed.

§ 581. Definition of bank

For purposes of sections 582 and 584, the term “bank” means a bank or trust company incorporated and doing business under the laws of the United States (including laws relating to the District of Columbia) or of any State, a substantial part of the business of which consists of receiving deposits and making loans and discounts, or of exercising fiduciary powers similar to those permitted to national banks under authority of the Comptroller of the Currency, and which is subject by law to supervision and examination by State or Federal authority having supervision over banking institutions. Such term also means a domestic building and loan association.

(Aug. 16, 1954, ch. 736, 68A Stat. 202; Pub. L. 87–722, § 5, Sept. 28, 1962, 76 Stat. 670; Pub. L. 94–455, title XIX, § 1901(c)(5), Oct. 4, 1976, 90 Stat. 1803.)

§ 582. Bad debts, losses, and gains with respect to securities held by financial institutions

(a) Securities

(b) Worthless stock in affiliated bank

(1) General rule

(2) Financial institutions to which paragraph (1) applies

(A) In general

For purposes of paragraph (1), the financial institutions referred to in this paragraph are—

(i) any bank (and any corporation which would be a bank except for the fact it is a foreign corporation),

(ii) any financial institution referred to in section 591,

(iii) any small business investment company operating under the Small Business Investment Act of 1958, and

(iv) any business development corporation.

(B) Business development corporation

(Aug. 16, 1954, ch. 736, 68A Stat. 202; Pub. L. 85–866, title I, § 34, Sept. 2, 1958, 72 Stat. 1632; Pub. L. 91–172, title IV, § 433(a), (c), Dec. 30, 1969, 83 Stat. 623, 624; Pub. L. 94–455, title X, § 1044(a), title XIV, § 1402(b)(1)(G), (2), Oct. 4, 1976, 90 Stat. 1642, 1732; Pub. L. 98–369, div. A, title X, § 1001(b)(6), (e), July 18, 1984, 98 Stat. 1011, 1012; Pub. L. 99–514, title VI, § 671(b)(4), title IX, § 901(d)(3), Oct. 22, 1986, 100 Stat. 2318, 2379; Pub. L. 100–647, title I, § 1008(d)(3), Nov. 10, 1988, 102 Stat. 3439; Pub. L. 101–508, title XI, § 11801(a)(25), (c)(11), Nov. 5, 1990, 104 Stat. 1388–521, 1388–527; Pub. L. 104–188, title I, § 1621(b)(4), Aug. 20, 1996, 110 Stat. 1867; Pub. L. 108–357, title VIII, § 835(b)(3), Oct. 22, 2004, 118 Stat. 1593.)

[§ 583. Repealed. Pub. L. 94–455, title XIX, § 1901(a)(82), Oct. 4, 1976, 90 Stat. 1778]

§ 584. Common trust funds

(a) DefinitionsFor purposes of this subtitle, the term “common trust fund” means a fund maintained by a bank—

(1) exclusively for the collective investment and reinvestment of moneys contributed thereto by the bank in its capacity—

(A) as a trustee, executor, administrator, or guardian, or

(B) as a custodian of accounts—

(i) which the Secretary determines are established pursuant to a State law which is substantially similar to the Uniform Gifts to Minors Act as published by the American Law Institute, and

(ii) with respect to which the bank establishes, to the satisfaction of the Secretary, that it has duties and responsibilities similar to duties and responsibilities of a trustee or guardian; and

(2) in conformity with the rules and regulations, prevailing from time to time, of the Board of Governors of the Federal Reserve System or the Comptroller of the Currency pertaining to the collective investment of trust funds by national banks.

For purposes of this subsection, two or more banks which are members of the same affiliated group (within the meaning of section 1504) shall be treated as one bank for the period of affiliation with respect to any fund of which any of the member banks is trustee or two or more of the member banks are cotrustees.

(b) Taxation of common trust funds

(c) Income of participants in fundEach participant in the common trust fund in computing its taxable income shall include, whether or not distributed and whether or not distributable—

(1) as part of its gains and losses from sales or exchanges of capital assets held for not more than 1 year, its proportionate share of the gains and losses of the common trust fund from sales or exchanges of capital assets held for not more than 1 year,

(2) as part of its gains and losses from sales or exchanges of capital assets held for more than 1 year, its proportionate share of the gains and losses of the common trust fund from sales or exchanges of capital assets held for more than 1 year, and

(3) its proportionate share of the ordinary taxable income or the ordinary net loss of the common trust fund, computed as provided in subsection (d).

The proportionate share of each participant in the amount of dividends received by the common trust fund and to which section 1(h)(11) applies shall be considered for purposes of such paragraph as having been received by such participant.

(d) Computation of common trust fund incomeThe taxable income of a common trust fund shall be computed in the same manner and on the same basis as in the case of an individual, except that—

(1) there shall be segregated the gains and losses from sales or exchanges of capital assets;

(2) after excluding all items of gain and loss from sales or exchanges of capital assets, there shall be computed—

(A) an ordinary taxable income which shall consist of the excess of the gross income over deductions; or

(B) an ordinary net loss which shall consist of the excess of the deductions over the gross income; and

(3) the deduction provided by section 170 (relating to charitable, etc., contributions and gifts) shall not be allowed.

(e) Admission and withdrawal

(f) Different taxable years of common trust fund and participant

(g) Net operating loss deduction

(h) Nonrecognition treatment for certain transfers to regulated investment companies

(1) In generalIf—

(A) a common trust fund transfers substantially all of its assets to one or more regulated investment companies in exchange solely for stock in the company or companies to which such assets are so transferred, and

(B) such stock is distributed by such common trust fund to participants in such common trust fund in exchange solely for their interests in such common trust fund,

no gain or loss shall be recognized by such common trust fund by reason of such transfer or distribution, and no gain or loss shall be recognized by any participant in such common trust fund by reason of such exchange.

(2) Basis rules

(A) Regulated investment company

(B) Participants

(3) Treatment of assumptions of liability

(A) In general

(B) Special rule where assumed liabilities exceed basis

(i) In generalIf, in any transfer referred to in paragraph (1)(A), the assumed liabilities exceed the aggregate adjusted bases (in the hands of the common trust fund) of the assets transferred to the regulated investment company or companies—(I) notwithstanding paragraph (1), gain shall be recognized to the common trust fund on such transfer in an amount equal to such excess,(II) the basis of the assets received by the regulated investment company or companies in such transfer shall be increased by the amount so recognized, and(III) any adjustment to the basis of a participant’s interest in the common trust fund as a result of the gain so recognized shall be treated as occurring immediately before the exchange referred to in paragraph (1)(B).

If the transfer referred to in paragraph (1)(A) is to two or more regulated investment companies, the basis increase under subclause (II) shall be allocated among such companies on the basis of the respective fair market values of the assets received by each of such companies.

(ii) Assumed liabilities

(4) Common trust fund must meet diversification rules

(i) Taxable year of common trust fund

(Aug. 16, 1954, ch. 736, 68A Stat. 203; Pub. L. 87–722, § 4, Sept. 28, 1962, 76 Stat. 670; Pub. L. 88–272, title II, § 201(d)(5), Feb. 26, 1964, 78 Stat. 32; Pub. L. 94–414, § 1, Sept. 17, 1976, 90 Stat. 1273; Pub. L. 94–455, title XIV, § 1402(b)(1)(H), (2), title XIX, §§ 1901(b)(1)(G), 1906(b)(13)(A), title XXI, §§ 2131(d), 2138, Oct. 4, 1976, 90 Stat. 1732, 1790, 1834, 1924, 1932; Pub. L. 95–30, title I, § 101(d)(7), May 23, 1977, 91 Stat. 133; Pub. L. 96–223, title IV, § 404(b)(3), Apr. 2, 1980, 94 Stat. 306; Pub. L. 97–34, title III, § 301(b)(3), (6)(A), Aug. 13, 1981, 95 Stat. 270; Pub. L. 97–448, title I, § 103(a)(2), Jan. 12, 1983, 96 Stat. 2375; Pub. L. 98–369, div. A, title X, § 1001(b)(7), (e), July 18, 1984, 98 Stat. 1011, 1012; Pub. L. 99–514, title VI, § 612(b)(2), Oct. 22, 1986, 100 Stat. 2250; Pub. L. 100–647, title I, § 1008(e)(5)(A), Nov. 10, 1988, 102 Stat. 3440; Pub. L. 104–188, title I, § 1805(a), Aug. 20, 1996, 110 Stat. 1894; Pub. L. 106–36, title III, § 3001(c)(1), June 25, 1999, 113 Stat. 183; Pub. L. 108–27, title III, § 302(e)(7), May 28, 2003, 117 Stat. 764.)

§ 585. Reserves for losses on loans of banks

(a) Reserve for bad debts

(1) In general

(2) BankFor purposes of this section—

(A) In general

(B) Banking business of United States branch of foreign corporation

(span) Addition to reserves for bad debts

(1) General rule

(2) Experience methodThe amount determined under this paragraph for a taxable year shall be the amount necessary to increase the balance of the reserve for losses on loans (at the close of the taxable year) to the greater of—

(A) the amount which bears the same ratio to loans outstanding at the close of the taxable year as (i) the total bad debts sustained during the taxable year and the 5 preceding taxable years (or, with the approval of the Secretary, a shorter period), adjusted for recoveries of bad debts during such period, bears to (ii) the sum of the loans outstanding at the close of such 6 or fewer taxable years, or

(B) the lower of—

(i) the balance of the reserve at the close of the base year, or

(ii) if the amount of loans outstanding at the close of the taxable year is less than the amount of loans outstanding at the close of the base year, the amount which bears the same ratio to loans outstanding at the close of the taxable year as the balance of the reserve at the close of the base year bears to the amount of loans outstanding at the close of the base year.

For purposes of this paragraph, the base year shall be the last taxable year before the most recent adoption of the experience method, except that for taxable years beginning after 1987 the base year shall be the last taxable year beginning before 1988.

(3) Regulations; definition of loan

(1) In general

(2) Large banksFor purposes of this subsection, a bank is a large bank if, for the taxable year (or for any preceding taxable year beginning after December 31, 1986)—

(A) the average adjusted bases of all assets of such bank exceeded $500,000,000, or

(B) such bank was a member of a parent-subsidiary controlled group and the average adjusted bases of all assets of such group exceeded $500,000,000.

(3) 4-year spread of adjustments

(A) In generalExcept as provided in paragraph (4), in the case of any bank which for its last taxable year before the disqualification year maintained a reserve for bad debts—

(i) the provisions of this subsection shall be treated as a change in the method of accounting of such bank for the disqualification year,

(ii) such change shall be treated as having been made with the consent of the Secretary, and

(iii) the net amount of adjustments required by section 481(a) to be taken into account by the taxpayer shall be taken into account in each of the 4 taxable years beginning with the disqualification year with—(I) the amount taken into account for the 1st of such taxable years being the greater of 10 percent of such net amount or such higher percentage of such net amount as the taxpayer may elect, and(II) the amount taken into account in each of the 3 succeeding taxable years being equal to the applicable fraction (determined in accordance with the following table for the taxable year involved) of the portion of such net amount not taken into account under subclause (I).


	The applicable
If the case of the—	fraction is—
1st succeeding year	2⁄9
2nd succeeding year	⅓
3rd succeeding year	4⁄9.

(B) Suspension of recapture for taxable year for which bank is financially troubled

(i) In generalIn the case of a bank which is a financially troubled bank for any taxable year—(I) no adjustment shall be taken into account under subparagraph (A) for such taxable year, and(II) such taxable year shall be disregarded in determining whether any other taxable year is a taxable year for which an adjustment is required to be taken into account under subparagraph (A) or the amount of such adjustment.

(ii) Exception for elective recapture for 1st year

(iii) Financially troubled bank

(iv) Nonperforming loan percentageFor purposes of clause (iii), the term “nonperforming loan percentage” means the percentage determined by dividing—(I) the sum of the outstanding balances of nonperforming loans of the bank as of the close of each quarter of the taxable year, by(II) the sum of the amounts of equity of the bank as of the close of each such quarter.

In the case of a bank which is a member of a parent-subsidiary controlled group for the taxable year, the preceding sentence shall be applied with respect to such group.

(v) Other definitionsFor purposes of this subparagraph—(I) Nonperforming loans(II) Equity

(4) Elective cut-off methodIf a bank makes an election under this paragraph for the disqualification year—

(A) the provisions of this subsection shall not be treated as a change in the method of accounting of the taxpayer for purposes of section 481,

(B) the taxpayer shall continue to maintain its reserve for loans held by the bank as of the 1st day of the disqualification year and charge against such reserve any losses resulting from loans held by the bank as of such 1st day, and

(C) no deduction shall be allowed under this section (or any other provision of this subtitle) for any addition to such reserve for the disqualification year or any subsequent taxable year.

If the amount of the reserve referred to in subparagraph (B) as of the close of any taxable year exceeds the outstanding balance (as of such time) of the loans referred to in subparagraph (B), such excess shall be included in gross income for such taxable year.

(5) DefinitionsFor purposes of this subsection—

(A) Parent-subsidiary controlled group

(B) Disqualification year

(Added Puspan. L. 91–172, title IV, § 431(a), Dec. 30, 1969, 83 Stat. 616; amended Puspan. L. 94–455, title XIX, § 1906(span)(13)(A), Oct. 4, 1976, 90 Stat. 1834; Puspan. L. 97–34, title II, § 267(a), Aug. 13, 1981, 95 Stat. 266; Puspan. L. 99–514, title IX, § 901(a), (d)(1), Oct. 22, 1986, 100 Stat. 2375, 2378; Puspan. L. 100–203, title X, § 10301(span)(2), Dec. 22, 1987, 101 Stat. 1330–429; Puspan. L. 100–647, title I, § 1009(a)(2), (3), Nov. 10, 1988, 102 Stat. 3445; Puspan. L. 101–508, title XI, § 11801(a)(26), (c)(12)(C)–(E), Nov. 5, 1990, 104 Stat. 1388–521, 1388–527; Puspan. L. 104–188, title I, § 1616(span)(6), Aug. 20, 1996, 110 Stat. 1856.)

[§ 586. Repealed. Pub. L. 99–514, title IX, § 901(c), Oct. 22, 1986, 100 Stat. 2378]