Sec. 18-3.7. Bad debt deduction of the IBF

Tax Law, § 1453(f)(3)

(a) In computing applicable direct expenses pursuant to section 18-3.5 of this Subpart, the IBF of a taxpayer must compute its bad debt deduction by using the same method (direct charge-off or reserve) the bank used for Federal income tax purposes. A taxpayer which uses the direct charge-off method to compute its bad debt deduction for Federal income tax purposes, in accordance with subsection (a) of section 166 of the Internal Revenue Code, has as its IBF bad debt deduction the aggregate of those specific bad debts of the IBF from loans which produce or would have produced eligible gross income (hereinafter IBF loans) which were included in the bad debt deduction for Federal income tax purposes. A taxpayer which maintains a reserve balance for losses on loans, in accordance with section 585 or 593 of the Internal Revenue Code, for Federal income tax purposes must maintain an IBF reserve balance for losses on loans and has as its IBF bad debt deduction the addition to its IBF reserve balance for losses on loans.

(b) The addition to the IBF reserve balance for losses on loans is computed as follows:

(1)

(i) A taxpayer which computes its addition to its reserve balance for losses on loans for Federal income tax purposes pursuant to section 585(b)(2) of the Internal Revenue Code (the percentage method) determines a fraction the numerator of which is the amount of IBF eligible loans and the denominator of which is the amount of eligible loans both within and without the IBF.

(ii) A taxpayer which computes its addition to its reserve balance for losses on loans for Federal income tax purposes pursuant to section 585(b)(3) of the Internal Revenue Code (the experience method) determines a fraction the numerator of which is the amount of IBF outstanding loans and the denominator of which is the amount of outstanding loans both within and without the IBF.

(iii) A taxpayer which does not compute its addition to its reserve balance for losses on loans for Federal income tax purposes pursuant to section 585(b)(2) or (3) determines a fraction the numerator of which is the IBF amount which was included in the computation for Federal income tax purposes and the denominator of which is the amount used for Federal income tax purposes. The components of the fraction must reflect the method the taxpayer used for computing its addition to its reserve balance for losses on loans for Federal income tax purposes.

(2) Multiply the fraction determined in paragraph (1) of this subdivision by the Federal reserve balance for losses on loans after the taxable year's reserve addition. The result is the IBF reserve balance for losses on loans.

(3) Subtract the IBF reserve balance for losses on loans before the taxable year's reserve addition from the IBF reserve balance for losses on loans computed in paragraph (2) of this subdivision. The result is the addition to the IBF reserve balance for losses on loans. If the addition to the IBF reserve balance for losses on loans is a negative amount, the IBF bad debt deduction is a negative amount.

(c) For purposes of this section, the following rules apply:

(1) The terms loan, eligible loan, qualifying real property loan and nonqualifying loan have the same meanings as defined in sections 585 and 593, as the case may be, of the Internal Revenue Code and regulations promulgated thereunder. Therefore, interoffice loans do not qualify as eligible loans in computing the IBF bad debt deduction. Accordingly, the amount of the IBF bad debt deduction plus the amount of such deduction allocated without the IBF must equal the actual bad debt deduction taken for Federal income tax purposes.

(2) When outstanding loans or eligible loans that are outstanding are transferred to the IBF, the taxpayer must on the same date transfer to the IBF the portion of its reserve balance for losses on loans maintained for Federal income tax purposes which is attributable to such transferred loans. Such portion is computed by multiplying the Federal reserve balance for losses on loans on the date of transfer by a fraction:

(i) the numerator of which is such loans that were transferred as of the date of transfer which were included in the computation of the Federal reserve balance for losses on loans for the previous taxable year; and

(ii) the denominator of which is the total of such loans as of the date of transfer which were included in the computation of the Federal reserve balance for losses on loans for the previous taxable year.

When the outstanding loans or eligible loans that are outstanding are transferred from existing places of business, the reserve balance for such existing places of business must be reduced accordingly.