[Code of Federal Regulations]
[Title 26, Volume 7]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.582-1]

[Page 309-311]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.582-1  Bad debts, losses, and gains with respect to securities 
held by financial institutions.

    (a) Bad debt deduction for banks. A bank, as defined in section 581, 
is allowed a deduction for bad debts to the extent and in the manner 
provided by subsections (a), (b), and (c) of section 166 with respect to 
a debt which has become worthless in whole or in part and which is 
evidenced by a security (a bond, debenture, note, certificate, or other 
evidence of indebtedness to pay a fixed or determinable sum of money) 
issued by any corporation (including governments and their political 
subdivisions), with interest coupons or in registered form.
    (b) Worthless stock in affiliated bank. For purposes of section 
165(g)(1), relating to the deduction for losses involving worthless 
securities, if the taxpayer is a bank (as defined in section 581) and 
owns directly at least 80 percent of each class of stock of another 
bank, stock in such other bank shall not be treated as a capital asset.
    (c) Pre-1970 sales and exchanges of bonds, etc., by banks. For 
taxable years beginning before July 12, 1969, with respect to the 
taxation under subtitle A of the Code of a bank (as defined in section 
581), if the losses of the taxable year from sales or exchanges of 
bonds, debentures, notes, or certificates, or other evidences of 
indebtedness, issued by any corporation (including one issued by a 
government or political subdivision thereof), exceed the gains of the 
taxable year from such sales or exchanges, no such sale or exchange 
shall be considered a sale or exchange of a capital asset.
    (d) Post-1969 sales and exchanges of securities by financial 
institutions. For taxable years beginning after July 11, 1969, the sale 
or exchange of a security is not considered the sale or exchange of a 
capital asset if such sale or exchange

[[Page 310]]

is made by a financial institution to which any of the following 
sections applies: Section 585 (relating to banks), 586 (relating to 
small business investment companies and business development 
corporations), or 593 (relating to mutual savings banks, domestic 
building and loan associations, and cooperative banks). This paragraph 
shall apply to determine the character of gain or loss from the sale or 
exchange of a security notwithstanding any other provision of subtitle A 
of the Code, such as section 1233 (relating to short sales). However, 
this paragraph shall have no effect in the determination of whether a 
security is a capital asset under section 1221 for purposes of applying 
any other provision of the Code, such as section 1232 (relating to 
original issue discount). For purposes of this paragraph, a security is 
a bond, debenture, note, or certificate or other evidence of 
indebtedness, issued by any person. See paragraphs (e) and (f) of this 
section for special transitional rules applicable, respectively, to 
banks and to small business investment companies and business 
development corporations.
    (e) Transition rule for qualifying securities held by banks--(1) In 
general. Notwithstanding the provisions of paragraph (d) of this 
section, if the net long-term capital gain from sales and exchanges of 
qualifying securities exceeds the net short-term capital loss from such 
sales and exchanges in any taxable year beginning after July 11, 1969, 
such excess shall be treated as long-term capital gain, but in an amount 
not to exceed the net gain from sales and exchanges of securities in 
such year. For purposes of computing such net gain, a capital loss 
carried to the taxable year under section 1212 shall not be taken into 
account. See section 1222 and the regulations thereunder for definitions 
of the terms net long-term capital gain and net short-term capital loss. 
For purposes of this paragraph:
    (i) The term security means a security within the meaning of 
paragraph (d) of this section.
    (ii) The term qualifying security means a security which is held by 
the bank on July 11, 1969, and continuously thereafter until it is first 
sold or exchanged by the bank.

See also subparagraph (4) of this paragraph for rules under which the 
time certain securities are held is deemed to include a period of time 
determined under section 1223 (1) and (2) with respect to such security.
    (2) Computation of capital gain or loss. For purposes of this 
paragraph, the amount of gain or loss from the sale or exchange of a 
qualifying security treated as capital gain or loss is determined by 
multiplying the amount of gain or loss recognized from such sale or 
exchange by a fraction the numerator of which is the number of days 
before July 12, 1969, that such security was held by the bank and the 
denominator of which is the sum of the number of days included in the 
numerator and the number of days the security was held by the bank after 
July 11, 1969.
    (3) Special rules. For purposes of subparagraphs (1) and (2) of this 
paragraph, the following items are not taken into account:
    (i) Any amount treated as original issue discount under section 
1232, and
    (ii) Any amount which, without regard to section 582(c) and this 
section, would be treated as gain or loss from the sale or exchange of 
property which is not a capital asset, such as an amount which is 
realized from the sale or exchange of a security which is held by a bank 
as a dealer in securities.
    (4) Holding period in certain cases. For purposes of this paragraph:
    (i) The time a security received in an exchange is deemed to have 
been held by a bank includes a period of time determined under section 
1223(1) with respect to such security.
    (ii) The time a security transferred to a bank from another bank is 
deemed to have been held by the transferee bank includes a period of 
time determined under section 1223(2) with respect to such security.

For example, if a bank on December 3, 1972, surrendered an obligation of 
the United States which it held as a capital asset on July 11, 1969, in 
a transaction to which section 1037 applied, the time during which the 
newly received obligation is deemed to have been held includes the time 
during which the surrendered obligation was deemed to have been held by 
the bank. Because the surrendered obligation was held on

[[Page 311]]

July 11, 1969, the newly acquired obligation is deemed to have been held 
on that date and is a qualifying security. The period during which the 
surrendered obligation is deemed to have been held is taken into account 
in computing the fraction determined under subparagraph (2) of this 
paragraph with respect to the newly received obligation.
    (5) Examples. The provisions of this paragraph may be illustrated by 
the following examples:

    Example 1. Bank A, a calendar year taxpayer, purchased a qualifying 
security on July 14, 1968, and held it to maturity on August 20, 1970, 
when it was redeemed. The redemption resulted in a taxable gain of 
$10,000. The security was held by the bank for 363 days before July 12, 
1969, and for a total of 768 days. During the taxable year, the bank had 
no other gains and no losses from sales or exchanges of qualifying 
securities, but had a net loss of $4,000 from sales of securities other 
than qualifying securities. The portion of the gain from the redemption 
of the qualifying security treated as capital gain under subparagraph 
(2) of this paragraph is $4,726.56 (363/768x$10,000). Because the net 
gain of the taxable year from sales and exchanges of securities, $6,000 
($10,000-$4,000), exceeds the portion of the gain on the sale of the 
qualifying security treated as capital gain under this paragraph, 
$4,726.56 is treated as long-term capital gain on the sale of the 
qualifying security for the taxable year.
    Example 2. Assume the same facts as in example 1, except that the 
bank's net loss of the taxable year from the sale of securities other 
than qualifying securities was $7,000. The amount considered as long-
term capital gain under this paragraph is limited by the amount of gain 
on the sale of securities to $3,000 ($10,000-$7,000).

    (f) Small business investment companies and business development 
corporations--(1) Election. In the case of a small business investment 
company or a business development corporation, described in section 
586(a), section 582(c) does not apply for taxable years beginning after 
July 11, 1969, and before July 11, 1974, unless the taxpayer elects that 
such section shall apply. In the case of a small business investment 
company, see paragraph (a)(1) of Sec. 1.1243-1 if such an election is 
made, but see paragraph (a)(2) of Sec. 1.1243-1 if such an election is 
not made. Such election applies to all such taxable years and, except as 
provided in subparagraph (3) of this paragraph, is irrevocable. Such 
election must be made not later than (i) the time, including extensions 
thereof, prescribed by law for filing the taxpayer's income tax return 
for its first taxable year beginning after July 11, 1969, or (ii) June 
8, 1970, whichever is later.
    (2) Manner of making election. An election pursuant to the 
provisions of this paragraph is made by the taxpayer by a written 
statement attached to the taxpayer's income tax return (or an amended 
return) for its first taxable year beginning after July 11, 1969. Such 
statement shall indicate that the election is made pursuant to section 
433(d) of the Tax Reform Act of 1969 (83 Stat. 624). The taxpayer shall 
attach to its income tax return for each subsequent taxable year to 
which such election is applicable a statement indicating that the 
election has been made and the amount to which it applies for such year.
    (3) Revocation of election. An election made pursuant to 
subparagraph (2) of this paragraph shall be irrevocable unless:
    (i) A written application for consent to revoke the election, 
setting forth the reasons therefor, is filed with the Commissioner 
within 90 days after the permanent regulations relating to section 
433(d)(2) of the Tax Reform Act of 1969 (83 Stat. 624) are filed with 
the Office of the Federal Register, and
    (ii) The Commissioner consents to the revocation.

The revocation is effective for all taxable years to which the election 
applied.

[T.D. 7171, 37 FR 5620, Mar. 17, 1972; 37 FR 6400, Mar. 29, 1972]