[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: 26CFR1.585-1]

[Page 316-317]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.585-1  Reserve for losses on loans of banks.

    (a) General rule. As an alternative to a deduction from gross income 
under section 166(a) for specific debts which become worthless in whole 
or in part, a financial institution to which section 585 and this 
section apply shall be allowed a deduction under section 585(a) (or, for 
taxable years beginning before January 1, 1987, section 166(c)), for a 
reasonable addition to a reserve for bad debts provided such financial 
institution has adopted or adopts the reserve method of treating bad 
debts in accordance with paragraph (b) of Sec. 1.166-1. In the case of 
such a taxpayer the amount of the reasonable addition to such reserve 
for a taxable year beginning after July 11, 1969, shall be an amount 
determined by the taxpayer which does not exceed the amount computed 
under Sec. 1.585-2. Such reasonable addition for the taxable year shall 
be an amount at least equal to the amount provided by Sec. 1.585-
2(a)(2). For each taxable year the taxpayer must include in its income 
tax return (or amended return) for that year a computation of the amount 
of the addition determined under this section showing the method used to 
determine that amount. The use of a particular method in the return for 
a taxable year is not a binding election by the taxpayer to apply such 
method either for such taxable year or for subsequent taxable years. A 
financial institution to which section 585 and this section apply which 
adopts the reserve method is not entitled to charge off any bad debts 
pursuant to section 166(a) with respect to a loan (as defined in Sec. 
1.585-2(e)(2). Except as provided by Sec. 1.585-3, the reserve for bad 
debts of a financial institution to which section 585 and this section 
apply shall be established and maintained in the same manner as is 
provided by section 585 (or, for taxable years beginning before January 
1, 1987, section 166(c)) and theregulations under section 166 with 
respect to reserves for bad debts. Except as provided by this section, 
no deduction is allowable for an addition to a reserve for losses on 
loans as defined in Sec. 1.585-2(e)(2) of a financial institution to 
which section 585 and this section apply. For rules relating to 
deduction with respect to debts which are not loans (as defined in Sec. 
1.585-2(e)(2)), see section 166(a) and the regulations thereunder. For 
rules relating to a debt evidenced by a security (as defined in section 
165(g)(2)(C), see sections 166 and

[[Page 317]]

582(a) and the regulations thereunder. For the definition of certain 
terms, see paragraph (e) of Sec. 1.585-2. For rules relating to a 
transaction to which section 381(a) applies, see Sec. 1.585-4. For 
rules relating to large banks, see Sec. Sec. 1.585-5 through 1.585-8.
    (b) Application of section--(1) In general. Except as provided in 
paragraph (b)(2) of this section, section 585 and this section apply to 
the following financial institutions--
    (i) Any bank (as defined in section 581 and the regulations 
thereunder) other than a mutual savings bank, domestic building and loan 
association, or cooperative bank, to which section 593 applies; and
    (ii) Any corporation to which paragraph (b)(1)(i) of this section 
would apply except for the fact that it is a foreign corporation and in 
the case of any such foreign corporation, the rules provided by section 
585(a) and (b), this section, Sec. Sec. 1.585-2, 1.585-3, and 1.585-4 
apply only with respect to loans outstanding the interest on which is 
effectively connected with the conduct of a banking business within the 
United States.
    (2) Exception. For taxable years beginning after December 31, 1986, 
section 585(a) and (b) and this section do not apply to any large bank 
(as defined in Sec. 1.585-5(b)). For these years, a large bank may not 
deduct any amount under section 585 or any other section for an addition 
to a reserve for bad debts.

(Sec. 585(b)(4), of the Internal Revenue Code of 1954 (83 Stat. 618; (26 
U.S.C. 585(b)(4))))

[T.D. 7532, 43 FR 3109, Jan. 23, 1978, as amended by T.D. 8513, 58 FR 
68757, Dec. 29, 1993; 59 FR 15502, Apr. 1, 1994]