[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: 26CFR1.585-3]

[Page 325]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.585-3  Special rules.

    (a) Treatment of reserve. For taxable years beginning after July 11, 
1969, if a financial institution to which section 585 and Sec. 1.585-1 
apply establishes a reserve pursuant to section 585(a) (or, for taxable 
years beginning before January 1, 1987, section 166(c)), any bad debt in 
respect of a loan (whether or not such loan is an eligible loan) must be 
charged to the reserve for losses on loans provided for by Sec. 1.585-1 
for the taxable year in which the bad debt occurs. For such a year, any 
recovery of a bad debt previously charged to the reserve account in 
respect of a loan (whether or not such loan is an eligible loan) must be 
credited to such reserve in the taxable year of recovery regardless of 
whether such credit causes the reserve to exceed the permissible amount. 
If, as a result of net recoveries during the taxable year, the reserve 
balance exceeds the permissible amount, a taxpayer is not required to 
report the excess as taxable income. In such a case, the excess over the 
otherwise permissible amount in the reserve account precludes current 
reasonable additions to the reserve and may affect future reasonable 
additions. Recoveries of bad debts which were not charged to the reserve 
shall not be credited to such reserve, but shall be treated as taxable 
income subject to the provisions of section 111. No item other than a 
loan as defined in Sec. 1.585-2 (e)(2) shall be charged to the reserve 
for losses on loans.
    (b) Accounting for reserve. A financial institution to which section 
585 and Sec. 1.585-1 apply which establishes a reserve pursuant to 
section 585(a) (or, for taxable years beginning before January 1, 1987, 
section 166(c)) shall establish and maintain a permanent record of such 
reserve. Copies of Federal income tax returns and amended returns with 
attached schedules satisfy the requirements of this paragraph provided 
that such returns are permanently maintained by the financial 
institution and the balance of the reserve for losses on loans 
established pursuant to section 585(a) (or former section 166(c)) can be 
readily reconciled with the reservefor losses on loans maintained by the 
financial institution for financial statement purposes. The requirements 
of this paragraph would also be satisfied if a financial institution 
establishes and maintains a permanent subsidiary ledger reflecting an 
account for the reserve for losses on loans established pursuant to 
section 585(a) (or former section 166(c)) provided the balance in such 
account can be readily reconciled with the balance of the reserve for 
losses on loans for financial statement purposes maintained in any other 
ledger. The permanent records maintained pursuant to this section must 
reflect any changes in the amount initially added to the reserve for 
losses on loans and the amount finally determined by the taxpayer to be 
a reasonable addition to the reserve for losses on loans.

(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 3114, Jan. 23, 1978, as amended by T.D. 8513, 58 FR 
68757, Dec. 29, 1993]