[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: 26CFR1.586-1]

[Page 340]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.586-1  Reserve for losses on loans of small business investment 
companies, etc.

    (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 taxpayer which is a financial institution to which section 
586 and this section apply is allowed a deduction under 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. 1.586-2. A financial institution to which section 
586 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. 1.586-2(c)(2)). Except as 
provided by Sec. 1.586-2, regarding the manner of computation of the 
addition to the reserve for bad debts, the reserve for bad debts of a 
financial institution to which this section applies shall be maintained 
in the same manner as is provided by section 166(c) and the regulations 
thereunder with respect to reserves for bad debts. Except as provided by 
this section, no deduction is allowable for an addition to a reserve for 
bad debts of a financial institution to which section 586 and this 
section apply. For rules relating to deduction with respect to debts 
which are not loans (as defined in Sec. 1.586-2(c)(2)), see section 
166(a) and the regulations thereunder.
    (b) Application of section. Section 586 and this section shall apply 
only to the following financial institutions:
    (1) Any small business investment company operating under the Small 
Business Investment Act of 1958 as amended and supplemented (72 Stat. 
689), and
    (2) Any business development corporation, which for purposes of this 
section, means a corporation which was created by or pursuant to an act 
of a State legislature for purposes of promoting, maintaining, and 
assisting the economy and industry within such State on a regional or 
statewide basis by making loans which would generally not be made by 
banks (as defined in section 581 and the regulations thereunder) within 
such region or State in the ordinary course of their businesses (except 
on the basis of a partial participation), and which is operated 
primarily for such purposes.

[T.D. 7444, 41 FR 53482, Dec. 7, 1976]