Industry Directive on the Conformity Election for Bank Bad Debts


December 12, 2001


                                      DIRECTOR, FIELD SPECIALISTS
                                       DIRECTOR, PREFILING AND TECHNICAL GUIDANCE

FROM:                           David B. Robison /s/David B. Robison
                                       Industry Director, Financial Services

SUBJECT:                     Industry Directive on the Conformity Election for Bank Bad Debts

The purpose of this memorandum is to provide a directive to examiners in the audit of the bad debt conformity election for banking institutions, in light of and as a companion to the publication of Rev. Rul. 2001-59 in I.R.B. 2001-51. This Revenue Ruling resulted from the banking industry’s and the Service’s joint effort to clarify the conformity election as part of the Industry Issue Resolution Pilot Program.

The bad debt conformity election for banks was added to the Treasury Regulations in response to the September, 1991 Treasury White Paper, "Report to The Congress on The Tax Treatment of Bad Debts by Financial Institutions", which addressed industry requests for book/tax conformity in the bad debt area.  The conformity election under Treas. Reg. § 1.166-2(d)(3) is an accounting method available to banks to establish a conclusive presumption of worthlessness, either in whole or in part, for its loans. If a bank has properly complied with the terms of the conformity election, the bank is entitled to a bad debt deduction for loans classified as "loss assets", which were charged off for regulatory purposes.

Proper election of the conformity method of accounting substantially reduces the time required for auditing bad debts, thus saving resources for both the bank and the Service. The attached guidelines are intended to assist examiners in determining whether a proper conformity election was made and to provide assistance to examiners on the efficient use of time and resources in the analysis of this issue. The commitment of staffing to examine conformity election bad debts is usually not an effective utilization of resources. Approaches to planning and conducting an examination of the conformity election are explained in the attachment.

This LMSB Directive is not an official pronouncement of the law or the Service’s position and cannot be used, cited or relied upon as such.

If you have any questions, please contact me at (212) 298-2130 or either Jeffrey Kammerman, Commercial Banking/Savings & Loan Technical Advisor, at (212) 719-6569 or Jody Botsford, Savings & Loan/Commercial Banking Technical Advisor, at (626) 312-5101.