Rev. Rul. 79-214

ISSUE

Whether loans charged off by a taxpayer, in accordance with their classification as "losses" by the Federal Deposit Insurance Corporation (FDIC), are conclusively presumed to be worthless under section 1.166-2(d)(1) of the Income Tax Regulations. FACTS

The taxpayer is a commercial bank subject to the regulatory supervision of the FDIC, an agency of the United States Government. The taxpayer is on the reserve method of accounting for bad debts. During an examination of the taxpayer in 1975, FDIC examiners classified certain loans of the taxpayer as "losses." Solely on the basis of the FDIC examiners' classification of these loans as losses, the taxpayer claimed such loans as a charge to its bad debt reserve under section 166(c) of the Code for 1975 in computing its addition to such reserve.

LAW

Section 585 of the Code provides the general rule for reasonable additions to reserve for bad debts of financial institutions, for purposes of section 166(c).

Section 166(a)(1) of the Code provides that there shall be allowed as a deduction any debt that becomes worthless during the taxable year.

Section 166(c) of the Code provides that in lieu of any deduction under section 166(a), there shall be allowed, in the discretion of the Secretary, a deduction for a reasonable addition to a reserve for bad debts.

Section 1.166-2(d)(1) of the regulations provides, in part, that if a bank or other corporation subject to supervision by federal authorities charges off a debt in whole or in part in obedience to the specific order of such authorities, then the debt shall, to the extent charged off during the taxable year, be conclusively presumed to have become worthless during the taxable year.

ANALYSIS

Rev. Rul. 66-335, 1966-2 C.B. 58, holds that when a national bank charges off a debt in obedience to a written report of a national bank examiner, the debt will be treated as properly charged off in compliance with the "specific order" of a "supervisory authority" within the meaning of section 1.166-2(d)(1) of the regulations.

Since national bank examiners under the authority of the Comptroller of the Currency and examiners from the FDIC follow similar guidelines and procedures in classifying loans of the banks they examine and have similar authority to compel banks to charge off debts that they consider to be worthless, the classification of certain of taxpayer's loans as "losses" by the FDIC examiners constitutes a specific order within the meaning of section 1.166-2(d)(1) of the regulations.

HOLDING

There is a conclusive presumption of worthlessness under section 1.166-2(d)(1) of the regulations with respect to the loans charged off by taxpayer in 1975 in accordance with their classification as "losses" and such loans can be included as a charge to its bad debt reserve for such year under section 166(c) of the Code.