Subchapter H—Banking Institutions
Editorial Notes
Amendments
1976—
PART I—RULES OF GENERAL APPLICATION TO BANKING INSTITUTIONS
Editorial Notes
Amendments
1986—
1976—
1969—
§581. Definition of bank
For purposes of sections 582 and 584, the term "bank" means a bank or trust company incorporated and doing business under the laws of the United States (including laws relating to the District of Columbia) or of any State, a substantial part of the business of which consists of receiving deposits and making loans and discounts, or of exercising fiduciary powers similar to those permitted to national banks under authority of the Comptroller of the Currency, and which is subject by law to supervision and examination by State or Federal authority having supervision over banking institutions. Such term also means a domestic building and loan association.
(Aug. 16, 1954, ch. 736,
Editorial Notes
Amendments
1976—
1962—
§582. Bad debts, losses, and gains with respect to securities held by financial institutions
(a) Securities
Notwithstanding sections 165(g)(1) and 166(e), subsections (a) and (b) of section 166 (relating to allowance of deduction for bad debts) shall apply in the case of a bank to a debt which is evidenced by a security as defined in section 165(g)(2)(C).
(b) Worthless stock in affiliated bank
For purposes of section 165(g)(1), where the taxpayer is a bank and owns directly at least 80 percent of each class of stock of another bank, stock in such other bank shall not be treated as a capital asset.
(c) Bond, etc., losses and gains of financial institutions
(1) General rule
For purposes of this subtitle, in the case of a financial institution referred to in paragraph (2), the sale or exchange of a bond, debenture, note, or certificate or other evidence of indebtedness shall not be considered a sale or exchange of a capital asset. For purposes of the preceding sentence, any regular or residual interest in a REMIC shall be treated as an evidence of indebtedness.
(2) Financial institutions to which paragraph (1) applies
(A) In general
For purposes of paragraph (1), the financial institutions referred to in this paragraph are—
(i) any bank (and any corporation which would be a bank except for the fact it is a foreign corporation),
(ii) any financial institution referred to in section 591,
(iii) any small business investment company operating under the Small Business Investment Act of 1958, and
(iv) any business development corporation.
(B) Business development corporation
For purposes of subparagraph (A), the term "business development corporation" 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 to be used in trades and businesses which would generally not be made by banks within such region or State in the ordinary course of their business (except on the basis of a partial participation), and which is operated primarily for such purposes.
(C) Limitations on foreign banks
In the case of a foreign corporation referred to in subparagraph (A)(i), paragraph (1) shall only apply to gains and losses which are effectively connected with the conduct of a banking business in the United States.
(Aug. 16, 1954, ch. 736,
Editorial Notes
References in Text
The Small Business Investment Act of 1958, referred to in subsec. (c)(2)(A)(iii), is
Amendments
2004—Subsec. (c)(1).
1996—Subsec. (c)(1).
1990—Subsec. (c)(1).
Subsec. (c)(2).
Subsec. (c)(3).
"(A) The term 'qualifying security' means a bond, debenture, note, or certificate or other evidence of indebtedness held by a bank on July 11, 1969.
"(B) The amount treated as capital gain or loss from the sale or exchange of a qualifying security shall be determined by multiplying the amount of capital gain or loss from the sale or exchange of such security (determined without regard to this subsection) by a fraction, the numerator of which is the number of days before July 12, 1969, that such security was held by the bank, and the denominator of which is the number of days the security was held by the bank."
Subsec. (c)(4).
Subsec. (c)(5).
1988—Subsec. (a).
1986—Subsec. (c)(1).
Subsec. (c)(5).
1984—Subsec. (c)(2).
1976—Subsec. (c)(2).
Subsec. (c)(4).
1969—
Subsec. (c).
1958—Subsec. (c).
Statutory Notes and Related Subsidiaries
Effective Date of 2004 Amendment
Amendment by
Effective Date of 1996 Amendment
Amendment by
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1986 Amendment
Amendment by section 671(b)(4) of
Amendment by section 901(d)(3) of
Effective Date of 1984 Amendment
Amendment by
Effective Date of 1976 Amendment
"(1) The amendment made by subsection (a) [amending this section] shall apply with respect to taxable years beginning after July 11, 1969.
"(2) If the refund or credit of any overpayment attributable to the application of the amendment made by subsection (a) to any taxable year is otherwise prevented by the operation of any law or rule of law (other than section 7122 of the Internal Revenue Code of 1986 [formerly I.R.C. 1954], relating to compromises) on the day which is one year after the date of the enactment of this Act [Oct. 4, 1976], such credit or refund shall be nevertheless allowed or made if claim therefor is filed on or before such day."
Effective Date of 1969 Amendment
"(1)
"(2)
Effective Date of 1958 Amendment
Amendment by
Savings Provision
For provisions that nothing in amendment by
[§583. Repealed. Pub. L. 94–455, title XIX, §1901(a)(82), Oct. 4, 1976, 90 Stat. 1778 ]
Section, act Aug. 16, 1954, ch. 736,
Statutory Notes and Related Subsidiaries
Effective Date of Repeal
Repeal effective with respect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of
§584. Common trust funds
(a) Definitions
For purposes of this subtitle, the term "common trust fund" means a fund maintained by a bank—
(1) exclusively for the collective investment and reinvestment of moneys contributed thereto by the bank in its capacity—
(A) as a trustee, executor, administrator, or guardian, or
(B) as a custodian of accounts—
(i) which the Secretary determines are established pursuant to a State law which is substantially similar to the Uniform Gifts to Minors Act as published by the American Law Institute, and
(ii) with respect to which the bank establishes, to the satisfaction of the Secretary, that it has duties and responsibilities similar to duties and responsibilities of a trustee or guardian; and
(2) in conformity with the rules and regulations, prevailing from time to time, of the Board of Governors of the Federal Reserve System or the Comptroller of the Currency pertaining to the collective investment of trust funds by national banks.
For purposes of this subsection, two or more banks which are members of the same affiliated group (within the meaning of section 1504) shall be treated as one bank for the period of affiliation with respect to any fund of which any of the member banks is trustee or two or more of the member banks are cotrustees.
(b) Taxation of common trust funds
A common trust fund shall not be subject to taxation under this chapter and for purposes of this chapter shall not be considered a corporation.
(c) Income of participants in fund
Each participant in the common trust fund in computing its taxable income shall include, whether or not distributed and whether or not distributable—
(1) as part of its gains and losses from sales or exchanges of capital assets held for not more than 1 year, its proportionate share of the gains and losses of the common trust fund from sales or exchanges of capital assets held for not more than 1 year,
(2) as part of its gains and losses from sales or exchanges of capital assets held for more than 1 year, its proportionate share of the gains and losses of the common trust fund from sales or exchanges of capital assets held for more than 1 year, and
(3) its proportionate share of the ordinary taxable income or the ordinary net loss of the common trust fund, computed as provided in subsection (d).
The proportionate share of each participant in the amount of dividends received by the common trust fund and to which section 1(h)(11) applies shall be considered for purposes of such paragraph as having been received by such participant.
(d) Computation of common trust fund income
The taxable income of a common trust fund shall be computed in the same manner and on the same basis as in the case of an individual, except that—
(1) there shall be segregated the gains and losses from sales or exchanges of capital assets;
(2) after excluding all items of gain and loss from sales or exchanges of capital assets, there shall be computed—
(A) an ordinary taxable income which shall consist of the excess of the gross income over deductions; or
(B) an ordinary net loss which shall consist of the excess of the deductions over the gross income; and
(3) the deduction provided by section 170 (relating to charitable, etc., contributions and gifts) shall not be allowed.
(e) Admission and withdrawal
No gain or loss shall be realized by the common trust fund by the admission or withdrawal of a participant. The admission of a participant shall be treated with respect to the participant as the purchase of, or an exchange for, the participating interest. The withdrawal of any participating interest by a participant shall be treated as a sale or exchange of such interest by the participant.
(f) Different taxable years of common trust fund and participant
If the taxable year of the common trust fund is different from that of a participant, the inclusions with respect to the taxable income of the common trust fund, in computing the taxable income of the participant for its taxable year, shall be based upon the taxable income of the common trust fund for any taxable year of the common trust fund ending within or with the taxable year of the participant.
(g) Net operating loss deduction
The benefit of the deduction for net operating losses provided by section 172 shall not be allowed to a common trust fund, but shall be allowed to the participants in the common trust fund under regulations prescribed by the Secretary.
(h) Nonrecognition treatment for certain transfers to regulated investment companies
(1) In general
If—
(A) a common trust fund transfers substantially all of its assets to one or more regulated investment companies in exchange solely for stock in the company or companies to which such assets are so transferred, and
(B) such stock is distributed by such common trust fund to participants in such common trust fund in exchange solely for their interests in such common trust fund,
no gain or loss shall be recognized by such common trust fund by reason of such transfer or distribution, and no gain or loss shall be recognized by any participant in such common trust fund by reason of such exchange.
(2) Basis rules
(A) Regulated investment company
The basis of any asset received by a regulated investment company in a transfer referred to in paragraph (1)(A) shall be the same as it would be in the hands of the common trust fund.
(B) Participants
The basis of the stock which is received in an exchange referred to in paragraph (1)(B) shall be the same as that of the property exchanged. If stock in more than one regulated investment company is received in such exchange, the basis determined under the preceding sentence shall be allocated among the stock in each such company on the basis of respective fair market values.
(3) Treatment of assumptions of liability
(A) In general
In determining whether the transfer referred to in paragraph (1)(A) is in exchange solely for stock in one or more regulated investment companies, the assumption by any such company of a liability of the common trust fund shall be disregarded.
(B) Special rule where assumed liabilities exceed basis
(i) In general
If, in any transfer referred to in paragraph (1)(A), the assumed liabilities exceed the aggregate adjusted bases (in the hands of the common trust fund) of the assets transferred to the regulated investment company or companies—
(I) notwithstanding paragraph (1), gain shall be recognized to the common trust fund on such transfer in an amount equal to such excess,
(II) the basis of the assets received by the regulated investment company or companies in such transfer shall be increased by the amount so recognized, and
(III) any adjustment to the basis of a participant's interest in the common trust fund as a result of the gain so recognized shall be treated as occurring immediately before the exchange referred to in paragraph (1)(B).
If the transfer referred to in paragraph (1)(A) is to two or more regulated investment companies, the basis increase under subclause (II) shall be allocated among such companies on the basis of the respective fair market values of the assets received by each of such companies.
(ii) Assumed liabilities
For purposes of clause (i), the term "assumed liabilities" means any liability of the common trust fund assumed by any regulated investment company in connection with the transfer referred to in paragraph (1)(A).
(C) Assumption
For purposes of this paragraph, in determining the amount of any liability assumed, the rules of section 357(d) shall apply.
(4) Common trust fund must meet diversification rules
This subsection shall not apply to any common trust fund which would not meet the requirements of section 368(a)(2)(F)(ii) if it were a corporation. For purposes of the preceding sentence, Government securities shall not be treated as securities of an issuer in applying the 25-percent and 50-percent test and such securities shall not be excluded for purposes of determining total assets under clause (iv) of section 368(a)(2)(F).
(i) Taxable year of common trust fund
For purposes of this subtitle, the taxable year of any common trust fund shall be the calendar year.
(Aug. 16, 1954, ch. 736,
Editorial Notes
Amendments
2003—Subsec. (c).
1999—Subsec. (h)(3)(A).
Subsec. (h)(3)(B)(ii).
"(I) any liability of the common trust fund assumed by any regulated investment company in connection with the transfer referred to in paragraph (1)(A), and
"(II) any liability to which property so transferred is subject."
Subsec. (h)(3)(C).
1996—Subsecs. (h), (i).
1988—Subsec. (h).
1986—Subsec. (c).
1984—Subsec. (c)(1)(A), (B).
1983—Subsec. (c)(2).
1981—Subsec. (c)(2).
1980—Subsec. (c)(2).
1977—Subsec. (d)(4).
1976—Subsec. (a).
Subsec. (a)(1).
Subsec. (c)(1)(A), (B).
Subsec. (c)(2).
Subsec. (e).
Subsec. (g).
1964—Subsec. (c)(2).
1962—Subsec. (a)(2).
Statutory Notes and Related Subsidiaries
Effective Date of 2003 Amendment
Amendment by
Effective Date of 1999 Amendment
Amendment by
Effective Date of 1996 Amendment
Effective Date of 1988 Amendment
"(i) a participant in a common trust fund shall be treated in the same manner as a partner, and
"(ii) subparagraph (C) thereof shall be applied by substituting 'December 31, 1987' for 'December 31, 1986' and as if it did not contain the election to include all income in the short taxable year."
Effective Date of 1986 Amendment
Amendment by section 612(b)(2) of
Effective Date of 1984 Amendment
Amendment by
Effective Date of 1983 Amendment
Amendment by
Effective Date of 1981 Amendment
Amendment by section 301(b)(3) of
Effective and Termination Dates of 1980 Amendment
Amendment by
Effective Date of 1977 Amendment
Amendment by
Effective Date of 1976 Amendment
Amendment by section 1901(b)(1)(G) of
Effective Date of 1964 Amendment
Amendment by
§585. Reserves for losses on loans of banks
(a) Reserve for bad debts
(1) In general
Except as provided in subsection (c), a bank shall be allowed a deduction for a reasonable addition to a reserve for bad debts. Such deduction shall be in lieu of any deduction under section 166(a).
(2) Bank
For purposes of this section—
(A) In general
The term "bank" means any bank (as defined in section 581).
(B) Banking business of United States branch of foreign corporation
The term "bank" also includes any corporation to which subparagraph (A) would apply except for the fact that it is a foreign corporation. In the case of any such foreign corporation, this section shall 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.
(b) Addition to reserves for bad debts
(1) General rule
For purposes of subsection (a), the reasonable addition to the reserve for bad debts of any financial institution to which this section applies shall be an amount determined by the taxpayer which shall not exceed the addition to the reserve for losses on loans determined under the experience method as provided in paragraph (2).
(2) Experience method
The amount determined under this paragraph for a taxable year shall be the amount necessary to increase the balance of the reserve for losses on loans (at the close of the taxable year) to the greater of—
(A) the amount which bears the same ratio to loans outstanding at the close of the taxable year as (i) the total bad debts sustained during the taxable year and the 5 preceding taxable years (or, with the approval of the Secretary, a shorter period), adjusted for recoveries of bad debts during such period, bears to (ii) the sum of the loans outstanding at the close of such 6 or fewer taxable years, or
(B) the lower of—
(i) the balance of the reserve at the close of the base year, or
(ii) if the amount of loans outstanding at the close of the taxable year is less than the amount of loans outstanding at the close of the base year, the amount which bears the same ratio to loans outstanding at the close of the taxable year as the balance of the reserve at the close of the base year bears to the amount of loans outstanding at the close of the base year.
For purposes of this paragraph, the base year shall be the last taxable year before the most recent adoption of the experience method, except that for taxable years beginning after 1987 the base year shall be the last taxable year beginning before 1988.
(3) Regulations; definition of loan
The Secretary shall define the term loan and prescribe such regulations as may be necessary to carry out the purposes of this section.
(c) Section not to apply to large banks
(1) In general
In the case of a large bank, this section shall not apply (and no deduction shall be allowed under any other provision of this subtitle for any addition to a reserve for bad debts).
(2) Large banks
For purposes of this subsection, a bank is a large bank if, for the taxable year (or for any preceding taxable year beginning after December 31, 1986)—
(A) the average adjusted bases of all assets of such bank exceeded $500,000,000, or
(B) such bank was a member of a parent-subsidiary controlled group and the average adjusted bases of all assets of such group exceeded $500,000,000.
(3) 4-year spread of adjustments
(A) In general
Except as provided in paragraph (4), in the case of any bank which for its last taxable year before the disqualification year maintained a reserve for bad debts—
(i) the provisions of this subsection shall be treated as a change in the method of accounting of such bank for the disqualification year,
(ii) such change shall be treated as having been made with the consent of the Secretary, and
(iii) the net amount of adjustments required by section 481(a) to be taken into account by the taxpayer shall be taken into account in each of the 4 taxable years beginning with the disqualification year with—
(I) the amount taken into account for the 1st of such taxable years being the greater of 10 percent of such net amount or such higher percentage of such net amount as the taxpayer may elect, and
(II) the amount taken into account in each of the 3 succeeding taxable years being equal to the applicable fraction (determined in accordance with the following table for the taxable year involved) of the portion of such net amount not taken into account under subclause (I).
| The applicable | |
| If the case of the— | fraction is— |
| 1st succeeding year | 2/9 |
| 2nd succeeding year | 1/3 |
| 3rd succeeding year | 4/9. |
(B) Suspension of recapture for taxable year for which bank is financially troubled
(i) In general
In the case of a bank which is a financially troubled bank for any taxable year—
(I) no adjustment shall be taken into account under subparagraph (A) for such taxable year, and
(II) such taxable year shall be disregarded in determining whether any other taxable year is a taxable year for which an adjustment is required to be taken into account under subparagraph (A) or the amount of such adjustment.
(ii) Exception for elective recapture for 1st year
Clause (i) shall not apply to the 1st taxable year referred to in subparagraph (A)(iii)(I) if the taxpayer elects a higher percentage in accordance with such subparagraph.
(iii) Financially troubled bank
For purposes of clause (i), the term "financially troubled bank" means any bank if, for the taxable year, the nonperforming loan percentage of such bank exceeds 75 percent.
(iv) Nonperforming loan percentage
For purposes of clause (iii), the term "nonperforming loan percentage" means the percentage determined by dividing—
(I) the sum of the outstanding balances of nonperforming loans of the bank as of the close of each quarter of the taxable year, by
(II) the sum of the amounts of equity of the bank as of the close of each such quarter.
In the case of a bank which is a member of a parent-subsidiary controlled group for the taxable year, the preceding sentence shall be applied with respect to such group.
(v) Other definitions
For purposes of this subparagraph—
(I) Nonperforming loans
The term "nonperforming loan" means any loan which is considered to be nonperforming by the primary Federal regulatory agency with respect to the bank.
(II) Equity
The term "equity" means the equity of the bank as determined for Federal regulatory purposes.
(C) Coordination with estimated tax payments
For purposes of applying section 6655(e)(2)(A)(i) with respect to any installment, the determination under subparagraph (B) of whether an adjustment is required to be taken into account under subparagraph (A) shall be made as of the last day prescribed for payment of such installment.
(4) Elective cut-off method
If a bank makes an election under this paragraph for the disqualification year—
(A) the provisions of this subsection shall not be treated as a change in the method of accounting of the taxpayer for purposes of section 481,
(B) the taxpayer shall continue to maintain its reserve for loans held by the bank as of the 1st day of the disqualification year and charge against such reserve any losses resulting from loans held by the bank as of such 1st day, and
(C) no deduction shall be allowed under this section (or any other provision of this subtitle) for any addition to such reserve for the disqualification year or any subsequent taxable year.
If the amount of the reserve referred to in subparagraph (B) as of the close of any taxable year exceeds the outstanding balance (as of such time) of the loans referred to in subparagraph (B), such excess shall be included in gross income for such taxable year.
(5) Definitions
For purposes of this subsection—
(A) Parent-subsidiary controlled group
The term "parent-subsidiary controlled group" means any controlled group of corporations described in section 1563(a)(1). In determining the average adjusted bases of assets held by such a group, interests held by one member of such group in another member of such group shall be disregarded.
(B) Disqualification year
The term "disqualification year" means, with respect to any bank, the 1st taxable year beginning after December 31, 1986, for which such bank was a large bank if such bank maintained a reserve for bad debts for the preceding taxable year.
(C) Election made by each member
In the case of a parent-subsidiary controlled group, any election under this section shall be made separately by each member of such group.
(Added
Editorial Notes
Amendments
1996—Subsec. (a)(2)(A).
1990—Subsec. (b)(1).
"(A) for taxable years beginning before 1988 the addition to the reserve for losses on loans determined under the percentage method as provided in paragraph (2), or
"(B) the addition to the reserve for losses on loans determined under the experience method as provided in paragraph (3)."
Subsec. (b)(2).
Subsec. (b)(3).
"(A) a loan to a bank (as defined in section 581),
"(B) a loan to a domestic branch of a foreign corporation to which subsection (a)(2) applies,
"(C) a loan secured by a deposit (i) in the lending bank, or (ii) in an institution described in subparagraph (A) or (B) if the lending bank has control over withdrawal of such deposit,
"(D) a loan to or guaranteed by the United States, a possession or instrumentality thereof, or a State or a political subdivision thereof,
"(E) a loan evidenced by a security as defined in section 165(g)(2)(C),
"(F) a loan of Federal funds, and
"(G) commercial paper, including short-term promissory notes which may be purchased on the open market." Former par. (3) redesignated (2).
Subsec. (b)(4).
1988—Subsec. (c)(3)(A)(iii)(I).
Subsec. (c)(3)(B)(ii).
Subsec. (c)(4).
Subsec. (c)(5)(C).
1987—Subsec. (c)(3)(C).
1986—Subsec. (a).
"(1) any bank (as defined in section 581) other than an organization to which section 593 applies, and
"(2) any corporation to which paragraph (1) would apply except for the fact that it is a foreign corporation, and in the case of any such foreign corporation this section shall 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."
Subsec. (b)(1).
Subsec. (c).
1981—Subsec. (b)(2).
1976—Subsec. (b)(3), (4).
Statutory Notes and Related Subsidiaries
Effective Date of 1996 Amendment
Amendment by
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1987 Amendment
Effective Date of 1986 Amendment
Amendment by
Effective Date of 1981 Amendment
Effective Date
Savings Provision
For provisions that nothing in amendment by
[§586. Repealed. Pub. L. 99–514, title IX, §901(c), Oct. 22, 1986, 100 Stat. 2378 ]
Section, added
Statutory Notes and Related Subsidiaries
Effective Date of Repeal
Repeal applicable to taxable years beginning after Dec. 31, 1986, see section 901(e) of
PART II—MUTUAL SAVINGS BANKS, ETC.
Editorial Notes
Amendments
1996—
1989—
1988—
1986—
1981—
1976—
1969—
1962—
§591. Deduction for dividends paid on deposits
(a) In general
In the case of mutual savings banks, cooperative banks, domestic building and loan associations, and other savings institutions chartered and supervised as savings and loan or similar associations under Federal or State law, there shall be allowed as deductions in computing taxable income amounts paid to, or credited to the accounts of, depositors or holders of accounts as dividends or interest on their deposits or withdrawable accounts, if such amounts paid or credited are withdrawable on demand subject only to customary notice of intention to withdraw.
(b) Mutual savings bank to include certain banks with capital stock
For purposes of this part, the term "mutual savings bank" includes any bank—
(1) which has capital stock represented by shares, and
(2) which is subject to, and operates under, Federal or State laws relating to mutual savings bank.
(Aug. 16, 1954, ch. 736,
Editorial Notes
Amendments
1981—
1962—
Statutory Notes and Related Subsidiaries
Effective Date of 1981 Amendment
[§592. Repealed. Pub. L. 94–455, title XIX, §1901(a)(83), Oct. 4, 1976, 90 Stat. 1778 ]
Section, act Aug. 16, 1954, ch. 736,
Statutory Notes and Related Subsidiaries
Effective Date of Repeal
Repeal effective with respect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of
§593. Reserves for losses on loans
(a) Reserve for bad debts
(1) In general
Except as provided in paragraph (2), in the case of—
(A) any domestic building and loan association,
(B) any mutual savings bank, or
(C) any cooperative bank without capital stock organized and operated for mutual purposes and without profit,
there shall be allowed a deduction for a reasonable addition to a reserve for bad debts. Such deduction shall be in lieu of any deduction under section 166(a).
(2) Organization must meet 60-percent asset test of section 7701(a)(19)
This section shall apply to an association or bank referred to in paragraph (1) only if it meets the requirements of section 7701(a)(19)(C).
(b) Addition to reserves for bad debts
(1) In general
For purposes of subsection (a), the reasonable addition for the taxable year to the reserve for bad debts of any taxpayer described in subsection (a) shall be an amount equal to the sum of—
(A) the amount determined to be a reasonable addition to the reserve for losses on nonqualifying loans, computed in the same manner as is provided with respect to additions to the reserves for losses on loans of banks under section 585(b)(2), plus
(B) the amount determined by the taxpayer to be a reasonable addition to the reserve for losses on qualifying real property loans, but such amount shall not exceed the amount determined under paragraph (2) or (3), whichever is the larger, but the amount determined under this subparagraph shall in no case be greater than the larger of—
(i) the amount determined under paragraph (3), or
(ii) the amount which, when added to the amount determined under subparagraph (A), equals the amount by which 12 percent of the total deposits or withdrawable accounts of depositors of the taxpayer at the close of such year exceeds the sum of its surplus, undivided profits, and reserves at the beginning of such year (taking into account any portion thereof attributable to the period before the first taxable year beginning after December 31, 1951).
(2) Percentage of taxable income method
(A) In general
Subject to subparagraphs (B) and (C), the amount determined under this paragraph for the taxable year shall be an amount equal to 8 percent of the taxable income for such year.
(B) Reduction for amounts referred to in paragraph (1)(A)
The amount determined under subparagraph (A) shall be reduced (but not below 0) by the amount determined under paragraph (1)(A).
(C) Overall limitation on paragraph
The amount determined under this paragraph shall not exceed the amount necessary to increase the balance at the close of the taxable year of the reserve for losses on qualifying real property loans to 6 percent of such loans outstanding at such time.
(D) Computation of taxable income
For purposes of this paragraph, taxable income shall be computed—
(i) by excluding from gross income any amount included therein by reason of subsection (e),
(ii) without regard to any deduction allowable for any addition to the reserve for bad debts,
(iii) by excluding from gross income an amount equal to the net gain for the taxable year arising from the sale or exchange of stock of a corporation or of obligations the interest on which is excludable from gross income under section 103,
(iv) by excluding from gross income dividends with respect to which a deduction is allowable by part VIII of subchapter B, reduced by an amount equal to 8 percent of the dividends received deduction for the taxable year, and
(v) if there is a capital gain rate differential (as defined in section 904(b)(3)(D)) for the taxable year, by excluding from gross income the rate differential portion (within the meaning of section 904(b)(3)(E)) of the lesser of—
(I) the net long-term capital gain for the taxable year, or
(II) the net long-term capital gain for the taxable year from the sale or exchange of property other than property described in clause (iii).
(3) Experience method
The amount determined under this paragraph for the taxable year shall be computed in the same manner as is provided with respect to additions to the reserves for losses on loans of banks under section 585(b)(2).
(c) Treatment of reserves for bad debts
(1) Establishment of reserves
Each taxpayer described in subsection (a) which uses the reserve method of accounting for bad debts shall establish and maintain a reserve for losses on qualifying real property loans, a reserve for losses on nonqualifying loans, and a supplemental reserve for losses on loans. For purposes of this title, such reserves shall be treated as reserves for bad debts, but no deduction shall be allowed for any addition to the supplemental reserve for losses on loans.
(2) Certain pre-1963 reserves
Notwithstanding the second sentence of paragraph (1), any amount allocated pursuant to paragraph (5) (as in effect immediately before the enactment of the Tax Reform Act of 1976) during a taxable year beginning before January 1, 1977, to the reserve for losses on qualifying real property loans out of the surplus, undivided profits, and bad debt reserves (determined as of December 31, 1962) attributable to the period before the first taxable year beginning after December 31, 1951, shall not be treated as a reserve for bad debts for any purpose other than determining the amount referred to in subsection (b)(1)(B), and for such purpose such amount shall be treated as remaining in such reserve.
(3) Charging of bad debts to reserves
Any debt becoming worthless or partially worthless in respect of a qualifying real property loan shall be charged to the reserve for losses on such loans, and any debt becoming worthless or partially worthless in respect of a nonqualifying loan shall be charged to the reserve for losses on nonqualifying loans; except that any such debt may, at the election of the taxpayer, be charged in whole or in part to the supplemental reserve for losses on loans.
(d) Loans defined
For purposes of this section—
(1) Qualifying real property loans
The term "qualifying real property loan" means any loan secured by an interest in improved real property or secured by an interest in real property which is to be improved out of the proceeds of the loan, but such term does not include—
(A) any loan evidenced by a security (as defined in section 165(g)(2)(C));
(B) any loan, whether or not evidenced by a security (as defined in section 165(g)(2)(C)), the primary obligor on which is—
(i) a government or political subdivision or instrumentality thereof;
(ii) a bank (as defined in section 581); or
(iii) another member of the same affiliated group;
(C) any loan, to the extent secured by a deposit in or share of the taxpayer; or
(D) any loan which, within a 60-day period beginning in one taxable year of the creditor and ending in its next taxable year, is made or acquired and then repaid or disposed of, unless the transactions by which such loan was made or acquired and then repaid or disposed of are established to be for bona fide business purposes. For purposes of subparagraph (B)(iii), the term "affiliated group" has the meaning assigned to such term by section 1504(a); except that (i) the phrase "more than 50 percent" shall be substituted for the phrase "at least 80 percent" each place it appears in section 1504(a), and (ii) all corporations shall be treated as includible corporations (without any exclusion under section 1504(b)).
(2) Nonqualifying loans
The term "nonqualifying loan" means any loan which is not a qualifying real property loan.
(3) Loan
The term "loan" means debt, as the term "debt" is used in section 166.
(4) Treatment of interests in REMIC's
A regular or residual interest in a REMIC shall be treated as a qualifying real property loan; except that, if less than 95 percent of the assets of such REMIC are qualifying real property loans (determined as if the taxpayer held the assets of the REMIC), such interest shall be so treated only in the proportion which the assets of such REMIC consist of such loans. For purposes of determining whether any interest in a REMIC qualifies under the preceding sentence, any interest in another REMIC held by such REMIC shall be treated as a qualifying real property loan under principles similar to the principles of the preceding sentence, except that if such REMIC's are part of a tiered structure, they shall be treated as 1 REMIC for purposes of this paragraph.
(e) Distributions to shareholders
(1) In general
For purposes of this chapter, any distribution of property (as defined in section 317(a)) by a taxpayer having a balance described in subsection (g)(2)(A)(ii) to a shareholder with respect to its stock, if such distribution is not allowable as a deduction under section 591, shall be treated as made—
(A) first out of its earnings and profits accumulated in taxable years beginning after December 31, 1951, (and, in the case of an S corporation, the accumulated adjustments account, as defined in section 1368(e)(1)) to the extent thereof,
(B) then out of the balance taken into account under subsection (g)(2)(A)(ii) (properly adjusted for amounts charged against such reserves for taxable years beginning after December 31, 1987),
(C) then out of the supplemental reserve for losses on loans, to the extent thereof,
(D) then out of such other accounts as may be proper.
This paragraph shall apply in the case of any distribution in redemption of stock or in partial or complete liquidation of a taxpayer having a balance described in subsection (g)(2)(A)(ii), except that any such distribution shall be treated as made first out of the amount referred to in subparagraph (B), second out of the amount referred to in subparagraph (C), third out of the amount referred to in subparagraph (A), and then out of such other accounts as may be proper. This paragraph shall not apply to any transaction to which section 381 applies, or to any distribution to the Federal Savings and Loan Insurance Corporation (or any successor thereof) or the Federal Deposit Insurance Corporation in redemption of an interest in a taxpayer having a balance described in subsection (g)(2)(A)(ii), if such interest was originally received by any such entity in exchange for assistance provided under a provision of law referred to in section 597(c). This paragraph shall not apply to any distribution of all of the stock of a bank (as defined in section 581) to another corporation if, immediately after the distribution, such bank and such other corporation are members of the same affiliated group (as defined in section 1504) and the provisions of section 5(e) of the Federal Deposit Insurance Act (as in effect on December 31, 1995) or similar provisions are in effect.
(2) Amounts charged to reserve accounts and included in gross income
If any distribution is treated under paragraph (1) as having been made out of the reserves described in subparagraphs (B) and (C) of such paragraph, the amount charged against such reserve shall be the amount which, when reduced by the amount of tax imposed under this chapter and attributable to the inclusion of such amount in gross income, is equal to the amount of such distribution; and the amount so charged against such reserve shall be included in gross income of the taxpayer.
(3) Special rules
(A) For purposes of paragraph (1)(B), additions to the reserve for losses on qualifying real property loans for the taxable year in which the distribution occurs shall be taken into account.
(B) For purposes of computing under this section the amount of a reasonable addition to the reserve for losses on qualifying real property loans for any taxable year, any amount charged during any year to such reserve pursuant to the provisions of paragraph (2) shall not be taken into account.
(f) Termination of reserve method
Subsections (a), (b), (c), and (d) shall not apply to any taxable year beginning after December 31, 1995.
(g) 6-year spread of adjustments
(1) In general
In the case of any taxpayer who is required by reason of subsection (f) to change its method of computing reserves for bad debts—
(A) such change shall be treated as a change in a method of accounting,
(B) such change shall be treated as initiated by the taxpayer and as having been made with the consent of the Secretary, and
(C) the net amount of the adjustments required to be taken into account by the taxpayer under section 481(a)—
(i) shall be determined by taking into account only applicable excess reserves, and
(ii) as so determined, shall be taken into account ratably over the 6-taxable year period beginning with the first taxable year beginning after December 31, 1995.
(2) Applicable excess reserves
(A) In general
For purposes of paragraph (1), the term "applicable excess reserves" means the excess (if any) of—
(i) the balance of the reserves described in subsection (c)(1) (other than the supplemental reserve) as of the close of the taxpayer's last taxable year beginning before January 1, 1996, over
(ii) the lesser of—
(I) the balance of such reserves as of the close of the taxpayer's last taxable year beginning before January 1, 1988, or
(II) the balance of the reserves described in subclause (I), reduced in the same manner as under section 585(b)(2)(B)(ii) on the basis of the taxable years described in clause (i) and this clause.
(B) Special rule for thrifts which become small banks
In the case of a bank (as defined in section 581) which was not a large bank (as defined in section 585(c)(2)) for its first taxable year beginning after December 31, 1995—
(i) the balance taken into account under subparagraph (A)(ii) shall not be less than the amount which would be the balance of such reserves as of the close of its last taxable year beginning before such date if the additions to such reserves for all taxable years had been determined under section 585(b)(2)(A), and
(ii) the opening balance of the reserve for bad debts as of the beginning of such first taxable year shall be the balance taken into account under subparagraph (A)(ii) (determined after the application of clause (i) of this subparagraph).
The preceding sentence shall not apply for purposes of paragraphs (5) and (6) or subsection (e)(1).
(3) Recapture of pre-1988 reserves where taxpayer ceases to be bank
If, during any taxable year beginning after December 31, 1995, a taxpayer to which paragraph (1) applied is not a bank (as defined in section 581), paragraph (1) shall apply to the reserves described in paragraph (2)(A)(ii) and the supplemental reserve; except that such reserves shall be taken into account ratably over the 6-taxable year period beginning with such taxable year.
(4) Suspension of recapture if residential loan requirement met
(A) In general
In the case of a bank which meets the residential loan requirement of subparagraph (B) for the first taxable year beginning after December 31, 1995, or for the following taxable year—
(i) no adjustment shall be taken into account under paragraph (1) for such taxable year, and
(ii) such taxable year shall be disregarded in determining—
(I) whether any other taxable year is a taxable year for which an adjustment is required to be taken into account under paragraph (1), and
(II) the amount of such adjustment.
(B) Residential loan requirement
A taxpayer meets the residential loan requirement of this subparagraph for any taxable year if the principal amount of the residential loans made by the taxpayer during such year is not less than the base amount for such year.
(C) Residential loan
For purposes of this paragraph, the term "residential loan" means any loan described in clause (v) of section 7701(a)(19)(C) but only if such loan is incurred in acquiring, constructing, or improving the property described in such clause.
(D) Base amount
For purposes of subparagraph (B), the base amount is the average of the principal amounts of the residential loans made by the taxpayer during the 6 most recent taxable years beginning on or before December 31, 1995. At the election of the taxpayer who made such loans during each of such 6 taxable years, the preceding sentence shall be applied without regard to the taxable year in which such principal amount was the highest and the taxable year in such principal amount was the lowest. Such an election may be made only for the first taxable year beginning after such date, and, if made for such taxable year, shall apply to the succeeding taxable year unless revoked with the consent of the Secretary.
(E) Controlled groups
In the case of a taxpayer which is a member of any controlled group of corporations described in section 1563(a)(1), subparagraph (B) shall be applied with respect to such group.
(5) Continued application of fresh start under section 585 transitional rules
In the case of a taxpayer to which paragraph (1) applied and which was not a large bank (as defined in section 585(c)(2)) for its first taxable year beginning after December 31, 1995:
(A) In general
For purposes of determining the net amount of adjustments referred to in section 585(c)(3)(A)(iii), there shall be taken into account only the excess (if any) of the reserve for bad debts as of the close of the last taxable year before the disqualification year over the balance taken into account by such taxpayer under paragraph (2)(A)(ii) of this subsection.
(B) Treatment under elective cut-off method
For purposes of applying section 585(c)(4)—
(i) the balance of the reserve taken into account under subparagraph (B) thereof shall be reduced by the balance taken into account by such taxpayer under paragraph (2)(A)(ii) of this subsection, and
(ii) no amount shall be includible in gross income by reason of such reduction.
(6) Suspended reserve included as section 381(c) items
The balance taken into account by a taxpayer under paragraph (2)(A)(ii) of this subsection and the supplemental reserve shall be treated as items described in section 381(c).
(7) Conversions to credit unions
In the case of a taxpayer to which paragraph (1) applied which becomes a credit union described in section 501(c) and exempt from taxation under section 501(a)—
(A) any amount required to be included in the gross income of the credit union by reason of this subsection shall be treated as derived from an unrelated trade or business (as defined in section 513), and
(B) for purposes of paragraph (3), the credit union shall not be treated as if it were a bank.
(8) Regulations
The Secretary shall prescribe such regulations as may be necessary to carry out this subsection and subsection (e), including regulations providing for the application of such subsections in the case of acquisitions, mergers, spin-offs, and other reorganizations.
(Aug. 16, 1954, ch. 736,
Editorial Notes
References in Text
The Tax Reform Act of 1976, referred to in subsec. (c)(2), is
Section 5(e) of the Federal Deposit Insurance Act, referred to in subsec. (e)(1), is classified to
Amendments
2018—Subsec. (b)(2)(D)(iv).
1997—Subsec. (e)(1)(A).
1996—Subsec. (b)(1)(A), (3).
Subsec. (e)(1).
Subsec. (e)(1)(B).
Subsecs. (f), (g).
1990—Subsec. (b).
1989—Subsec. (e)(1).
1988—Subsec. (b)(2)(D)(v).
Subsec. (d)(4).
1986—Subsec. (a).
Subsec. (b)(1).
Subsec. (b)(2)(A).
Subpar. (b)(2)(B).
Subsec. (b)(2)(C).
Subsec. (b)(2)(D).
Subsec. (b)(2)(E).
Subsec. (b)(3), (4).
Subsec. (b)(5).
Subsec. (d)(4).
Subsec. (e)(1)(B).
1981—Subsec. (a).
Subsec. (b)(2)(B).
Subsec. (b)(2)(C).
Subsec. (e)(1).
1980—Subsec. (b)(2)(E)(iv).
1976—Subsec. (b)(2)(A).
Subsec. (b)(2)(E)(i).
Subsec. (c)(2).
Subsec. (c)(3).
Subsec. (c)(4), (5).
Subsec. (c)(6).
Subsecs. (d) to (f).
Subsecs. (e), (f).
1969—Subsec. (b)(1)(A).
Subsec. (b)(2).
Subsec. (b)(3).
Subsec. (b)(4).
Subsec. (b)(5).
Subsec. (f).
1962—
"§593. Additions to reserve for bad debts
"In the case of a mutual savings bank not having capital stock represented by shares, a domestic building and loan association, and a cooperative bank without capital stock organized and operated for mutual purposes and without profit, the reasonable addition to a reserve for bad debts under section 166(c) shall be determined with due regard to the amount of the taxpayer's surplus or bad debt reserves existing at the close of December 31, 1951. In the case of a taxpayer described in the preceding sentence, the reasonable addition to a reserve for bad debts for any taxable year shall in no case be less than the amount determined by the taxpayer as the reasonable addition for such year; except that the amount determined by the taxpayer under this sentence shall not be greater than the lesser of—
"(1) the amount of its taxable income for the taxable year, computed without regard to this section, or
"(2) the amount by which 12 percent of the total deposits or withdrawable accounts of its depositors at the close of such year exceeds the sum of its surplus, undivided profits, and reserves at the beginning of the taxable year."
Statutory Notes and Related Subsidiaries
Effective Date of 1997 Amendment
Amendment by
Effective Date of 1996 Amendment
"(1)
"(2)
"(A) such stock is outstanding at all times after October 31, 1995, and before the distribution, and
"(B) such distribution is made before the date which is 1 year after the date of the enactment of this Act [Aug. 20, 1996] (or, in the case of stock which may be redeemed, if later, the date which is 30 days after the earliest date that such stock may be redeemed).
"(3)
"(4)
Effective Date of 1989 Amendment
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1986 Amendment
Amendment by section 671(b)(2) of
Amendment by section 901(b)(1)–(3), (d)(2) of
Effective Date of 1981 Amendment
Amendment by section 245(b), (c) of
Effective Date of 1980 Amendment
Amendment by
Effective Date of 1976 Amendment
Amendment by
Effective Date of 1969 Amendment
Effective Date of 1962 Amendment
Savings Provision
For provisions that nothing in amendment by
For provisions that nothing in amendment by
Transfer of Functions
Federal Savings and Loan Insurance Corporation abolished and its functions transferred, see sections 401 to 406 of
§594. Alternative tax for mutual savings banks conducting life insurance business
(a) Alternative tax
In the case of a mutual savings bank not having capital stock represented by shares, authorized under State law to engage in the business of issuing life insurance contracts, and which conducts a life insurance business in a separate department the accounts of which are maintained separately from the other accounts of the mutual savings bank, there shall be imposed in lieu of the tax imposed by section 11, a tax consisting of the sum of the partial taxes determined under paragraphs (1) and (2):
(1) A partial tax computed on the taxable income determined without regard to any items of gross income or deductions properly allocable to the business of the life insurance department, at the rates and in the manner as if this section had not been enacted; and
(2) a partial tax computed on the income of the life insurance department determined without regard to any items of gross income or deductions not properly allocable to such department, at the rates and in the manner provided in subchapter L (sec. 801 and following) with respect to life insurance companies.
(b) Limitations of section
Subsection (a) shall apply only if the life insurance department would, if it were treated as a separate corporation, qualify as a life insurance company under section 816.
(Aug. 16, 1954, ch. 736,
Editorial Notes
Amendments
2017—Subsec. (a).
1984—Subsec. (b).
1956—Subsec. (a)(2). Act Mar. 13, 1956, substituted "the income" for "the taxable income (as defined in section 803)".
Statutory Notes and Related Subsidiaries
Effective Date of 2017 Amendment
Amendment by
Effective Date of 1984 Amendment
Amendment by
Effective Date of 1956 Amendment
Amendment by act Mar. 13, 1956, applicable only to taxable years beginning after Dec. 31, 1954, see section 6 of act Mar. 13, 1956, set out as a note under
[§§595, 596. Repealed. Pub. L. 104–188, title I, §1616(b)(8), (9), Aug. 20, 1996, 110 Stat. 1857 ]
Section 595, added
Section 596, added
Statutory Notes and Related Subsidiaries
Effective Date of Repeal
Repeal of section 595 applicable to property acquired in taxable years beginning after Dec. 31, 1995, and repeal of section 596 applicable to taxable years beginning after Dec. 31, 1995, see section 1616(c)(1), (3) of
§597. Treatment of transactions in which Federal financial assistance provided
(a) General rule
The treatment for purposes of this chapter of any transaction in which Federal financial assistance is provided with respect to a bank or domestic building and loan association shall be determined under regulations prescribed by the Secretary.
(b) Principles used in prescribing regulations
(1) Treatment of taxable asset acquisitions
In the case of any acquisition of assets to which section 381(a) does not apply, the regulations prescribed under subsection (a) shall—
(A) provide that Federal financial assistance shall be properly taken into account by the institution from which the assets were acquired, and
(B) provide the proper method of allocating basis among the assets so acquired (including rights to receive Federal financial assistance).
(2) Other transactions
In the case of any transaction not described in paragraph (1), the regulations prescribed under subsection (a) shall provide for the proper treatment of Federal financial assistance and appropriate adjustments to basis or other tax attributes in connection with such assistance.
(3) Denial of double benefit
No regulations prescribed under this section shall permit the utilization of any deduction (or other tax benefit) if such amount was in effect reimbursed by nontaxable Federal financial assistance.
(c) Federal financial assistance
For purposes of this section, the term "Federal financial assistance" means—
(1) any money or other property provided with respect to a domestic building and loan association by the Federal Savings and Loan Insurance Corporation or the Resolution Trust Corporation pursuant to section 406(f) of the National Housing Act (or under any other similar provision of law), and
(2) any money or other property provided with respect to a bank or domestic building and loan association by the Federal Deposit Insurance Corporation pursuant to section 11(f) or 13(c) of the Federal Deposit Insurance Act (or under any other similar provision of law),
regardless of whether any note or other instrument is issued in exchange therefor.
(d) Domestic building and loan association
For purposes of this section, the term "domestic building and loan association" has the meaning given such term by section 7701(a)(19) without regard to subparagraph (C) thereof.
(Added
Editorial Notes
References in Text
Section 406 of the National Housing Act, referred to in subsec. (c)(1), which was classified to
Sections 11(f) and 13(c) of the Federal Deposit Insurance Act, referred to in subsec. (c)(2), are classified to sections 1821(f) and 1823(c), respectively, of Title 12.
Amendments
2018—Subsec. (c)(1).
1990—Subsec. (c).
1989—
Subsec. (b)(2).
1988—
Subsec. (a).
Subsec. (b).
Subsec. (c).
Subsec. (d).
1986—
Statutory Notes and Related Subsidiaries
Effective Date of 1989 Amendment
"(3)
"(A)
"(B)
"(4)
"(5)
Effective Date of 1988 Amendment
"(i) after the date of the enactment of this Act [Nov. 10, 1988], and before January 1, 1990, unless such transfer is pursuant to an acquisition occurring on or before such date of enactment, and
"(ii) after December 31, 1989, if such transfer is pursuant to an acquisition occurring after such date of enactment and before January 1, 1990."
"(A) after December 31, 1988, and before January 1, 1990, unless such transfer is pursuant to an acquisition occurring before January 1, 1989, and
"(B) after December 31, 1989, if such transfer is pursuant to an acquisition occurring after December 31, 1988, and before January 1, 1990.
In the case of any bank or any institution treated as a domestic building and loan association for purposes of section 597 of the 1986 Code by reason of the amendment made by subsection (b)(2)(B), the amendments made by this subsection shall also apply to any transfer before January 1, 1989, to which the amendments made by subsection (b)(2) [amending this section] apply."
Effective Date of Repeal
Effective Date
Savings Provision
For provisions that nothing in amendment by
Transfer of Functions
Federal Savings and Loan Insurance Corporation abolished and its functions transferred, see sections 401 to 406 of
Repeal of Provisions Relating to Repeal of Special Reorganization Rules for Financial Institutions
References to Federal Savings and Loan Insurance Corporation
Annual Reports on Transactions in Which Federal Financial Assistance Provided
[§601. Repealed. Pub. L. 94–455, title XIX, §1901(a)(85), Oct. 4, 1976, 90 Stat. 1778 ]
Section, act Aug. 16, 1954, ch. 736,
Statutory Notes and Related Subsidiaries
Effective Date of Repeal
Repeal effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of