SECTION 5. SECTION 481(a)

ADJUSTMENT

.01 As a condition of the change in method of accounting under this revenue procedure, a bank must include the amount of its § 481(a) adjustment in its income, beginning with its 1997 tax year, ratably over the lesser of 6 years or the number of years that the bank has used the § 585 reserve method. See section 5.04 and 5.05 for exceptions to the § 481(a) adjustment period.

.02 Generally, the amount of a bank’s § 481(a) adjustment for a change in method of accounting under this revenue procedure is the amount of the bank’s reserve for bad debts as of the close of the tax year immediately before the year

of change. However, the amount of the § 481(a) adjustment does not include the amount of a bank’s pre-1988 reserves (as described in § 593(g)(2)(A)(ii), without taking into account § 593(g)(2)(B)) if the bank changed in a prior year from the § 593 reserve method to the § 585 reserve method and § 593(g) applied to that change. The § 481(a) adjustment is recognized built-in gain under § 1374. See § 1.1374–4(d). In addition, banks should be aware of the effects of the interaction between provisions specially applicable to banks and provisions of subchapter S, for example, (i) §§ 593(e) and 1368 with respect to earnings and profits, and (ii) §§ 593(e) and (g)(3) and 1374.

.03 A change in method of accounting under this revenue procedure shall be treated as a voluntary change in method of accounting that is initiated by the bank; and therefore, the § 481(a) adjustment is not restricted to post-1953 items.

.04 A bank may elect to use a oneyear § 481(a) adjustment period if its entire § 481(a) adjustment is less than $25,000. A bank that desires to elect this one-year adjustment period must so indicate by checking the ‘‘Yes’’ box in Question 26 on its Form 3115 and must include the entire § 481(a) adjustment in its income for the 1997 tax year.

.05 A bank taking a § 481(a) adjustment into account under this revenue procedure that ceases being a bank as defined in § 581 must include in its income for the tax year of the cessation any remaining balance of the § 481(a) adjustment.