SECTION 4. SAFE HARBOR

METHOD OF ACCOUNTING FOR UNCOLLECTED INTEREST

.01 Safe Harbor Method . Under the safe harbor method of accounting provided by this SECTION 4, a bank determines for each taxable year the amount of uncollected interest (other than interest described in 1.446–2(a)(2)) for which it is considered to have a reasonable expectancy of payment by multiplying: (1) the total accrued (determined under § 1.446–2) but uncollected interest for the year by, (2) the bank’s “recovery percentage” (determined under paragraph .02 of this SECTION 4) for that year. Solely for purposes of this safe harbor, the bank is not considered to have a reasonable expectancy of payment for the excess, if any, of the accrued but uncollected interest over the expected collection amount determined using the bank’s recovery percentage. The bank includes in gross income the portion of accrued but uncollected interest for which it has a reasonable expectancy of payment. The bank excludes from income the portion of accrued but uncollected interest for which it has no reasonable expectancy of payment.

.02 Recovery Percentage . (1) Subject to the limitations and conditions in subparagraphs (2) - (4) of this SECTION 4.02, a bank determines its recovery percentage for each taxable year by dividing—

(a) total payments that the bank received on loans (including principal and interest) during the 5 taxable years immediately preceding the taxable year (or, with the approval of the Commissioner, a shorter period if the bank has less than 6 years of collection experience, i.e., the

taxable year and the 5 immediately preceding taxable years), by

(b) total amounts that were due and payable to the bank on loans during the same 5 (or fewer) taxable years.

(2) The recovery percentage cannot exceed 100 percent.

(3) The recovery percentage must be calculated to at least four decimal places.

(4) The data used in the recovery percentage must take into account acquisitions and dispositions as follows:

(a) If a bank acquires the major portion of a trade or business of another person (predecessor) or the major portion of a separate unit of a trade or business of a predecessor, then in applying this revenue procedure for any taxable year ending on or after the acquisition, the data from preceding taxable years of the predecessor attributable to the portion of the trade or business acquired, if available, must be used in determining the bank’s recovery percentage.

(b) If a bank disposes of a major portion of a trade or business or the major portion of a separate unit of a trade or business, and the bank furnished the acquiring person the information necessary for the computations required by this revenue procedure, then in applying this revenue procedure for any taxable year ending on or after the disposition, the data from preceding taxable years attributable to the disposed portion of the trade or business may not be used in determining the bank’s recovery percentage.