SECTION 5. SPECIAL RULE FOR

CERTAIN 2006 TAXABLE YEARS

A special rule is provided for a bank that, prior to the issuance of this revenue procedure, changed its method of accounting for bad debts from the § 585 reserve method to the § 166 specific charge-off method under section 11.01 of the APPENDIX of Rev. Proc. 2002–9 for a year of change beginning after December 31, 2005, and ending before December 31, 2007 (“2006 taxable year”). This special rule only applies if the bank elected to be an S corporation for its first taxable year beginning after December 31, 2006. Under this special rule, the bank may elect to take the entire § 481(a) adjustment into account in determining taxable income for the 2006 taxable year by attaching a copy of its original Form 3115 with the following language written on the top of the document, “Special Election under Section 5 of Rev. Proc. 2008–18,” to an amended return for the 2006 taxable year that reflects the entire § 481(a) adjustment. A copy of the original Form 3115 with the required language written at the top should also be provided to the National Office (see section 6.02(6) of Rev. Proc. 2002–9 for the address). This special rule only applies to

that is a financial institution which uses the reserve method of accounting for bad debts described in § 585 is not eligible to be an S corporation.

.02 If a financial institution changes from the § 585 reserve method of accounting for bad debts to the § 166 specific charge-off method, the amount of the § 481(a) adjustment for the change generally is the amount of the institution’s reserve for bad debts as of the close of the taxable year immediately before the year of change. This positive adjustment is generally taken into account over four taxable years beginning in the year of change.

.03 Rev. Proc. 2002–9, 2002–1 C.B. 327, (as modified and amplified by Rev. Proc. 2002–19, 2002–1 C.B. 696, as amplified, clarified and modified by Rev. Proc. 2002–54, 2002–2 C.B. 432, and as modified and clarified by Announcement 2002–17, 2002–1 C.B. 561) provides procedures by which a taxpayer may obtain the automatic consent of the Commissioner of Internal Revenue under § 446 for a change in method of accounting described in the APPENDIX of Rev. Proc. 2002–9. Section 11.01 of that APPENDIX provides rules for a bank changing its method of accounting for bad debts from the § 585 reserve method of accounting to the § 166 specific charge-off method of accounting. A taxpayer complying with all of the applicable provisions of Rev. Proc. 2002–9 has obtained the consent of the Commissioner to change its method of accounting.

.04 Section 8233(a) of the Small Business and Work Opportunity Act of 2007 (Public Law 110–28) added § 1361(g) to the Code. Section 1361(g) provides that, in the case of a bank which changes from the reserve method of accounting for bad debts described in § 585 for its first taxable year for which an election under § 1362(a) is in effect, the bank may elect to take into account any adjustments under § 481 by reason of such change for the taxable year immediately preceding such first taxable year. Section 1361(g) applies to taxable years beginning after December 31, 2006.