SECTION 24. BANK RESERVES FOR

BAD DEBTS (§ 585)

.01 Changing from the § 585 reserve method to the § 166 specific charge-off method .

(1) Description of change .

(a) Applicability . This change applies to a bank (as defined in § 581, including a bank for which a qualified subchapter S subsidiary (QSub) election is filed) that wants to change its method of accounting for bad debts from the § 585 reserve method to the § 166 specific charge-off method.

(b) Inapplicability . This change does not apply to a large bank as defined in § 585(c)(2).

2008–36 I.R.B. 671 September 8, 2008

with all of the applicable provisions of this revenue procedure (including section 6 of this revenue procedure, which requires filing a Form 3115 in duplicate). The resulting § 481(a) adjustment is recognized built-in gain under § 1374, unless the bank elects under § 1361(g) and section 24.01(4)(b) of this APPENDIX to take the § 481(a) adjustment into account in determining taxable income for the taxable year immediately preceding the year of change. See § 1.1374–4 (d).

(b) Election to include § 481(a) adjust- ment in taxable year immediately preced- ing the year of change .

(i) Election requirements . For a taxable year beginning after December 31, 2006, a bank that changes its method of accounting for bad debts under this section 24.01 of the APPENDIX, from the § 585 reserve method to the § 166 specific charge-off method for the first taxable year for which the bank’s S corporation election is effective (year of change) may elect under § 1361(g) to take into account the amount of the resulting § 481(a) adjustment in determining taxable income for the taxable year immediately preceding the year of change. To make this election, a bank must (1) file an original and copy of Form 3115 under section 6.02(3) of this revenue procedure for the year of change, (2) file an additional copy of the Form 3115 with its original (or amended) federal income tax return for the taxable year immediately preceding the year of change filed no later than the date the original Form 3115 is properly filed under section 6.02(3) of this revenue procedure, and (3) include the amount of the § 481(a) adjustment in gross income for the taxable year immediately preceding the year of change. The bank must attach a statement to the original and both copies of Form 3115 stating that the bank elects under § 1361(g) to take the § 481(a) adjustment into account in determining taxable income for the taxable year immediately preceding the year of change.

(ii) Special rule for QSub banks . In the case of a QSub bank, the S corporation parent must file an original and copy of Form 3115 under section 6.02(3) of this revenue procedure for the year of change. The QSub bank must file an additional copy of the Form 3115 with its original (or amended) federal income tax return for the taxable year immediately preced

ing the year of change filed no later than the date the original Form 3115 is properly filed under section 6.02(3) of this revenue procedure, and include the amount of the § 481(a) adjustment in gross income for the taxable year immediately preceding the year of change. In the case of a QSub bank, the Form 3115 should indicate that the “filer” is the S corporation parent and the “applicant” is the QSub bank.

(iii) The following example illustrates the principles of section 24.01(4)(b) of this APPENDIX.

Example . X, a calendar year taxpayer, is a bank as defined in § 581 and is not a large bank as defined in § 585(c)(2). For taxable years before 2007, X accounted for its bad debts under the § 585 reserve method. By March 15, 2007, X properly filed a Form 2553 electing to be an S corporation effective January 1, 2007. Pursuant to section 24.01(4)(a) of this APPENDIX, the filing of the Form 2553 constituted an agreement by X to change from the § 585 reserve method to the § 166 specific charge-off method in 2007 in accordance with all of the applicable provisions of this revenue procedure. Thus, for example, X must file a Form 3115 for this 2007 change in duplicate, in accordance with section 6.02(3) of this revenue procedure, by attaching the original Form 3115 to X ’s timely filed (including extensions) original federal income tax return for 2007 and filing a copy of the Form 3115 with the national office. The amount of X ’s § 481(a) adjustment for the change is the amount of X ’s bad debt reserve as of the close of December 31, 2006. X wishes to elect under § 1361(g) to include the § 481(a) adjustment in income in the taxable year ending December 31, 2006, the taxable year immediately preceding the year of change. To make this election, X must (1) file an original and copy of Form 3115 for the 2007 change under section 6.02(3) of this revenue procedure, (2) file an additional copy of that Form 3115 with its original (or amended) federal income tax return for 2006 filed no later than the date the original Form 3115 is properly filed under section 6.02(3) of this revenue procedure, and (3) include the amount of its § 481(a) adjustment in gross income in its return for 2006. X must attach a statement to the original and both copies of Form 3115 stating that X elects under § 1361(g) to take the § 481(a) adjustment into account in determining taxable income for 2006, the taxable year immediately preceding the year of change.

(5) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 24.01 of this APPENDIX is “66.” See section 6.02(4) of this revenue procedure.

(6) Contact information . For further information regarding a change under this section, contact Sharon Galm at 202–622–3930 or Laura Fields at 202–622–3050 (not a toll-free call).

.02 Reserved .