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).

(2) Certain scope limitations inapplica- ble . A bank that changed from the § 593 reserve method under § 593(g) to the § 585 reserve method will not be prohibited under section 4.02(7) of this revenue procedure from changing its method of accounting for bad debts under this section 24.01 of the APPENDIX solely because of the § 593(g) change. A bank for which a

Qsub election is filed will not be prohibited under section 4.02(7) of this revenue procedure from changing its method of accounting for bad debts under this section 24.01 of the APPENDIX solely because of the deemed liquidation of the bank arising from a Qsub election.

(3) Section 481(a) adjustment . Generally, the amount of the § 481(a) adjustment for a change in method of accounting under this section 24.01 of the APPENDIX is the amount of the bank’s reserve for bad debts as of the close of the taxable 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 deemed liquidation of a bank occurring solely because its parent makes a Qsub election does not accelerate the § 481(a) adjustment. In accordance with section 5.04(3)(c) of this revenue procedure, a bank that ceases to be a bank under § 581 must accelerate its § 481(a) adjustment.

(4) Change from § 585 required when electing S corporation status .

(a) General rule . A bank electing S corporation status (or a bank for which a Qsub election is filed) cannot use the § 585 reserve method. The filing by a bank of a Form 2553, Election by a Small Busi- ness Corporation, or the filing by a bank’s parent of Form 8869, Qualified Subchap- ter S Subsidiary Election, with respect to the bank will constitute an agreement by the bank to change its method of accounting for bad debts from the § 585 reserve method to the § 166 specific charge-off method effective as of the taxable year for which the S corporation election or Qsub election is effective (year of change) in accordance 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

January 24, 2011 417 2011–4 I.R.B.

Shield organization within the meaning of § 833(c)(2), or an organization described in § 833(c)(3), that is required to change its method of accounting for unearned premiums by reason of failing to meet the MLR requirements of § 833(c)(5), or by reason of meeting the MLR requirements of § 833(c)(5) after failing to meet those requirements in a prior year. See Notice 2011–4, 2011–2 I.R.B. 282. (2) Scope limitations inapplicable . The scope limitations of section 4.02 of this revenue procedure do not apply to this change.

(3) Accelerated § 481(a) adjustment period in certain situations . In addition to the circumstances set forth in section 5.04(3) of this revenue procedure, the § 481 adjustment period provided in section 5.04(1) will be accelerated in the event a taxpayer with a remaining balance of a § 481(a) adjustment that arose by reason of a change in method of accounting described in this APPENDIX section 25.02 is required to effect another change in method of accounting described in this APPENDIX section 25.02. Thus, for example, a taxpayer that fails to satisfy the requirements of § 833(c)(5) and as a result has a positive § 481(a) adjustment is required to accelerate the remaining balance, if any, of that adjustment in a subsequent taxable year in which the taxpayer meets the requirements of § 833(c)(5).

(4) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 25.02 of this APPENDIX is “155.” See section 6.02(4) of this revenue procedure. (5) Contact information . For further information regarding this section, contact Rebecca L. Baxter at (202) 622–7117 (not a toll-free call).