SECTION 3. DISCUSSION

A. Bank Regulatory Standards and Debt Asset Review Process

The Conclusive Presumption Regulations reflect a policy that when there is sufficient similarity between the standards a tax administrator uses to permit a deduction for a bad debt and the standards a regulator uses to identify a loan that should be charged off, in whole or in part, the tax administrator should accept the determination of the regulator for purposes of section 166. This policy provides administrative convenience in that a debt asset is treated consistently for regulatory and tax purposes and only one agency needs to analyze the debt assets in a regulated entity’s loan portfolio. In view of the “large volume of loans charged off annually for regulatory purposes,” administrative convenience alone is not a sufficient reason for the Conclusive Presumption Regulations. See Treasury Department, Report to the Congress on the Tax Treatment of Bad Debts by Financial Institutions 19 (September 1991)(“Treasury Report”). Rather, the standards and processes applied by a regulator must result in loan classifications that are “similar enough to the criteria for worthlessness under section 166 to make regulatory criteria and examination by regulatory authorities an acceptable surrogate for independent investigation by the Internal Revenue Service.” Treasury Report, 19–22. Although the Treasury Department and the Internal Revenue Service believed that this similarity existed at the time of the adoption of the Conclusive Presumption Regulations, subsequent changes in the standards or processes that bank regulators use to determine worthlessness of a debt may have undermined the assumptions underlying the Conclusive Presumption Regulations.

Since adoption of the Conclusive Presumption Regulations, there have been a number of significant changes to the regulatory standards for loan charge-offs. For example, bank regulators rarely order banks to charge off particular loans or provide written confirmation that a bank took an appropriate charge-off on a loan as required by the Specific Order Method. Bank regulators also have changed the

2013–24 I.R.B. 1240 June 10, 2013

4. Should § 1.166–2(d)(1) and (3) be replaced with a single rule or should the regulations retain more than one conclusive presumption of worthlessness?
5. What process should be required by any new conclusive presumption regulations to verify that the regulated entity applied appropriate regulatory standards in taking a charge-off?
6. Are there limits that should be placed on the extent to which the timing of a deduction under section 166 may vary from the time when the regulatory standards mandate a charge-off?
7. Are there impediments to the uniform application of a loss standard across different GAAP debt classifications?

Comments must be submitted by October 8, 2013. All materials submitted will be available for public inspection and copying. Comments may be submitted to Internal Revenue Service, CC:PA:LPD:PR (Notice 2013–35), Room 5203, PO Box 7604, Ben Franklin Station, Washington, D.C. 20044. Submissions may also be hand-delivered Monday through Friday between the hours of 8:00 a.m. and 4:00 p.m. to the Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC 20224, Attn: CC:PA:LPD:PR (Notice 2013–35), Room 5203. Submissions may also be sent electronically via the internet to the following email address: Notice.Comments@irscounsel.treas.gov . Include the notice number (Notice 2013–35) in the subject line.