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 eligibility rule inapplica- ble . A bank that changed from the § 593 reserve method under § 593(g) to the § 585 reserve method is not prohibited under section 5.01(1)(f) of Rev. Proc. 2015–13, 2015–5 I.R.B. 419, from changing its method of accounting for bad debts under this section 24.01 solely because of the § 593(g) change. A bank for which a

Qsub election is filed will not be prohibited under section 5.01(1)(f) of Rev. Proc. 2015–13 from changing its method of accounting for bad debts under this section 24.01 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 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 pre1988 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 7.03(4)(a) of Rev. Proc. 2015–13, 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 Business Corporation, or the filing by a bank’s parent of Form 8869, Qualified Subchapter 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 automatic change procedures of Rev. Proc. 2015–13 and this section 24.01. 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 revenue procedure 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 . A bank that changes its method of accounting for bad debts under this section 24.01, 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 6.03(1) of Rev. Proc. 2015–13 (and any other copy required under section 6.03) 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 6.03(1) of Rev. Proc. 2015–13 (and any other copy required under section 6.03) 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 6.03(1) of Rev. Proc. 2015–13 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 preceding the year of change filed no later than the date the original Form 3115 is properly filed under section 6.03(1) of Rev. Proc. 2015–13, 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.

Bulletin No. 2015–5 551 February 2, 2015

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

Example . X, a calendar year taxpayer, is a calendar year bank as defined in § 581 and is not a large bank as defined in § 585(c)(2). For taxable years before 2015, X accounted for its bad debts under the § 585 reserve method. By March 15, 2015, X properly filed a Form 2553 electing to be an S corporation effective January 1, 2015. Pursuant to section 24.01(4)(a) of this revenue procedure, 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 for 2015 in accordance with all of the automatic change procedures of Rev. Proc. 2015–13, and the applicable provisions of this section 24.01. Thus, for example, X must file a Form 3115 for this 2015 change in duplicate, in accordance with section 6.03(1) of Rev. Proc. 2015–13, by attaching the original Form 3115 to X ’s timely filed (including any extension) original federal income tax return for 2015 and filing a copy of the Form 3115 with the Ogden 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, 2014. X wishes to elect under § 1361(g) to include the § 481(a) adjustment in income in the taxable year ending December 31, 2014, 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 2015 change under section 6.03(1) of Rev. Proc. 2015–13, (2) file an additional copy of that Form 3115 with its original (or amended) federal income tax return for 2014 filed no later than the date the original Form 3115 is properly filed under section 6.03(1) of Rev. Proc. 2015–13, and (3) include the amount of its § 481(a) adjustment in gross income in its return for 2014. 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 2014, 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 this section 24.01 is “66.” (6) Contact information . For further information regarding a change under this section, contact K. Scott Brown at (202) 317-6945, Laura Fields at (202) 317-6850 or Adrienne Mikolashek at (202) 3176850 (not a toll-free number). .02 Reserved .