On January 24, 1973, the Internal
Revenue Service amended section 1.166-2(d) of its income tax regulations
to require banks to obtain a written confirmation from the supervisory
authorities that loans voluntarily charged off would have been classified
as “loss” had an examination been made on the dates of the charge-offs.
Please instruct your examiners, when requested by state
member banks, to review individually during the examination any such
charge-offs voluntarily made by the bank prior to the examination
to determine if such loans would have been classified “loss” if an
examination had been conducted at the time of the charge-offs. All
such loans determined to have been a “loss” at the time of the charge-offs.
All such loans determined to have been a “loss” at the time of the
charge-offs should be listed in writing and a confirmation of their
worthlessness given to the bank. The confirmation given should include
the name of the borrower, the date charged off, the unpaid balance,
and the length of time each loan was delinquent when charged off.
All charged-off loans significant in amount in relation
to the size of the bank should be reviewed individually to determine
their value or lack of value at the time of the charge-off. However,
in those instances where banks have charged off small loans or blocks
of installment loans, it is not necessary to review each such loan.
The examiner should nevertheless satisfy himself that charge-off policies
on such loans are reasonable and that a review of an adequate sample
of the charge-offs substantiates that such policies are being followed.
There is attached a copy of a letter which should be sent
to each state member bank to assure that adequate records will be
available on which the examiner can base a determination. SR-73-225;
Sept. 7, 1973.
Attachment to SR-73-225 We have been advised by the Internal Revenue Service
that section 1.166-2(d) of its Income Tax Regulations which pertains
to charge-off of bad debts by a bank has been amended.
Prior to the amendment, the relevant
portion of the IRS regulations read as follows:
Section 1.166-2(d)—If a bank or other corporation
which is subject to supervision of Federal authorities, or by State
authorities maintaining substantially equivalent standards, charges
off a debt in whole or in part in obedience to the specific orders
of such supervisory authorities, then the debt shall, to the extent
charged-off during the taxable year, be conclusively presumed to have
become worthless, or worthless only in part, as the case may be, during
such taxable year. . . (26 CFR 1.166-2(d)).
The amendment to the regulations added another provision
to the above-quoted section, and after the amendment, the section
reads:
If a bank or other corporation which is subject to supervision
of Federal authorities, or by State authorities maintaining substantially
equivalent standards, charges off a debt in whole or in part, either—
(i) In obedience to the specific orders of such authorities,
or
(ii) In accordance with established policies of such authorities,
and, upon their first audit of the bank or other corporation subsequent
to the charge-off such authorities confirm in writing that the charge-off
would have been subject to such specific orders if the audit had been
made on the date of the charge-off, then the debt shall, to the extent
charged-off during the taxable year, be conclusively presumed to have
become worthless, or worthless only in part, as the case may be, during
such taxable year. . . .
Examiners for the Federal Reserve Bank of
have been
instructed to review at your request at each examination any voluntary
charge-offs made by your bank since the prior examination and determine
whether those loans would have been regarded as a loss if the examination
had been made on the dates of the charge-offs. Examiners have also
been instructed to list all such loans so determined and confirm in
writing that such loans would have been classified as “loss”.
To assist the examiner in making
an evaluation, it will be necessary for your bank to maintain complete
records of the charge-offs, including the name of the borrower, unpaid
balance, date of the charge-off, length of time loan was delinquent
when charged off, financial statements and other related documents,
and the reasons for making the charge-offs.
