Rev. Rul. 54-74

Advice is requested with respect to the proper treatment, for excess-profits tax purposes, to be accorded recoveries of bad debts in the case of banks using the reserve method of accounting for bad debts.

Section 433(a)(1)(G) of the Internal Revenue Code provides for the exclusion from excess-profits net income of any income attributable to the recovery of a bad debt if the deduction for such debt was allowable from gross income for any taxable year for which an excess-profits tax was not imposed (that is, a taxable year beginning before January 1, 1940, or a taxable year beginning after December 31, 1945, and ending before July 1, 1950), or if such debt was properly charged to a bad debt reserve during any such taxable year. Under section 433(a)(1)(L) of the Code, banks which have elected the reserve method of accounting for bad debts for income tax purposes should substitute for excess-profits tax purposes a deduction for bad debts which actually become worthless in the taxable year.

Line 19, page 1 of Schedule EP (Form 1120), for the taxable years 195i and 1953 should reflect the excess, if any, of the actual bad debts for the taxable year over the total recoveries of bad debts during such taxable year. If such recoveries exceed such actual bad debts, line 19 should show such excess as an addition, preferably in red ink. Line 16 of the returns should reflect only those recoveries which should be excluded under section 433(a)(1)(G) of the Code. Since, for excess-profits tax purposes, banks are on the specific chargeoff method for treating bad debts, no adjustment on line 5 of Schedule EP (Form 1120) will be necessary where the ceiling is reached and no addition to the reserve is permissible for income tax purposes under the provisions of Mimeograph 6209, C.B. 1947-2, 26.