The Large Business and International division (LB&I) of the
IRS recently issued a directive to its examining agents providing
guidance for examining bad debt deductions under Section 166 for
banks and bank subsidiaries.
According to the directive, agents should not challenge a
bank's bad debt deduction for taxable years 2010 through 2014
if the amount is the same as the credit-related impairment reported
in the applicable financial statements. Additionally, the IRS will
not challenge the inclusion of certain estimated selling costs in
the bank's or bank subsidiaries' bad debt deduction.
To determine their bad debt deduction, and whether debt is
worthless, banks may apply the general facts and circumstances test
in Treas. Reg. Sec. 1.166-2(a). Alternatively, they may also use
one of two special rules provided specifically for banks. The first
provides a "conclusive presumption rule" under which
worthlessness is generally presumed to occur in the same year that
a
