RESERVE FOR LOSSES ON LOANS; NET OPERATING LOSS CARRYBACKS.

SEC. 431. RESERVE FOR LOSSES ON LOANS; NET OPERATING LOSS CARRYBACKS. (a) Bad Debt Deductions of Financial Institutions.—Part I of subchapter H of chapter 1 (relating to rules of general application to banking institutions) is amended by adding at the end thereof the following new sections: “SEC. 585. RESERVES FOR LOSSES ON LOANS OF BANKS. “(a) Institutions to Which Section Applies.—This section shall apply to the following financial institutions: “(1) any bank (as defined in section 581) other than an organization to which section 593 applies, and “(2) any corporation to which paragraph (1) would apply except for the fact that it is a foreign corporation, and in the case of any such foreign corporation this section shall apply only with respect to loans outstanding the interest on which is effectively connected with the conduct of a banking business within the United States. “(b) Addition to Reserves for Bad Debts.— “(1) General rule.—For purposes of section 166(c), the reasonable addition to the reserve for bad debts of any financial institution to which this section applies shall be an amount determined by the taxpayer which shall not exceed the greater of— “(A) for taxable years beginning before 1988 the addition to the reserve for losses on loans determined under the percentage method as provided in paragraph (2), or “(B) the addition to the reserve for losses on loans determined under the experience method as provided in paragraph (3). “(2) Percentage Method.—The amount determined under this paragraph for a taxable year shall be the amount necessary to increase the balance of the reserve for losses on loans (at the close 83 Stat. 617 of the taxable year) to the allowable percentage of eligible loans outstanding at such time, except that— “(A) If the reserve for losses on loans at the close of the base year is less than the allowable percentage of eligible loans outstanding at such time, the amount determined under this paragraph with respect to the difference shall not exceed one-fifth of such difference. “(B) If the reserve for losses on loans at the close of the base year is not less than the allowable percentage of eligible loans outstanding at such time, the amount determined under this paragraph shall be the amount necessary to increase the balance of the reserve at the close of the taxable year to (i) the allowable percentage of eligible loans outstanding at such time, or (ii) the balance of the reserve at the close of the base year, whichever is greater, but if the amount of eligible loans outstanding at the close of the taxable year is less than the amount of such loans outstanding at the close of the base year, the amount determined under clause (ii) shall be the amount necessary to increase the balance of the reserve at the close of the taxable year to the amount which bears the same ratio to eligible loans outstanding at the close of the taxable year as the balance of the reserve at the close of the base year bears to the amount of eligible loans outstanding at the close of the base year. For purposes of this paragraph, the term ‘allowable percentage’ means 1.8 percent for taxable years beginning before 1976; 1.2 percent for taxable years beginning after 1975 but before 1982; and 0.6 percent for taxable years beginning after 1981. The amount determined under this paragraph shall not exceed 0.6 percent of eligible loans outstanding at the close of the taxable year or an amount sufficient to increase the reserve for losses on loans to 0.6 percent of eligible loans outstanding at the close of the taxable year, whichever is greater. For purposes of this paragraph, the term ‘base year’ means: for taxable years beginning before 1976, the last taxable year beginning on or before July 11, 1969, for taxable years beginning after 1975 but before 1982, the last taxable year beginning before 1976, and for taxable years beginning after 1981, the last taxable year beginning before 1982; except that for purposes of subparagraph (A) such term means the last taxable year before the most recent adoption of the percentage method, if later. “(3) Experience Method.—The amount determined under this paragraph for a taxable year shall be the amount necessary to increase the balance of the reserve for losses on loans (at the close of the taxable year) to the greater of— “(A) the amount which bears the same ratio to loans outstanding at the close of the taxable year as (i) the total bad debts sustained during the taxable year and the 5 preceding taxable years (or, with the approval of the Secretary or his delegate, a shorter period), adjusted for recoveries of bad debts during such period, bears to (ii) the sum of the loans outstanding at the close of such 6 or fewer taxable years, or “(B) the lower of— “(i) the balance of the reserve at the close of the base year, or “(ii) if the amount of loans outstanding at the close of the taxable year is less than the amount of loans outstanding at the close of the base year, the amount which bears the same ratio to loans outstanding at the close of the taxable 83 Stat. 618 year as the balance of the reserve at the close of the base year bears to the amount of loans outstanding at the close of the base year. For purposes of this paragraph, the base year shall be the last taxable year before the most recent adoption of the experience method, except that for taxable years beginning after 1987 the base year shall be the last taxable year beginning before 1988. “(4) Regulations; definition of eligible loan, etc.—The Secretary or his delegate shall define the terms ‘loan’ and ‘eligible loan’ and prescribe such regulations as may be necessary to carry out the purposes of this section; except that the term ‘eligible loan’ shall not include— “(A) a loan to a bank (as defined in section 581), “(B) a loan to a domestic branch of a foreign corporation to which subsection (a)(2) applies, “(C) a loan secured by a deposit (i) in the lending bank or (ii) in an institution described in subparagraph (A) or (B) if the lending bank has control over withdrawal of such deposit, “(D) a loan to or guaranteed by the United States, a possession or instrumentality thereof, or a State or a political subdivision thereof, “(E) a loan evidenced by a security as defined in section 165 (g)(2)(C), “(F) a loan of Federal funds, and “(G) commercial paper, including short-term promissory notes which may be purchased on the open market. “SEC. 586. RESERVES FOR LOSSES ON LOANS OF SMALL BUSINESS INVESTMENT COMPANIES, ETC. “(a) Institutions to Which Section Applies.—This section shall apply to the following financial institutions: “(1) any small business investment company operating under the Small Business Investment Act of 1958, and “(2) any business development corporation. For purposes of this section, the term ‘business development corporation’ means a corporation which was created by or pursuant to an act of a State legislature for purposes of promoting, maintaining, and assisting the economy and industry within such State on a regional or statewide basis by making loans to be used in trades and businesses which would generally not be made by banks (as defined in section 581) within such region or State in the ordinary course of their business (except on the basis of a partial participation), and which is operated primarily for such purposes. “(b) Addition to Reserves for Bad Debts.— “(1) General rule.—For purposes of section 166(c), except as provided in paragraph (2) the reasonable addition to the reserve for bad debts of any financial institution to which this section applies shall be an amount determined by the taxpayer which shall not exceed the amount necessary to increase the balance of the reserve for bad debts (at the close of the taxable year) to the greater of— “(A) the amount which bears the same ratio to loans outstanding at the close of the taxable year as (i) the total bad debts sustained during the taxable year and the 5 preceding taxable years (or, with the approval of the Secretary or his delegate, a shorter period), adjusted for recoveries of bad debts during such period, bears to (ii) the sum of the loans outstanding at the close of such 6 or fewer taxable years, or 83 Stat. 619 “(B) the lower of— “(i) the balance of the reserve at the close of the base year, or “(ii) if the amount of loans outstanding at the close of the taxable year is less than the amount of loans outstanding at the close of the base year, the amount which bears the same ratio to loans outstanding at the close of the taxable year as the balance of the reserve at the close of the base year bears to the amount of loans outstanding at the close of the base year. For purposes of this subparagraph, the term ‘base year’ means the last taxable year beginning on or before July 11, 1969. “(2) New financial institutions.—In the case of any taxable year beginning not more than 10 years after the day before the first day on which a financial institution (or any predecessor) was authorized to do business as a financial institution described in subsection (a), the reasonable addition to the reserve for bad debts of such financial institution shall not exceed the larger of the amount determined under paragraph (1) or the amount necessary to increase the balance of the reserve for bad debts at the close of the taxable year to the amount which bears the same ratio (as determined by the Secretary or his delegate) to loans outstanding at the close of the taxable year as (i) the total bad debts sustained by all institutions described in the applicable paragraph of subsection (a) during the 6 preceding taxable years (adjusted for recoveries of bad debts during such period), bears to (ii) the sum of the loans by all such institutions outstanding at the close of such taxable years.” (b) 10-Year Net Operating Loss Carryback.—Section 172(b)(1) (relating to net operating loss deduction) is amended by striking out in subparagraph (A)(i) thereof “and (E)” and inserting in lieu thereof “(E), (F), and (G)”, and by adding at the end thereof the following new subparagraphs: “(F) In the case of a financial institution to which section 585, 586, or 593 applies, a net operating loss for any taxable year beginning after December 31, 1975, shall be a net operating loss carryback to each of the 10 taxable years preceding the taxable year of such loss and shall be a net operating loss carryover to each of the 5 taxable years following the taxable year of such loss. “(G) In the case of a Bank for Cooperatives (organized and chartered pursuant to section 2 of the Farm Credit Act of 1933 (12 U.S.C. 1134)), a net operating loss for any taxable year beginning after December 31, 1969, shall be a net operating loss carryback to each of the 10 taxable years preceding the taxable year of such loss and shall be a net operating loss carryover to each of the 5 taxable years following the taxable year of such loss.” (c) Technical and Clerical Amendments.— (1) Subsection (h) of section 166 (relating to bad debts) is amended by adding at the end thereof the following new paragraph: “(4) For special rule for bad debt reserves of banks, small business investment companies, etc., see sections 585 and 586.” 83 Stat. 620 (2) The table of sections for part I of subchapter H of chapter 1 is amended— (A) by striking out: “Sec. 582. Bad debt and loss deduction with respect to securities held by banks.” and inserting in lieu thereof: “Sec. 582. Bad debts, losses, and gains with respect to securities held by financial institutions.” (B) by adding at the end thereof the following: “Sec. 585. Reserves for losses on loans of banks. “Sec. 586. Reserves for losses on loans of small business investment companies, etc.” (d) Effective Date.—The amendments made by subsections (a) and (c) shall apply to taxable years beginning after July 11, 1969.