Bad-Debt Reserves of Savings and Loan Associations
by HENRY D. FORER In-Charge Accountant, Miami Office
Presented before the Haskins & Sells Regional Conference on Savings and Loan Associations, Miami, Florida—November 1961
THE PRESENT tax treatment of bad-debt reserves afforded savings
and loan associations is currently subjected to increased congressional
pressures from within and without the Kennedy Administration. Here is a description of the mechanics of 1954 Internal Revenue Code governing these reserves as now constituted.
In 1951, Congress removed the blanket tax exemption that it had previously granted to savings and loan associations. To mitigate the effect of the loss of exemption, it appears to have been congressional
intent to substitute certain statutory deductions that because of their liberality tend to decelerate the sudden change from tax-exempt to taxpayer. Among these liberalized deductions, not available to other corporate taxpayers, are the deduction for dividends paid on deposits (IRC Sect. 591); the deduction for repayment of certain loans (IRC Sec. 592) ; and most important—the deduction for additions
to the Reserve for Bad Debts (IRC Sec. 593) which allows many associations to offset all of their taxable income.
In a sense, ten years from 1951 to 1961 have been to the savings and loan association taxpayer what the ten years from 1913 to 1923 were to other taxpayers. In these ten years, the Commissioner of Internal Revenue has issued rulings interpreting the Code and Regulations
and the Courts have arbitrated sporadic disputes between the Commissioner and taxpayers who disliked the Commissioner's interpretations.
The result of all of this is a liberalized bad-debt deduction subject to certain rules and technicalities over which the Commissioner presides with unyielding exactness, ever wary of any breach of these rules or technicalities.
Like all taxpayers, savings and loan associations may elect either the direct charge-off method1 of deducting bad debts as they become worthless or the reserve method which allows a tax deduction for a reasonable addition to the reserve. Election of the direct charge-off
1 IRC Sec 166(a).