What are the special tax problems of banks?;

              Banking is a specialized type of business and, as such, has some
highly specialized tax problems. Since it is their business, bankers are
aware at all times of the cost of money. Perhaps more than any other
client, a banker will appreciate a saving in taxes or even a deferral of
taxes. In order that you, as auditors for and advisers to bankers, may
be better equipped to recognize basic tax problems which may exist
with respect to those clients, this article will attempt to point out the
areas in which tax problems are most commonly encountered in
commercial banks.
Reserve for bad debts
In examining the accounts of any bank it is almost a certainty that
you will find that there is a reserve for bad debts. Although most
bankers justifiably believe that such a reserve is necessary and claim
tax deductions for additions thereto, there are many tax problems
connected with this deduction. I would venture to say that this par­ticular
reserve has resulted in more rules and less agreement than any
other single deduction claimed by banks since 1947.
The foundation of the above opinion lies in the history of this
particular item as it relates to banks.
Until 1947 banks, in providing for losses on loans, were subject to
the same statutory restrictions as any other corporation. That is, the
deductible addition to the reserve for bad debts was limited to an
amount which was considered to be reasonable when related to past
14 THE QUARTERLY