19 RCNY § 10-01 Bad Debts.
§ 10-01 Bad Debts.
(a) Consolidated returns. Requests to the Commissioner of Finance for permission to file banking corporation tax returns on a consolidated basis (or to include corporations not previously included, or to exclude corporations previously included, in a consolidated return) must be filed not later than thirty days after the close of the taxable period for which permission is requested. In no event will a request be considered which is not filed on or before such thirtieth day.
(b) Bad debts may be treated in either of two ways: by a deduction from income as to debts ascertained to be worthless in whole or in part, or by a deduction from income of an addition to a reserve for bad debts. A corporation or association filing its first return of income, pursuant to Part 1 or 2 of Subchapter 3 of Chapter 6, Title 11, New York City Administrative Code, may select either of the two methods, subject to approval by the Commissioner of Finance upon examination of the return, provided however that a corporation or association electing the reserve method must use particular reserve method it uses for New York State franchise tax purposes. The method originally adopted on such first return must be used in filing returns for all subsequent years unless the Commissioner of Finance consents to a change. Application for permission to change the method of treating bad debts shall be made at least 30 days prior to the close of the year the income of which is to measure the tax to be paid under the changed method.
(c) Rules governing actual charge-off method.
(1) Where all surrounding and attending circumstances indicate that debt is worthless, either wholly or in part, the amount which is worthless and charged off within the year on the books of the corporation or association shall be allowed as a deduction in computing net income. Where a debt is ascertained to be worthless, in whole or in part, and the amount so ascertained is credited to a specific reserve account for such debt, having the effect of removing the debt from the assets of the taxpayer, such credit is considered a charge-off. Before a corporation or association may charge off and deduct a debt in part, it must ascertain and be able to demonstrate, with a reasonable degree of certainty, the amount thereof which is uncollectible.
(2) In determining whether a debt is worthless in whole or in part, the Commissioner of Finance will consider all pertinent evidence including the value of the collateral, if any, securing the debt and the financial condition of the debtor. Partial deductions will be allowed with respect to specific debts only. Where the surrounding circumstances indicate that a debt is worthless and uncollectible and that legal action to enforce payment would in all probability not result in the satisfaction of execution on a judgment, a showing of these facts will be sufficient evidence of the worthlessness of the debt for the purpose of deduction. Bankruptcy is generally an indication of the worthlessness of at least a part of an unsecured and unpreferred debt. Actual determination of worthlessness in bankruptcy cases is sometimes possible before, and at other times only when, a settlement in bankruptcy shall have been made. If a corporation or association computes its income upon the basis of valuing its notes or accounts receivable at their fair market value when received, which may be less than their face value, the amount deductible for bad debts in any case is limited to such original valuation.
(3) Where a taxpayer which is subject to supervision by Federal or by State authorities charges off debts in whole or in part pursuant to the order, suggestion or policy of such authority, or in keeping with the classification of the debts by such authority, such debts shall, in the absence of affirmative evidence clearly establishing the contrary, be presumed, for the purpose of measuring this tax, as of the date of the charge-off by the taxpayer, to be worthless or recoverable only in part, as the case may be. The provisions of this paragraph, however, shall not be construed as limiting the validity of charge-offs for bad debts not directed or approved by the supervising authority.
(4) All recoveries on charged-off loans, allocable to offices or branches located within New York City, including the release of specific reserves or valuation allowances therefor, must be included in gross income unless excludable under the provisions of 19 RCNY § 10-01(b)(6) below.
(5) A corporation or association doing business or carrying on business through offices or branches both within and without New York City shall charge off only those worthless debts allocated and determined on the basis of separate accounting to the offices or branches located in New York City. Deductions for charge-off of loans administered by an office or branch must be allocated to that office or branch. If loans are administered and serviced centrally, the deduction for charge-off of such loans must be apportioned in a manner consistent with the apportionment of income derived therefrom.
(6) Recoveries on loans allocated within New York City (exclusive of those evidenced by bonds or other securities) may be excluded from gross income to the extent that such write-off did not serve to reduce the amount of tax computable upon net income in the year made. Where such debts when charged off did serve to reduce the tax computable on net income, recoveries thereon may be excluded until they equal in the aggregate the sum of the charge-offs not accomplishing a reduction in tax liability. Recoveries on loans charged off during a year in which the taxpayer was not subject to tax under Part 1 or 2 of Subchapter 3 of Chapter 6 of Title 11, may not be excluded from gross income in whole or in part.
(d) Rules governing use of reserve method.
(1) Taxpayers which have established the reserve method (other than specific reserves) of treating bad debts and maintain proper reserve accounts for bad debts, and which in accordance with subdivision (b) of this section adopt the reserve method of treating bad debts, may deduct from gross income a reasonable addition to a reserve for bad debts in lieu of a deduction for specific bad debt items.
(2) What constitutes a reasonable addition to a reserve for bad debts must be determined in the light of the facts and will vary with conditions of business prosperity. It will depend primarily upon the total amount of debts outstanding as of the close of the taxable year, those arising currently as well as those arising in prior taxable years, and the total amount of the existing reserve. In case subsequent realizations upon outstanding debts prove to be more or less than estimated at the time of the creation of the existing reserve, the amount of the excess or inadequacy in the existing reserve must be reflected in the determination of the reasonable addition necessary for the taxable year. A taxpayer using the reserve method must show, in a statement made part of its return, the total amount of loans receivable at the beginning and close of the taxable year, the percentage of the reserve to the total loans outstanding at the close of the year, and the amount of the debts which have become wholly or partially worthless and have been charged off against the reserve account.
(3) A corporation or association doing business or carrying on business through offices or branches both within and without New York City must determine what constitutes a reasonable addition to a reserve for bad debts on the basis of the total amount of debts and total amount of existing reserves of the New York City offices or branches. The statement required in 19 RCNY § 10-01(d)(2) above should show the total loans receivable at the beginning and close of the taxable year, the percentage of the reserve to the loans outstanding at the end of the year and the amount of the bad debts which have become totally or partially worthless and have been charged against the reserve account of the New York City offices or branches allocated or determined on the basis of separate accounting. Loans administered by an office or branch must be allocated to that office or branch. Loans administered and serviced centrally must be apportioned in a manner consistent with the apportionment of income derived therefrom. The existing reserve of New York City offices or branches, as of January 1, 1966, is that amount which bears the same ratio to the total amount of the existing reserve for New York State franchise tax purposes, as of January 1, 1966, that the amount of outstanding New York City loans, as of January 1, 1966, bears to the total outstanding loans, as of January 1, 1966.
(4) As an alternative, a taxpayer may adopt the moving-average method of computing reserves. Deductions in such cases will be allowed for additions to reserves for bad debts in accordance with the principles and rules adopted by the Commissioner of Internal Revenue on December 8, 1947 (Mim. 6209) and the rules interpretative thereof, issued by the Commissioner of Internal Revenue under dates of December 29, 1947, January 21, 1948, January 29, 1948, March 16, 1948 (Mim. 6247), March 1948, March 31, 1948, June 14, 1948, under GCM 25,605 and under I.T. 3936, except as otherwise expressly provided below.
(i) In the case of a corporation or association using the moving-average method of determining the addition to the reserve for bad debts for New York State franchise tax purposes and electing the same method for New York City Financial Corporation Tax purposes, which is not doing business or carrying on business through offices or branches outside New York City, the initial balance of the New York City reserve for bad debts shall be the existing reserve for bad debts as determined for New York State franchise tax purposes under Article 9-B or 9-C of the Tax Law, as of the close of the calendar year preceding the year for which the election to use the moving-average method becomes effective. Accordingly, the addition to the reserve for bad debts for New York City Financial Corporation Tax purposes for such a corporation or association shall be an amount equal to, and shall be computed in the same manner as, the deduction reported for New York State franchise tax purposes under Article 9-B or 9-C of the Tax Law.
(ii) A corporation or association using the moving-average method of determining the addition to the reserve for bad debts for New York State franchise tax purposes and electing the same method for New York City Financial Corporation Tax purposes, which is doing business or carrying on business through offices or branches both within and without New York City, must compute the addition to the reserve for bad debts in the manner provided under Mim. 6209 as interpreted, except that:
(A) The moving average shall be the moving average for twenty years, including the taxable year for which the report is made, as determined for New York State franchise tax purposes; provided, however, that a taxpayer may apply to the Commissioner of Finance for permission to substitute the experience of New York City offices or branches for twenty consecutive years, including the taxable year for which the report is made, as determined by separate accounting.
(B) Outstanding loans of New York City offices or branches of the taxpayer are those allocated or determined on the basis of separate accounting to the offices and branches located in New York City. Loans directly administered by a New York City office or branch are allocable to New York City. Loans administered and serviced centrally must be apportioned in a manner consistent with the apportionment of income derived therefrom.
(C) The initial balance of the New York City reserve for bad debts shall be that amount which bears the same ratio to the New York State reserve for bad debts, as determined for New York State franchise tax purposes under Article 9-B or 9-C of the Tax Law as of the close of the calendar year preceding the year for which the election to use the moving-average method becomes effective, as the amount of outstanding loans of New York City offices and branches, as of the close of such preceding calendar year, bears to outstanding loans of all offices and branches, as of the close of such preceding calendar year.
(D) In determining net charge-offs, outstanding loans ascertained to be worthless and charged off, and any recoveries of loans previously charged against the reserve allocable and apportioned under 19 RCNY § 10-01(d)(4)(ii)(B)(D) to offices and branches situated outside New York City, must be excluded. All other recoveries, including loans charged off prior to January 1, 1966, must be included.
(iii) A corporation or association may deduct (in addition to any allowable deduction computed under Mim. 6209 as provided in subparagraph (i) or (ii) of this paragraph, if any) an amount equal to the difference between
(A) the product of the current moving average percentage times the amount by which the outstanding loans of New York City offices and branches at the close of the taxable year for which the report is made exceeds the outstanding loans of New York City offices and branches at the close of the preceding calendar year, and
(B) the deduction computed in accordance with Mim. 6209 and subparagraph (i) or (ii) of this paragraph; provided, however, that the total deduction allowable under this subparagraph for all taxable years shall not exceed the initial balance of the New York City reserve for bad debts as determined in subparagraph (i) or subparagraph (ii)(c) of this paragraph. A corporation or association claiming such additional deduction must attach a schedule to the return for the taxable year showing the computation of such deduction, the total of such deductions taken for all years (including that taken on the return), and the initial balance of the New York City reserve for bad debts as defined hereunder.