Letter to the IRS Regarding Bad Debt Deductions for Regulated Financial Companies

Dear Ms. Floyd:

The American Bankers Association (ABA) submits these comments in response to the request for comments in REG–121010–17, issued by the Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) regarding bad debt deductions for regulated financial companies and members of regulated financial groups under Section 166 (the Proposed Regulations).

The Proposed Regulations provide useful guidance regarding whether a debt instrument is conclusively presumed to be worthless for federal income tax purposes for certain eligible entities—including proposing a new charge-off method that generally would allow applicable taxpayers to conclusively presume that charge-offs of debt instruments reported on their financial statements satisfy the Section 166 requirements for a bad debt deduction (the Allowance Charge-off Method).

ABA acknowledges and appreciates Treasury and the IRS’s efforts in promulgating these Proposed Regulations—and ABA supports the overall Proposed Regulations as an effective and reasonable evolution of the regulations governing bad debt deductions under Section 166. Still, as discussed below in more detail, ABA recommends that Treasury and the IRS make several changes to the Proposed Regulations prior to finalization—most notably:

1. Considering an expansive description of accounting for credit losses of debt instruments subject to Section 166
2. Removing references to the phrase "loss asset"
3. Expanding the application of the Allowance Charge-off Method to U.S. branches of foreign banks and Consolidated REITs
4. Permitting flexibility regarding Allowance Charge-off Method accounting method changes, and
5. Clarifying the future role of pertinent IRS Large Business and International Division Directives.

ABA greatly appreciates your time and efforts in drafting the Proposed Regulations and further appreciates your consideration of the recommendations discussed in this letter.

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