EC - 216 Supplement 1
EXAMINING ISSUANCE

Comptroller of the Currency
Administrator of National Banks
Type:  Examining Circular
Subject:  IRS Determination Letters

To:  Deputy Comptrollers, District Administrators, Department and
     Division Heads and all Examining Personnel

PURPOSE

This circular outlines the procedures for issuing an express determination
letter in connection with the new Internal Revenue Service (IRS)
regulations relating to bank-initiated charge-offs. This issuance
supplements Examining Circular 216, "Certification Procedures for Consumer
Loans Charged-off Between Examinations" (EC 216). The procedures contained
in EC 216 remain in effect for banks choosing not to elect the new
regulations.

BACKGROUND

The IRS recently issued new regulations relating to the deductibility of
loan charge-offs by financial institutions. Under these regulations,
institutions may elect to conform their tax accounting for bad debts with
their regulatory accounting. Institutions making this election will
automatically be allowed to deduct charge-offs of loss assets, for federal
income tax purposes, in the same year the charge-offs are taken for
regulatory purposes.

The new regulations require an institution to maintain loan loss
classification standards that are consistent with the standards
established for loan charge-offs by its primary federal supervisory
agency. If the institution meets these requirements, its loan charge-offs
are conclusively presumed worthless for federal income tax purposes. These
regulations are effective for taxable years ending on or after December
31, 1991.

ELECTION REQUIREMENTS

To be eligible, an institution must file a conformity election with its
federal tax return. The IRS regulations also require the institution's
primary federal supervisory agency to expressly determine that the
institution maintains and applies classification standards for loan
charge-offs that are consistent with regulatory requirements.

TRANSITION RULES

The transition rules allow a bank to make the conformity election without
the express determination letter until the primary federal supervisory
agency's first examination involving the loan review process after October
1, 1992.

For taxable years ending before completion of the first examination
involving the loan review process after October 1, 1992, the bank must
make a declaration that the bank maintains and applies loan loss
classification standards that are consistent with the regulatory standards
of its supervisory authority.

Once the first examination of the loan review process after October 1,
1992, has been performed, the transition rules no longer apply and the
bank must obtain the determination letter before making the election. To
continue using the new method, the bank must request a new letter at each
subsequent examination that covers the loan review process.

PROCEDURES

The bank is responsible for requesting a determination letter.

When requested by a bank that has made or intends to make the election
under IRS Regulation section 1.166-2(d)(3), the examiner may issue the
attached Express Determination Letter, provided the bank maintains and
applies loan loss classification standards that are consistent with
regulatory requirements.

The letter should be issued only at the completion of an examination that
covers the bank's loan review process, and for which the examiner has
concluded that issuance of the letter is appropriate. Examiners should not
alter the scope or frequency of examinations merely to permit a bank to
use this new regulation.

The letter should be signed and dated by the examiner-in-charge and
provided to the bank for its files. The letter is not part of the
examination report. The examiner should document, in examination
workpapers, his/her conclusions regarding the bank's loan loss
classification standards.


OCC standards for loan charge-offs and classification standards are set
forth in section 209 (Installment Loans), section 212 (Credit Card Loans),
and section 215 (Classification of Credits) of the Comptroller's Handbook
for National Bank Examiners. A listing of other OCC banking and examining
issuances related to OCC classification standards can be found in section
215.2 of the handbook.

The determination letter should be issued only if:

* The examination indicates that the bank maintains and applies loan loss
  classification standards that are consistent with OCC standards
  regarding the identification of losses and charge-off of loans.

* There are no material deviations from regulatory standards. Minor
  criticisms of the bank's loan review process or immaterial individual
  deviations from regulatory standards should not preclude issuance of the
  letter.

The letter should not be issued if:

* The bank's loan review process relating to charge-offs is subject to
  significant criticism.

* Loan charge-offs for call report purposes are consistently overstated or
  understated.

* There is a pattern of loan charge-offs not recognized in the appropriate
  year.

REVOKING THE ELECTION

The bank's election of the new method is revoked automatically if the
examiner does not issue an express determination letter at the end of an
examination covering the loan review process. The OCC is not required to
rescind any previously issued express determination letters.

An examiner's decision to withhold the determination letter generally
revokes the election for the current year. However, does not invalidate a
bank's election for any prior year(s). Withholding the determination
letter places the burden of proof on the bank to support its tax
deductions for loan charge-offs.

ORIGINATING OFFICE

Questions about this circular may be directed to the Office of the Chief
Accountant or to Traditional Activities, Office of the Chief National Bank
Examiner (202) 874-5350.


 






Jerilyn Gilland
Acting Chief National Bank Examiner


Attachment




Date:  October 2, 1992


Comptroller of the Currency
Administrator of National Banks
Washington, D.C. 20429

	
Date

Chief Executive Officer
National Bank




EXPRESS DETERMINATION LETTER FOR IRS REGULATION 1.166-2(d)(3)

In connection with the most recent examination of [NAME OF BANK] by the
Office of the Comptroller of the Currency, as of [EXAMINATION DATE], we
reviewed the institution's loan review process as it relates to loan
charge-offs. Based on our review, we concluded that the bank, as of that
date, maintained and applied loan loss classification standards that were
consistent with regulatory standards regarding loan charge-offs.

This statement is made on the basis of a review that was conducted in
accordance with our normal examination procedures and criteria, including
sampling of loans in accordance with those procedures and criteria. It
does not in any way limit or preclude any formal or informal supervisory
action (including enforcement actions) by this supervisory authority
relating to the institution's loan review process or the level at which it
maintains its allowance for loan and lease losses.


 
Sincerely yours,



National Bank Examiner
Examiner-in-charge