Bad Debt Deductions for Regulated Financial Companies and Members of Regulated Financial Groups, 89636-89644 [2023-28589]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 88, Number 248 (Thursday, December 28, 2023)]
[Proposed Rules]
[Pages 89636-89644]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-28589]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-121010-17]
RIN 1545-BO11


Bad Debt Deductions for Regulated Financial Companies and Members 
of Regulated Financial Groups

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations that would provide 
guidance regarding whether a debt instrument is worthless for Federal 
income tax purposes. The proposed regulations are necessary to update 
the standard for determining when a debt instrument held by a regulated 
financial company or a member of a regulated financial group will be 
conclusively presumed to be worthless. The proposed regulations will 
affect regulated financial companies and members of regulated financial 
groups that hold debt instruments.

DATES: Written or electronic comments and requests for a public hearing 
must be received by February 26, 2024.

ADDRESSES: Commenters are strongly encouraged to submit public comments 
electronically via the Federal eRulemaking Portal at https://www.regulations.gov (indicate IRS and REG-121010-17) by following the 
online instructions for submitting comments. Requests for a public 
hearing must be submitted as prescribed in the ``Comments and Requests 
for a Public Hearing'' section. Once submitted to the Federal 
eRulemaking Portal, comments cannot be edited or withdrawn. The 
Department of the Treasury (Treasury Department) and the IRS will 
publish for public availability any comments submitted to the IRS's 
public docket. Send paper submissions to: CC:PA:01:PR (REG-121010-17), 
Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin 
Station, Washington, DC 20044.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Stephanie D. Floyd at (202) 317-7053; concerning submissions of 
comments and requesting a hearing, Vivian Hayes at (202) 317-6901 (not 
toll-free numbers) or by email to [email protected] (preferred).

SUPPLEMENTARY INFORMATION: 

Background

    This document contains proposed amendments to the Income Tax 
Regulations (26 CFR part 1) under section 166 of the Internal Revenue 
Code (Code). These proposed amendments (proposed regulations) would 
update the standard in the current regulations under Sec.  1.166-2 
(existing regulations) for determining when a debt instrument held by a 
regulated financial company or a member of a regulated financial group 
will be conclusively presumed to be worthless.

1. Existing Rules

    Section 166(a)(1) provides that a deduction is allowed for any debt 
that becomes worthless within the taxable year. Section 166(a)(2) 
permits the Secretary of the Treasury or her delegate (Secretary) to 
allow a taxpayer to deduct a portion of a partially worthless debt that 
does not exceed the amount charged-off within the taxable year. The 
existing regulations do not define ``worthless.'' In determining 
whether a debt is worthless in whole or in part, the IRS considers all 
pertinent evidence, including the value of any collateral securing the 
debt and the financial condition of the debtor. See Sec.  1.166-2(a). 
The existing regulations provide further that, when 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, legal action is 
not required in order to determine that the debt is worthless. See 
Sec.  1.166-2(b).
    The existing regulations provide two alternative conclusive 
presumptions of worthlessness for bad debt. First, Sec.  1.166-2(d)(1) 
generally provides that if a bank or other corporation subject to 
supervision by Federal authorities, or by State authorities maintaining 
substantially equivalent standards, charges off a debt in whole or in 
part, either (1) in obedience to the specific orders of such 
authorities, or (2) in accordance with the established policies of such 
authorities, and such authorities at the first audit subsequent to the 
charge-off confirm in writing that the charge-off would have been 
subject to specific orders, then the debt is conclusively presumed to 
have become worthless, in whole or in part, to the extent charged off 
during the taxable year.
    Second, Sec.  1.166-2(d)(3) generally provides that a bank (but not 
other corporations) subject to supervision by Federal authorities, or 
by State authorities maintaining substantially equivalent standards, 
may elect to use a method of accounting that establishes a conclusive 
presumption of worthlessness for debts, provided the bank's supervisory 
authority has made an express determination that the bank maintains and 
applies loan loss classification standards that are consistent with the 
regulatory standards of that supervisory authority. Section 1.166-
2(d)(1) and (3) are collectively referred to as the ``Conclusive 
Presumption Regulations.''

2. Generally Accepted Accounting Principles Prior to the Current 
Expected Credit Loss Revisions

    For financial reporting purposes, financial institutions in the 
United States follow the U.S. Generally Accepted Accounting Principles 
(GAAP) issued by the Financial Accounting Standards Board (FASB). The 
long-standing GAAP model for recognizing credit losses is referred to 
as the ``incurred loss model'' because it delays recognition of credit 
losses until it is probable that a loss has been incurred. Under the 
incurred loss model, an entity considers only past events and current 
conditions in measuring the incurred credit loss. This method does not 
require or allow the incorporation of economic forecasts, or 
consideration of industry cycles. The incurred loss model permits 
institutions to use various methods to estimate credit losses, 
including historical loss methods, roll-rate methods, and discounted 
cash flow methods. The GAAP accounting for credit losses has been 
revised with the introduction of the current expected credit loss 
methodology for estimating allowance for credit losses, as further 
described in section 3 of this Background.
    Under the GAAP incurred loss model, an institution must first 
assess whether a decline in fair value of a debt security below the 
amortized cost of the security is a temporary impairment or other than 
temporary impairment (OTTI). If an entity intends to sell the security 
or more likely than not will be required to

[[Page 89637]]

sell the security before recovery of its amortized cost basis less any 
current-period credit loss, OTTI will be recognized in earnings equal 
to the difference between the investment's amortized cost basis and its 
fair value at the balance sheet date. In assessing whether the entity 
more likely than not will be required to sell the security before 
recovery of its amortized cost basis less any current period credit 
losses, an entity considers various factors such as the payment 
structure of the debt security, adverse conditions related to the 
security, or the length of time and the extent to which the fair value 
has been less than the amortized cost basis.
    By contrast, if an entity determines OTTI exists but does not 
intend to sell the debt security or it is more likely than not that the 
entity will not be required to sell the debt security prior to its 
anticipated recovery, the impairment is separated into two parts: the 
portion of OTTI related to credit loss on a debt security (Credit-Only 
OTTI) and the portion of OTTI related to other factors but not credit 
(Non-Credit OTTI). Credit-Only OTTI will be recognized in earnings on 
the income statement, but Non-Credit OTTI will be reported on the 
balance sheet as Other Comprehensive Income. FASB Staff Positions, FSP 
FAS 115-2 and 124-2, Recognition and Presentation of Other-Than-
Temporary Impairments (later codified as part of ASC 320).

3. The Current Expected Credit Loss Standard

    On June 16, 2016, FASB introduced a new standard, the Accounting 
Standards Update (ASU) No. 2016-13, Financial Instruments--Credit 
Losses (Topic 326): Measurement of Credit Losses on Financial 
Instruments (Update). The Update, which replaces the incurred loss 
model in GAAP, became effective for many entities for fiscal years 
beginning after December 15, 2019, and became generally effective for 
all entities for fiscal years beginning after December 15, 2022.
    The Update was in response to concerns by regulators that the 
incurred loss model under GAAP restricted the ability to record credit 
losses that are expected but that do not yet meet the probable 
threshold. The Update is based on a current expected credit loss model 
(CECL Model), which generally requires the recognition of expected 
credit loss (ECL) in the allowance for credit losses upon initial 
recognition of a financial asset, with the addition to the allowance 
recorded as an offset to current earnings. Subsequently, the ECL must 
be assessed each reporting period, and both negative and positive 
changes to the ECL must be recognized through an adjustment to the 
allowance and to earnings. ASC 326-20-30-1; ASC 326-20-35-1. In 
estimating the ECL under the CECL Model, institutions must consider 
information about past events, current conditions, and reasonable and 
supportable forecasts relevant to assessing the collectability of the 
cash flow of financial assets. The CECL Model does not prescribe the 
use of specific estimation methods for measuring the ECL. However, an 
entity will need to make adjustments to provide an estimate of the ECL 
over the remaining contractual life of an asset and to incorporate 
reasonable and supportable forecasts about future economic conditions 
in the calculations. A charge-off of a financial asset, which may be 
full or partial, is taken out of the allowance in the period in which a 
financial asset is deemed uncollectible. ASC 326-20-35-8. At that time 
the carrying value of the financial asset is also written down. See ASC 
326-20-55-52. The ECL recognized under the CECL Model cannot be used to 
determine bad debt deductions under section 166 because the ECL 
recognized under the CECL Model would be a current deduction for 
estimated future losses.

4. Insurance Company Financial Accounting

    Publicly traded insurance companies report their financial 
transactions and losses to the Securities and Exchange Commission in 
accordance with GAAP. Privately held insurance companies may also 
report their financial transactions and losses in accordance with GAAP. 
However, in the United States, all insurance companies, whether 
publicly traded or privately held, are regulated by State governments 
in the States in which they are licensed to do business and are 
required by State law to prepare financial statements in accordance 
with statutory accounting principles (Statements of Statutory 
Accounting Principles, known as SSAPs or SAPs). SSAPs serve as a basis 
for preparing financial statements for insurance companies in 
accordance with statutes or regulations promulgated by various States. 
SSAPs establish guidelines that must be followed when an asset is 
impaired. SSAPs are detailed in the National Association of Insurance 
Commissioner's (NAIC's) Accounting Practices and Procedures Manual. 
Generally, the NAIC's guidelines require the carrying value of an asset 
to be written down if the loss of principal is OTTI. The OTTI standard 
is found in several different statutory accounting provisions, 
including SSAP 43R (loan-backed and structured securities) and SSAP 26 
(bonds, excluding loan-backed and structured securities).

5. IRS Directives

    In 2012, in response to comments regarding the significant burden 
on both insurance companies and the IRS's Large Business and 
International Division (LB&I) in dealing with audits relating to the 
accounting of loss assets, the IRS issued an insurance industry 
directive to its LB&I examiners. See I.R.C. Sec.  166: LB&I Directive 
Related to Partial Worthlessness Deduction for Eligible Securities 
Reported by Insurance Companies, LB&I 04-0712-009 (July 30, 2012) 
(Insurance Directive). The Insurance Directive states that LB&I 
examiners would not challenge an insurance company's partial 
worthlessness deduction under section 166(a)(2) for the amount of the 
SSAP 43R--Revised Loan-Backed and Structured Securities (September 14, 
2009) credit-related impairment charge-offs of ``eligible securities'' 
as reported according to SSAP 43R on its annual statement if the 
company follows the procedure set forth in that directive. The 
definition of ``eligible securities'' in the Insurance Directive covers 
investments in loan-backed and structured securities within the scope 
of SSAP 43R, subject to section 166 and not subject to section 
165(g)(2)(C) of the Code, including real estate mortgage investment 
conduit regular interests. Thus, the Insurance Directive allowed 
insurance companies to use the financial accounting standard for tax 
purposes in limited circumstances regardless of whether the regulatory 
standard is precisely the same as the tax standard for worthlessness 
under section 166.
    In 2014, the IRS issued another industry directive to LB&I 
examiners regarding bad debt deductions claimed under section 166 by a 
bank or bank subsidiary. See LB&I Directive Related to Sec.  166 
Deductions for Eligible Debt and Eligible Debt Securities, LB&I-04-
1014-008 (October 24, 2014) (Bank Directive). Unlike insurance 
companies, banks generally determine loss deductions for partial and 
wholly worthless debts in the same manner for GAAP and regulatory 
purposes. The Bank Directive generally allowed for loss deductions for 
partial and wholly worthless debts to follow those reported for GAAP 
and regulatory purposes.

6. Summary of Comments Received in Response to Notice 2013-35

    In 2013, the IRS issued Notice 2013-35, 2013-24 I.R.B. 1240, 
requesting comments on the Conclusive Presumption Regulations. The 
Treasury

[[Page 89638]]

Department and the IRS noted that since the adoption of the Conclusive 
Presumption Regulations, there have been significant changes made to 
the regulatory standards relevant for loan charge-offs. In light of 
those changes, Notice 2013-35 sought comments on whether (1) changes 
that have occurred in bank regulatory standards and processes since 
adoption of the Conclusive Presumption Regulations require amendment of 
those regulations, and (2) application of the Conclusive Presumption 
Regulations continues to be consistent with the principles of section 
166. Comments were also sought on the types of entities that are 
permitted, or should be permitted, to apply a conclusive presumption of 
worthlessness.
    Commenters responded that the Conclusive Presumption Regulations 
are outdated and contain requirements for a bad debt deduction that 
taxpayers can no longer satisfy. For example, one commenter noted that 
Sec.  1.166-2(d)(1) is unusable by community banks because banking 
regulators will not issue written correspondence confirming that a 
charge-off is being made for either of the reasons set forth in Sec.  
1.166-2(d)(1). A commenter similarly noted that regulators generally no 
longer provide specific orders on a loan-by-loan basis and may never 
confirm the appropriateness of a charge-off in writing. Another 
commenter noted that for certain banks the election under Sec.  1.166-
2(d)(3) was automatically revoked under Sec.  1.166-2(d)(3)(iv)(C) 
during the 2008 financial crisis because bank examiners ordered greater 
charge-offs than those initially taken by the banks, and then could not 
provide the required express determination letter stating that the 
banks maintained and applied loan loss classification standards 
consistent with the regulatory standards of the supervisory authority.
    Commenters noted the advantages of retaining a conclusive 
presumption of worthlessness. One commenter stated that a conclusive 
presumption helps to avoid costly factual disputes between the IRS and 
taxpayers. Another commenter stated that it is in the best interests of 
all stakeholders to ensure that duplicative efforts by Federal and 
State bank regulators and the IRS do not occur. A commenter suggested 
that the IRS follow determinations made by regulators that routinely 
and thoroughly examine the financial and accounting records and 
processes of financial institutions such as banks, bank holding 
companies, and their non-bank subsidiaries. Another commenter noted 
that for decades virtually all community banks have conformed their 
losses on loans for income tax purposes to losses recorded for 
regulatory reporting purposes. Several commenters recommended that 
Sec.  1.166-2(d)(1) and (3) should be replaced with a single conclusive 
presumption rule.
    Commenters requested that the Conclusive Presumption Regulations be 
revised to apply to any institution that is subject to consolidated 
supervision by the Board of Governors of the Federal Reserve System 
(Federal Reserve), including systemically important financial 
institutions (SIFIs) and subsidiaries and affiliates of SIFIs, because 
these institutions are required to follow a strict process for 
determining the amounts of the allowance for credit losses under GAAP 
for financial reporting purposes and the Federal Reserve's examination 
will focus on the consistent application and adherence to this process. 
Another commenter suggested that the election under Sec.  1.166-2(d)(3) 
should be extended to bank holding companies and their nonbank 
subsidiaries, and potentially to other regulated financial institutions 
that are examined by the same primary supervisory authority or 
regulator.
    Commenters stated that the GAAP loss standard and the accounting 
standards used by insurance companies for determining whether a debt is 
worthless are sufficiently similar to the tax standards for 
worthlessness under section 166 and, therefore, should be used in 
formulating a revised conclusive presumption rule. Commenters argued 
that in most cases, any divergence between the various standards will 
not be significant enough to result in a material acceleration of loss 
recognition for Federal income tax purposes. Commenters specifically 
requested that the Conclusive Presumption Regulations be revised to 
include all insurance company debts, not just the eligible securities 
covered in the Insurance Directive. Commenters noted that, in applying 
the OTTI standard set forth in the SSAPs, insurers consider similar 
factors to the ones examined under the tax rules such as the adequacy 
of the collateral or the income stream in determining whether a debt is 
worthless for purposes of section 166. Commenters stated that a 
critical condition for coverage under the existing regulations is 
whether Federal or State regulators have the authority to compel the 
charge-off on the financial statements of the company. Commenters said 
that State insurance regulators have this authority since they can 
mandate a charge-off if an insurance company has not complied with the 
State law accounting requirement that requires the charge-off.
    Commenters varied in their recommendations of what process the IRS 
should require in revised conclusive presumption regulations to verify 
that the regulated entity applied appropriate regulatory standards in 
taking a charge-off. Some commenters recommended that the IRS require 
an attestation from the taxpayer that the taxpayer has reported 
worthless debts consistently for tax and regulatory reporting purposes 
similar to the taxpayer self-certification statement required under the 
Insurance Directive. Commenters stated that a new self-certification 
requirement adopted by the IRS could replace the requirement in the 
existing regulations to obtain written confirmation from regulators. 
Another commenter suggested that a taxpayer claiming the benefit of the 
conclusive presumption should file a signed statement with its tax 
return listing the taxpayer's Federal and State regulators and stating 
that, for each bad debt deducted under section 166 on the tax return, 
the taxpayer has charged off the same amount on its financial 
statements.

Explanation of Provisions

1. Rationale for the Proposed Amendments to Sec.  1.166-2(d)

    Regulated financial companies and members of regulated financial 
groups are generally subject to capital requirements, leverage 
requirements, or both. A tension exists between the incentives of 
regulated entities and the incentives of their regulators. An entity 
that is subject to regulatory capital requirements has an incentive not 
to charge-off debt assets prematurely, in order to preserve the amount 
of its capital. Conversely, a regulator that relies on capital or 
leverage requirements is concerned with ensuring that capital is not 
overstated, and therefore has an incentive to ensure that regulated 
entities do not defer charge-offs of losses on loans and other debt 
instruments. Regulators have provided guidance to those financial 
companies to ensure they charge off debt losses appropriately.\1\ This 
tension

[[Page 89639]]

results in a balance with respect to the timing of charge-offs.
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    \1\ See, for example, Interagency Policy Statement on Allowances 
for Credit Losses, 85 FR 32991 (June 1, 2020) (providing guidance to 
financial institutions from the Office of the Comptroller of the 
Currency, the Board of Governors of the Federal Reserve System, the 
Federal Deposit Insurance Corporation, and the National Credit Union 
Administration on allowances for credit losses in response to 
changes to GAAP); Regulatory Capital Rule: Implementation and 
Transition of the Current Expected Credit Losses Methodology for 
Allowances and Related Adjustments to the Regulatory Capital Rule 
and Conforming Amendments to Other Regulations, 84 FR 4222 (2019) 
(adopting final rule to address changes to credit loss accounting 
under GAAP, including banking organizations' implementation of the 
CECL Model).
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    The Treasury Department and the IRS believe that regulated 
financial companies and members of regulated financial groups described 
in the proposed regulations are subject to regulatory and accounting 
standards for charge-offs that are sufficiently similar to the Federal 
income tax standards for determining worthlessness under section 166. 
Both GAAP and the SSAPs use a facts and circumstance analysis that 
takes into account all available information related to the 
collectability of the debt. The analysis considers the value of any 
collateral securing the debt and the financial condition of the debtor, 
which are factors that are also evaluated under the tax rules for 
determining worthlessness under section 166.
    As described in part 5 of the Background, the IRS previously has 
recognized the significant administrative burden for taxpayers and the 
IRS to independently determine worthlessness amounts under section 
166(a)(2) and has accepted charge-off amounts reported for the incurred 
loss model previously used by GAAP and for regulatory purposes, as well 
as in accordance with the SSAPs, as evidence of worthlessness. In the 
Bank Directive, the IRS accepted charge-off amounts reported by banks 
and bank subsidiaries for the incurred loss model previously used by 
GAAP and for regulatory purposes as sufficient evidence of 
worthlessness. Similarly, in the Insurance Directive, the IRS permitted 
the use of the insurance company's SSAP 43R credit-related impairment 
charge-offs for the same securities as reported on its annual statement 
regardless of whether the regulatory standard is precisely the same as 
the definition of worthlessness under section 166. Thus, the IRS 
previously has recognized that the present values of timing differences 
in taxable income that arise from applying the regulatory standards 
instead of the tax standards to determine worthlessness are likely to 
be minor and therefore do not outweigh the costs of having two 
different standards for book and tax purposes.
    Based on the foregoing, the Treasury Department and the IRS believe 
it is appropriate to provide conclusive presumption rules for regulated 
financial companies and members of regulated financial groups.
    Recently, Congress has directed insurance companies to follow their 
financial statements prepared in accordance with GAAP in certain 
circumstances. See sections 451(b)(3) and 56A(b) of the Code. Section 
451 provides the general rule for the taxable year of inclusion of 
gross income. Section 451(b) and (c) were amended by section 13221 of 
Public Law 115-97 (131 Stat. 2054), commonly referred to as the Tax 
Cuts and Jobs Act. For taxpayers using an accrual method of accounting, 
section 451(b) requires the recognition of income at the earliest of 
when the all events test is met or when any item of income is taken 
into account as revenue in the taxpayer's applicable financial 
statement (AFS). Section 451(b)(3) defines AFS. Section 451(b)(3) and 
Sec.  1.451-3(a)(5) list in descending priority the financial 
statements that can be considered an AFS for purposes of income 
inclusion under section 451(b) and Sec.  1.451-1(a). Highest priority 
is given to a financial statement that is certified as being prepared 
in accordance with GAAP, and lowest priority is assigned to, among 
other things, non-GAAP financial statements filed with a State 
government or State agency or a self-regulatory organization including, 
for example, a financial statement filed with a State agency that 
regulates insurance companies or the Financial Industry Regulatory 
Authority.
    Section 10101 of Public Law 117-169, 136 Stat. 1818, 1818-1828 
(August 16, 2022), commonly referred to as the Inflation Reduction Act 
of 2022, amended section 55 of the Code to impose a new corporate 
alternative minimum tax (CAMT) based on the ``adjusted financial 
statement income'' (AFSI) of an applicable corporation for taxable 
years beginning after December 31, 2022. For purposes of sections 55 
through 59 of the Code, the term AFSI means, with respect to any 
corporation for any taxable year, the net income or loss of the 
taxpayer set forth on the taxpayer's AFS of such taxable year, adjusted 
as provided in section 56A. See section 56A(a). Section 56A(b) defines 
``applicable financial statement'' by reference to section 451(b)(3) 
for purposes of determining the adjusted financial statement income on 
which applicable corporations base their tentative minimum tax under 
section 55(b). For purposes of section 56A, the term AFS means, with 
respect to any taxable year, an AFS as defined in section 451(b)(3) or 
as specified by the Secretary in regulations or other guidance that 
covers such taxable year. See section 56A(b).
    The Treasury Department and the IRS believe that, consistent with 
recent legislation enacted and regulations promulgated in other 
contexts, for purposes of determining whether a debt instrument is 
worthless for Federal income tax purposes, insurance companies should 
first rely on GAAP financial statements that are prioritized in these 
proposed regulations and then, in the absence of such a GAAP financial 
statement, should rely on their annual statement.

2. Description of Proposed Amendments to Sec.  1.166-2(d)

    These proposed regulations would revise Sec.  1.166-2(d) to permit 
``regulated financial companies,'' as defined in proposed Sec.  1.166-
2(d)(4)(ii), and members of ``regulated financial groups,'' as defined 
in proposed Sec.  1.166-2(d)(4)(iii), to use a method of accounting 
under which amounts charged off from the allowance for credit losses, 
or pursuant to SSAP standards, would be conclusively presumed to be 
worthless for Federal income tax purposes (Allowance Charge-off 
Method). Proposed Sec.  1.166-2(d)(1) would allow these taxpayers to 
conclusively presume that charge-offs from the allowance for credit 
losses of debt instruments subject to section 166 or, in the case of 
insurance companies that do not produce GAAP financial statements for 
substantive non-tax purposes, charge-offs pursuant to SSAP standards, 
satisfy the requirements for a bad debt deduction under section 166. 
The proposed regulations do not address when a debt instrument 
qualifies as a security within the meaning of section 165(g)(2)(C) and 
therefore would not change the scope of debt instruments to which 
section 166 applies.
    The definition of a ``regulated financial company'' in proposed 
Sec.  1.166-2(d)(4)(ii) includes entities that are regulated by 
insurance regulators and various Federal regulators including the 
Federal Housing Finance Agency (FHFA) and the Farm Credit 
Administration (FCA). The Housing and Economic Recovery Act of 2008 
established the FHFA as an independent agency responsible for 
regulating the safety and soundness of the Federal National Mortgage 
Association and the Federal Home Loan Mortgage Corporation (Government-
Sponsored Enterprises, or GSEs). The FHFA has a statutory 
responsibility to ensure that the GSEs operate in a safe and sound 
manner, which the FHFA accomplishes through supervision and regulation, 
including the supervision and regulation of accounting and disclosure 
and capital adequacy. Further, the FHFA may order the GSEs to classify 
and charge-off loans, with loan

[[Page 89640]]

classification generally following bank regulatory standards.
    The definition of a ``regulated financial company'' in proposed 
Sec.  1.166-2(d)(4)(ii) also includes Farm Credit System (FCS) 
institutions subject to the provisions of the Farm Credit Act of 1971. 
The FCA, an independent Federal agency, is the Federal regulator that 
examines the safety and soundness of all FCS institutions through 
regulatory oversight. Including FCS institutions in the definition of 
regulated financial company is consistent with the existing 
regulations, which define ``banks'' to include institutions that are 
subject to the supervision of the FCA. See Sec.  1.166-2(d)(4)(i).
    The definition of a ``regulated financial company'' in proposed 
Sec.  1.166-2(d)(4)(ii) does not include credit unions or U.S. branches 
of foreign banks. The proposed regulations do not address how credit 
unions or U.S. branches of foreign banks determine charge-offs since 
the IRS did not receive any comments on this topic in response to 
Notice 2013-35. Moreover, many credit unions are not subject to Federal 
income tax. However, the Treasury Department and the IRS request 
comments regarding whether and, if so, how the proposed regulations 
should be modified to apply to credit unions or U.S. branches of 
foreign banks.
    The definition of a ``regulated financial company'' in proposed 
Sec.  1.166-2(d)(4)(ii) also does not include non-bank SIFIs. Treasury 
and the IRS would need to understand the extent to which prudential or 
other regulators of non-bank SIFIs apply regulatory standards for 
worthlessness that are sufficiently close to tax standards before 
determining whether the rules provided in the proposed regulations 
should apply to those SIFIs.
    The definition of ``regulated insurance company'' in proposed Sec.  
1.166-2(d)(4)(vii) does not include corporations that, although 
licensed, authorized, or regulated by one or more States to sell 
insurance, reinsurance, or annuity contracts to persons other than 
related persons (within the meaning of section 954(d)(3) of the Code) 
in such States, are not engaged in regular issuances of (or subject to 
ongoing liability with respect to) insurance, reinsurance, or annuity 
contracts with persons that are not related persons (within the meaning 
of section 954(d)(3)). The Treasury Department and the IRS request 
comments regarding whether and how the proposed regulations should be 
modified to include a reinsurance entity that regularly issues 
reinsurance contracts only to related persons, provided the risks 
reinsured are regularly those of persons other than related persons.
    The term ``financial statement'' is defined in proposed Sec.  
1.166-2(d)(4)(ix) broadly to include a financial statement provided to 
a bank regulator, along with any amendments or supplements to that 
financial statement. The Treasury Department and the IRS note that many 
insurance companies prepare GAAP financial statements. Therefore, the 
term ``financial statement'' includes a financial statement based on 
GAAP that is prepared contemporaneously with a financial statement 
prepared in accordance with the standards set out by the NAIC and given 
to creditors for purposes of making lending decisions. However, the 
Treasury Department and the IRS also understand that there are 
insurance companies that do not prepare GAAP financial statements but, 
for substantive non-tax purposes, use the SSAP financial statements 
discussed above, which may not have the functional equivalent of an 
allowance from which charge-offs are made. In order to extend 
conformity to insurance company taxpayers that do not prepare GAAP 
financial statements for substantive non-tax purposes, the Treasury 
Department and the IRS propose to allow these taxpayers to use their 
SSAP financial statements for purposes of determining the amount of bad 
debt deduction under, and in the manner prescribed in, the proposed 
regulations. Thus, the proposed regulations would direct insurance 
companies to first rely on a financial statement certified as prepared 
in accordance with GAAP that is a Form 10-K or an annual statement to 
shareholders. If no such financial statement exists, the proposed 
regulations would direct insurance companies to next rely on a 
financial statement that is based on GAAP that is (1) given to 
creditors for purposes of making lending decisions, (2) given to equity 
holders for purposes of evaluating their investments in the regulated 
financial company or member of a regulated financial group, or (3) 
provided for other substantial non-tax purposes that also meet certain 
criteria set forth in these proposed regulations. If an insurance 
company does not have either of these two types of financial statements 
based on GAAP, the insurance company would then rely on a financial 
statement prepared in accordance with the standards set forth by the 
NAIC and filed with the insurance regulatory authorities of a State 
that is the principal insurance regulator of the insurance company. 
Accordingly, the term ``financial statement'' would be defined in the 
insurance industry context under proposed Sec.  1.166-2(d)(4)(ix)(D) to 
include a financial statement that is prepared in accordance with 
standards set out by the NAIC and filed with State insurance regulatory 
authorities. The Treasury Department and the IRS request comments 
regarding whether these financial statements should be assigned 
different levels of priority and on this definition generally.
    The term ``charge-off'' is defined in proposed Sec.  1.166-
2(d)(4)(i) to mean an accounting entry or set of accounting entries for 
a taxable year that reduces the basis of the debt when the debt is 
recorded in whole or in part as a loss asset on the applicable 
financial statement of the regulated financial company or the member of 
a regulated financial group for that year. For a regulated financial 
company that is a regulated insurance company that has as its 
applicable financial statement a financial statement described in 
proposed Sec.  1.166-2(d)(4)(ix)(D), the term charge-off is defined in 
the proposed regulations to mean an accounting entry or set of 
accounting entries that reduces the debt's carrying value and results 
in a realized loss or a charge to the statement of operations (as 
opposed to recognition of unrealized loss) that is recorded on the 
regulated insurance company's annual statement.
    Certain of the commenters suggested that the proposed regulations 
should extend to GAAP post-impairment accounting for recoveries. 
Extending tax conformity to GAAP post-impairment accounting for 
recoveries raises, among other issues, questions about whether GAAP 
recoveries qualify as tax recoveries, both with regard to amount and 
timing, and whether GAAP's treatment of recoveries is consistent with 
the tax recovery payment ordering rules. See, for example, section 111, 
Sec. Sec.  1.111-1(a)(2), 1.446-2(e), 1.1275-2(a), Rev. Rul. 2007-32, 
2007-1 C.B. 1278, and Hillsboro National Bank v. Commissioner, 460 U.S. 
370 (1983). In view of the foregoing, the Treasury Department and the 
IRS, while welcoming comments on the topic, do not propose extending 
tax conformity to GAAP post-impairment recovery accounting at this 
time.
    Under the proposed regulations, the Allowance Charge-off Method 
would be a method of accounting because it would determine the timing 
of the bad debt deduction. Accordingly, proposed Sec.  1.166-2(d)(2) 
provides that a change to the Allowance Charge-off Method is a change 
in method of accounting

[[Page 89641]]

requiring consent of the Commissioner under section 446(e).
    When the proposed regulations are finalized, those regulated 
financial companies or members of regulated financial groups that do 
not presently use or change to the Allowance Charge-off Method would 
not be entitled to a conclusive presumption of worthlessness and would 
in most cases be required to use the specific charge-off method for 
deducting bad debts under section 166(a) and Sec.  1.166-1(a)(1).

3. Proposed Applicability Dates and Reliance on the Proposed 
Regulations

A. Proposed Applicability Dates of the Final Regulations
    Under the proposed applicability date in proposed Sec.  1.166-
2(d)(5), the final regulations would apply to charge-offs made by a 
regulated financial company or a member of a regulated financial group 
on its applicable financial statement that occur in taxable years 
ending on or after the date of publication of a Treasury decision 
adopting those rules as final regulations in the Federal Register. 
However, under proposed Sec.  1.166-2(d)(5), a regulated financial 
company or a member of a regulated financial group may choose to apply 
the final regulations, once published in the Federal Register, to 
charge-offs made on its applicable financial statement that occur in 
taxable years ending on or after December 28, 2023, and before the date 
of publication of a Treasury decision adopting those rules as final 
regulations in the Federal Register. See section 7805(b)(7) of the 
Code.
B. Reliance on the Proposed Regulations
    A regulated financial company or a member of a regulated financial 
group may rely on proposed Sec.  1.166-2(d) for charge-offs made on its 
applicable financial statement that occur in taxable years ending on or 
after December 28, 2023, and before the date of publication of final 
regulations in the Federal Register.

Special Analyses

I. Regulatory Planning and Review

    Pursuant to the Memorandum of Agreement, Review of Treasury 
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory 
actions issued by the IRS are not subject to the requirements of 
section 6 of Executive Order 12866, as amended. Therefore, a regulatory 
impact assessment is not required.

II. Paperwork Reduction Act

    These proposed regulations do not impose any additional information 
collection requirements in the form of reporting, recordkeeping 
requirements, or third-party disclosure statements. The Allowance 
Charge-off Method is a method of accounting under the proposed 
regulations, and therefore taxpayers would be required to request the 
consent of the Commissioner for a change in method of accounting under 
section 446(e) to change to that method. The IRS expects that these 
taxpayers would request this consent by filing Form 3115, Application 
for Change in Accounting Method. Filing of Form 3115 and any statements 
attached thereto is the sole collection of information requirement 
imposed by the statute and the proposed regulations.
    For purposes of the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507(c)) (PRA), the reporting burden associated with the collection of 
information for the Form 3115 will be reflected in the PRA submission 
associated with the income tax returns under the OMB control number 
1545-0123. To the extent there is a change in burden because of these 
proposed regulations, the change in burden will be reflected in the 
updated burden estimates for Form 3115. The requirement to maintain 
records to substantiate information on Form 3115 is already contained 
in the burden associated with the control number for the form and 
remains unchanged.
    The proposed regulations also would remove the requirement in Sec.  
1.166-2(d)(3)(iii)(B) for a new bank to attach a statement to its 
income tax return, and thereby reduce the burden estimates for OMB 
control number 1545-0123. The overall burden estimates associated with 
the OMB control number are aggregate amounts related to the entire 
package of forms associated with the applicable OMB control number and 
will include, but not isolate, the estimated burden of the tax forms 
that will be created, revised, or reduced as a result of the 
information collection in these proposed regulations. These numbers are 
therefore not specific to the burden imposed by these proposed 
regulations. No burden estimates specific to the forms affected by the 
proposed regulations are currently available. For the OMB control 
number discussed in this section, the Treasury Department and the IRS 
estimate PRA burdens on a taxpayer-type basis rather than a provision-
specific basis. Those estimates capture both changes made by the 
proposed regulations (when final) and other regulations that affect the 
compliance burden for that form.
    The Treasury Department and IRS request comment on all aspects of 
the information collection burden related to the proposed regulations, 
including estimates for how much time it would take to comply with the 
paperwork burden described above for the relevant form and ways for the 
IRS to minimize paperwork burden. In addition, when available, drafts 
of IRS forms are posted at https://www.irs.gov/draft-tax-forms, and 
comments may be submitted at https://www.irs.gov/forms-pubs/comment-on-tax-forms-and-publications. Final IRS forms are available at https://www.irs.gov/forms-instructions. Forms will not be finalized until after 
they have been approved by OMB under the PRA.

III. Regulatory Flexibility Act

    It is hereby certified that these regulations would not have a 
significant economic impact on a substantial number of small entities 
within the meaning of section 601(6) of the Regulatory Flexibility Act 
(5 U.S.C. chapter 6).
    These proposed regulations would affect only those business 
entities that qualify as regulated financial companies and members of 
regulated financial groups, as defined in the proposed regulations. 
These entities are expected to consist of insurance companies and 
financial institutions with annual receipts in excess of the amounts 
set forth in 13 CFR 121.201, Sector 52 (finance and insurance). 
Therefore, these proposed regulations will not affect a substantial 
number of small entities.
    Although the burden falls primarily on larger entities, some small 
entities with annual receipts not in excess of the amounts set forth in 
13 CFR 121.201, Sector 52 (finance and insurance), may be affected. 
However, these proposed regulations are unlikely to present a 
significant economic burden on any small entities affected. The costs 
to comply with these proposed regulations are not significant. 
Taxpayers needing to make method changes pursuant to the proposed 
regulations would be required to file a Form 3115. For those entities 
that would make a method change, the cost to determine or track the 
information needed is minimal. The insurance companies and financial 
institutions affected by the proposed regulations prepare financial 
statements in accordance with SSAPs or GAAP. The Allowance Charge-off 
Method is a method of accounting under which these entities would be 
permitted to use these financial statements to obtain a

[[Page 89642]]

conclusive presumption of worthlessness for purposes of claiming bad 
debt deductions under section 166. Accordingly, the affected entities 
already possess the information needed. The cost in time to fill out a 
Form 3115 would be minimal.
    Notwithstanding this certification, the Treasury Department and IRS 
invite comments from the public about the impact of these proposed 
regulations on small entities.
    Pursuant to section 7805(f), these regulations will be submitted to 
the Chief Counsel for the Office of Advocacy of the Small Business 
Administration for comment on their impact on small business.

IV. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 requires 
that agencies assess anticipated costs and benefits and take certain 
other actions before issuing a final rule that includes any Federal 
mandate that may result in expenditures in any one year by a State, 
local, or Tribal government, in the aggregate, or by the private 
sector, of $100 million in 1995 dollars, updated annually for 
inflation. This proposed rule does not include any Federal mandate that 
may result in expenditures by State, local, or Tribal governments, or 
by the private sector, in excess of that threshold.

V. Executive Order 13132: Federalism

    Executive Order 13132 (Federalism) prohibits an agency from 
publishing any rule that has federalism implications if the rule either 
imposes substantial, direct compliance costs on State and local 
governments, and is not required by statute, or preempts State law, 
unless the agency meets the consultation and funding requirements of 
section 6 of the Executive order. These proposed regulations do not 
have federalism implications and do not impose substantial direct 
compliance costs on State and local governments or preempt State law 
within the meaning of the Executive order.

Comments and Requests for a Public Hearing

    Before these proposed amendments to the final regulations are 
adopted as final regulations, consideration will be given to comments 
that are submitted timely to the IRS as prescribed in this preamble 
under the ADDRESSES heading. The Treasury Department and the IRS 
request comments on all aspects of the proposed regulations, including 
how best to transition from the existing regulations to the proposed 
regulations. Any comments submitted will be made available at https://www.regulations.gov or upon request.
    A public hearing will be scheduled if requested in writing by any 
person who timely submits electronic or written comments. Requests for 
a public hearing are also encouraged to be made electronically. If a 
public hearing is scheduled, notice of the date and time for the public 
hearing will be published in the Federal Register.

Drafting Information

    The principal authors of these regulations are Stephanie D. Floyd 
and Jason D. Kristall of the Office of Associate Chief Counsel 
(Financial Institutions and Products). However, other personnel from 
the Treasury Department and the IRS participated in their development.

Statement of Availability of IRS Documents

    The IRS Notices, Revenue Procedures, and Revenue Rulings cited in 
this preamble are published in the Internal Revenue Bulletin (or 
Cumulative Bulletin) and are available from the Superintendent of 
Documents, U.S. Government Publishing Office, Washington, DC 20402, or 
by visiting the IRS website at https://www.irs.gov.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, the Treasury Department and the IRS propose to amend 
26 CFR part 1 as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority:  26 U.S.C. 7805 * * *

0
Par. 2. Section 1.166-2 is amended by revising paragraph (d) to read as 
follows:


Sec.  1.166-2  Evidence of worthlessness.

* * * * *
    (d) Regulated financial companies and members of regulated 
financial groups-- (1) Worthlessness presumed in year of charge-off. 
Debt held by a regulated financial company (as defined in paragraph 
(d)(4)(ii) of this section) or a member of a regulated financial group 
(as defined in paragraph (d)(4)(iii) of this section) that uses the 
charge-off method described in paragraph (d)(1) of this section 
(Allowance Charge-off Method) is conclusively presumed to have become 
worthless, in whole or in part, to the extent that the amount of any 
charge-off (as defined in paragraph (d)(4)(i) of this section) under 
paragraph (d)(1)(i) or (ii) of this section is claimed as a deduction 
under section 166 of the Internal Revenue Code (Code) by the regulated 
financial company or the member of a regulated financial group on the 
relevant Federal income tax return for the taxable year in which the 
charge-off takes place.
    (i) Allowance Charge-off Method generally. The debt is charged off 
from the allowance for credit losses in accordance with the United 
States Generally Accepted Accounting Principles and recorded in the 
period in which the debt is deemed uncollectible on the applicable 
financial statement (as defined in paragraph (d)(4)(viii) of this 
section) of the regulated financial company or the member of a 
regulated financial group.
    (ii) Certain regulated insurance companies. In the case of a 
regulated financial company that is a regulated insurance company (as 
defined in paragraph (d)(4)(vii) of this section) that prepares an 
applicable financial statement pursuant to paragraphs (d)(4)(viii) and 
(d)(4)(ix)(D) of this section, the debt is charged off pursuant to an 
accounting entry or set of accounting entries that reduce the debt's 
carrying value and result in a realized loss or a charge to the 
statement of operations (as opposed to recognition of an unrealized 
loss) that, in either case, is recorded on the regulated insurance 
company's annual statement.
    (2) Methods of accounting--(i) In general. A taxpayer may change a 
method of accounting only with the consent of the Commissioner as 
required under section 446(e) of the Code and the corresponding 
regulations. A change to the Allowance Charge-off Method under this 
paragraph (d) constitutes a change in method of accounting. 
Accordingly, a regulated financial company or member of a regulated 
financial group that changes its method of accounting to the Allowance 
Charge-Off Method is required to secure consent of the Commissioner 
before using this method for Federal income tax purposes. A change to 
the Allowance Charge-off Method must be made on an entity-by-entity 
basis.
    (ii) General rule for changes in method of accounting. A taxpayer 
that makes a change in method of accounting to the Allowance Charge-Off 
Method is treated as making a change in method initiated by the 
taxpayer for purposes of section 481 of the Code. A taxpayer obtains 
the consent of the Commissioner to make a change in method of

[[Page 89643]]

accounting by using the applicable administrative procedures that 
govern changes in method of accounting under section 446(e). See Sec.  
1.446-1(e)(3).
    (3) Worthlessness in later taxable year. If a regulated financial 
company or member of a regulated financial group does not claim a 
deduction under section 166 for a totally or partially worthless debt 
on its Federal income tax return for the taxable year in which the 
charge-off takes place, but claims the deduction for a later taxable 
year, then the charge-off in the prior taxable year is deemed to have 
been involuntary and the deduction under section 166 is allowed for the 
taxable year for which claimed.
    (4) Definitions. The following definitions apply for purposes of 
paragraph (d) of this section:
    (i) Charge-off. The term charge-off means an accounting entry or 
set of accounting entries for a taxable year that reduces the basis of 
the debt when the debt is recorded in whole or in part as a loss asset 
on the applicable financial statement (as defined in paragraph 
(d)(4)(viii) of this section) of the regulated financial company or the 
member of a regulated financial group for that year. For a regulated 
financial company that is a regulated insurance company (as defined in 
paragraph (d)(4)(vii) of this section) that has as its applicable 
financial statement a financial statement described in paragraph 
(d)(4)(ix)(D) of this section, the term charge-off means an accounting 
entry or set of accounting entries that reduce the debt's carrying 
value and results in a realized loss or a charge to the statement of 
operations (as opposed to recognition of unrealized loss) that is 
recorded on the regulated insurance company's annual statement.
    (ii) Regulated financial company. The term regulated financial 
company means--
    (A) A bank holding company, as defined in 12 U.S.C. 1841, that is a 
domestic corporation;
    (B) A covered savings and loan holding company, as defined in 12 
CFR 217.2;
    (C) A national bank;
    (D) A bank that is a member of the Federal Reserve System and is 
incorporated by special law of any State, or organized under the 
general laws of any State, or of the United States, or other 
incorporated banking institution engaged in a similar business;
    (E) An insured depository institution, as defined in 12 U.S.C. 
1813(c)(2);
    (F) A U.S. intermediate holding company formed by a foreign banking 
organization in compliance with 12 CFR 252.153;
    (G) An Edge Act corporation organized under section 25A of the 
Federal Reserve Act (12 U.S.C. 611-631);
    (H) A corporation having an agreement or undertaking with the Board 
of Governors of the Federal Reserve System under section 25 of the 
Federal Reserve Act (12 U.S.C. 601-604a);
    (I) A Federal Home Loan Bank, as defined in 12 U.S.C. 1422(1)(A);
    (J) A Farm Credit System Institution chartered and subject to the 
provisions of the Farm Credit Act of 1971 (12 U.S.C. 2001 et seq.);
    (K) A regulated insurance company, as defined in paragraph 
(d)(4)(vii) of this section;
    (L) The Federal National Mortgage Association;
    (M) The Federal Home Loan Mortgage Corporation; and
    (N) Any additional entities that may be provided in guidance 
published in the Internal Revenue Bulletin (see Sec.  
601.601(d)(2)(ii)(a) of this chapter).
    (iii) Regulated financial group. The term regulated financial group 
means one or more chains of corporations connected through stock 
ownership with a common parent corporation that is not described in 
section 1504(b)(4) of the Code and is a regulated financial company 
described in paragraphs (d)(4)(ii)(A) through (N) of this section 
(regulated financial group parent) that is not owned, directly or 
indirectly (as set out in paragraph (d)(4)(v) of this section), by 
another regulated financial company, but only if--
    (A) The regulated financial group parent owns directly or 
indirectly stock meeting the requirements of section 1504(a)(2) in at 
least one of the other corporations; and
    (B) Stock meeting the requirements of section 1504(a)(2) in each of 
the other corporations (except the regulated financial group parent) is 
owned directly or indirectly by one or more of the other corporations.
    (iv) Stock. The term stock has the same meaning as stock in section 
1504 (without regard to Sec.  1.1504-4), and all shares of stock within 
a single class are considered to have the same value. Thus, control 
premiums and minority and blockage discounts within a single class are 
not taken into account.
    (v) Indirect stock ownership. Indirect stock ownership is 
determined by applying the constructive ownership rules of section 
318(a) of the Code.
    (vi) Member of a regulated financial group. A member of a regulated 
financial group is any corporation in the chain of corporations of a 
regulated financial group described in paragraph (d)(4)(iii) of this 
section. A corporation, however, is not a member of a regulated 
financial group if it is held by a regulated financial company pursuant 
to 12 U.S.C. 1843(k)(1)(B), 12 U.S.C. 1843(k)(4)(H), or 12 U.S.C. 
1843(o), or if it is a Regulated Investment Company under section 851 
of the Code, or a Real Estate Investment Trust under section 856 of the 
Code.
    (vii) Regulated insurance company. The term regulated insurance 
company means a corporation that is--
    (A) Subject to tax under subchapter L of chapter 1 of the Code;
    (B) Domiciled or organized under the laws of one of the 50 States 
or the District of Columbia (State);
    (C) Licensed, authorized, or regulated by one or more States to 
sell insurance, reinsurance, or annuity contracts to persons other than 
related persons (within the meaning of section 954(d)(3) of the Code) 
in such States, but in no case will a corporation satisfy the 
requirements of this paragraph (d)(4)(vii)(C) if a principal purpose 
for obtaining such license, authorization, or regulation was to qualify 
the issuer as a regulated insurance company; and
    (D) Engaged in regular issuances of (or subject to ongoing 
liability with respect to) insurance, reinsurance, or annuity contracts 
with persons that are not related persons (within the meaning of 
section 954(d)(3)).
    (viii) Applicable financial statement. The term applicable 
financial statement means a financial statement that is described in 
paragraph (d)(4)(ix) of this section of a regulated financial company 
or any member of a regulated financial group. The financial statement 
may be a separate company financial statement of any member of a 
regulated financial group, if prepared in the ordinary course of 
business; otherwise, it is the consolidated financial statement that 
includes the assets, portion of the assets, or annual total revenue of 
any member of a regulated financial group.
    (ix) Financial statement. The term financial statement means the 
taxpayer's financial statement listed in paragraphs (d)(4)(ix)(A) 
through (D) of this section that has the highest priority. A financial 
statement includes any supplement or amendment to that financial 
statement. The financial statements are, in order of descending 
priority:
    (A) A financial statement certified as being prepared in accordance 
with Generally Accepted Accounting Principles that is a Form 10-K (or 
successor form), or annual statement to shareholders, required to be 
filed with the United States Securities and Exchange Commission;

[[Page 89644]]

    (B) A financial statement that is required to be provided to a bank 
regulator;
    (C) In the case of an insurance company, a financial statement 
based on Generally Accepted Accounting Principles that is given to 
creditors for purposes of making lending decisions, given to equity 
holders for purposes of evaluating their investments in the regulated 
financial company or member of a regulated financial group, or provided 
for other substantial non-tax purposes, and that the regulated 
financial company or member of a regulated financial group reasonably 
anticipates will be directly relied on for the purposes for which it 
was given or provided and that is prepared contemporaneously with a 
financial statement prepared in accordance with the standards set out 
by the National Association of Insurance Commissioners and filed with 
the insurance regulatory authorities of a State that is the principal 
insurance regulator of the insurance company; and
    (D) In the case of an insurance company, a financial statement that 
is prepared in accordance with the standards set out by the National 
Association of Insurance Commissioners and filed with the insurance 
regulatory authorities of a State that is the principal insurance 
regulator of the insurance company.
    (x) Bank regulator. The term bank regulator means the Office of the 
Comptroller of the Currency, the Board of Governors of the Federal 
Reserve System and any Federal Reserve Bank, the Federal Deposit 
Insurance Corporation, the Farm Credit Administration, the Federal 
Housing Finance Authority, any successor to any of the foregoing 
entities, or State banking authorities maintaining substantially 
equivalent standards as these Federal regulatory authorities. 
Additional entities included in this paragraph (d)(4)(x) may be 
provided in guidance published in the Internal Revenue Bulletin (see 
Sec.  601.601(d)(2)(ii)(a) of this chapter).
    (5) Applicability date. Paragraph (d) of this section applies to 
charge-offs made by a regulated financial company or a member of a 
regulated financial group on its applicable financial statement that 
occur in taxable years ending on or after [DATE OF FINAL RULE]. A 
regulated financial company or a member of a regulated financial group 
may choose to apply paragraph (d) of this section to charge-offs on its 
applicable financial statement that occur in taxable years ending on or 
after December 28, 2023.

Douglas W. O'Donnell,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2023-28589 Filed 12-27-23; 8:45 am]
BILLING CODE 4830-01-P