Tax Court upholds 1978 regulations on calculating the bad debt deduction.

• Author: Levy, Marc D.
• Position: Brief Article

In Central Pennsylvania Savings Association, 104 TC 384 (1995), the Tax Court reversed itself and ruled that a taxpayer must recalculate the percentage of taxable income bad debt deduction when a bad debt deduction is carried back. Regs. Sec. 1.593-6A(b)(5)(vi) and (vii), issued in 1978, required savings and loans to include net operating losses (NOLs) in taxable income before calculating a bad debt deduction. Before this, however, savings and loans were not required to recalculate their bad debt deduction to reflect NOL carrybacks. Beginning in 1990, the Tax Court ruled in a number of cases that the regulations were invalid (Pacific First Federal Savings Bank, 94 TC 101 (1990); Bell Federal Savings & Loan Ass'n, TC Memo 1991-368; Peoples Federal Savings & Loan Assn of Sidney, TC Memo 1990-129). Several circuit courts, however, subsequently reversed the Tax Court and upheld the regulations (Pacific First Federal Savings Bank, 961 F2d 800 (9th Cir. 1991); Bell Federal Savings & Loan Assn, 40 F3d 224 (7th Cir. 1994); Peoples Federal Savings & Loan Ass'n of Sidney, 948 F2d 289 (6th Cir. 1991)).

In reaching its Central Penn-sylvania decision, the Tax Court still maintained that the 1978 regulation was not...