BIR Ruling

December 4, 1973 Messrs. Salcedo, Del Rosario Bito, Misa & Lozada P. O. Box 781, Manila Gentlemen : This refers to your letter dated November 27, 1973 requesting, in behalf of your client, the First National City Bank, a ruling as to the effect of Central Bank Circular No. 358 implementing Section 84 of Republic Act No. 337, as amended, on the bad debt provisions prescribed in Section 30(e) of the Tax Code. cd It is represented that your client had already ascertained the accounts which are worthless during the current year, but it cannot as yet charge or write off the said accounts as bad debts this year in view of the provisions of Section 84, R. A. 337, as amended by Presidential Decree No. 71 quoted as follows: "SEC. 84. If losses have at any time been sustained by any banking institutions equal to or exceeding the undivided profits on hand, no dividend shall be declared; and no dividend shall ever be declared by any such bank while it continues in banking operations to an amount greater than its net profits then on hand, deducting therefrom its losses and bad debts. All debts due to any such bank on which interest is past due and unpaid for a period of six months, unless the same are well secured and in process of collection, shall be considered bad debts within the meaning of this section. "The Monetary Board may fix, by regulations or by order in specific cases, the amount of reserves for bad debts or doubtful accounts or other contingencies. " Writing-off of loans and advances with an outstanding amount of one hundred thousand pesos or more shall require prior approval of the Monetary Board ." (Emphasis ours). Under the above-quoted provisions, the writing off of loans and advances with an outstanding amount of P100,000 or more shall require prior approval of the Monetary Board. You now request a ruling whether your client can be allowed to defer the charging or writing off in its books of such accounts which have already been ascertained as worthless this year, until the approval of the Monetary Board shall have been obtained, possibly next year, and to claim the bad debt deductions accordingly in its income tax returns for that year. In reply, I have the honor to inform you in the affirmative. It is a rule that bad debts considered worthless in a certain year should be charged off in that year and be claimed as deductions in the same year. However, in the case of a banking institutions, like that of your client, where under existing law, the charging or writing off of bad debts consisting of loans or advances shall be approved by the Monetary Board, such bad debt became worthless upon such approval. aisadc "If a bank charges off debts pursuant to specific orders of federal or state supervisory authorities, the debts, to the extent charged off during that year , will be conclusively presumed to have become worthless during that year." (34 Am. Jur. 2d 634) Accordingly, the bad debts may be claimed as deduction in the bank's income tax return for said year they were charged off. cdt Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue TAN-1601-593-5