Document Type
Article
Publication Date
1950
Publication Information
19 U. Cin. L. Rev. 1 (1950)
Abstract
Instead of deducting "debts which become worthless" taxpayers may deduct "a reasonable addition to a reserve for bad debts." "Prior to the publication of [Mimeograph 6209 on December 8, 1947] it was the consistent position of the Bureau [of Internal Revenue] . . . that deductions for additions to bad debt reserves were allowable in amounts sufficient to bring such reserves up to a measure of the bad debt risk at the close of each taxable year based solely on the facts and circumstances at such time." In practice a reserve for bad debts was limited in amount to the bad-debt losses which were expected to eventuate in the 12-month period immediately following the taxable year.
The practice of limiting the reserve to the estimated bad-debt losses of the ensuing 12 months appears to have been based on the tacit assumption that all debts mature, and so will turn out to be either good or bad, within a year. This remarkable assumption may be well founded so far as concerns trade credit (credit extended by a merchant to his customers) and, as regards such credit, is not without support in the decisions; but it has no basis whatever so far as concerns bank credit, as Mr. Severson demonstrates in the excellent monograph which immediately follows this brief introductory note. In contrast with trade credit bank credit, in large part, is long-term and is increasingly a source of permanent working capital. Nevertheless, prior to Mimeograph 62094 there appears to have been no recognition by the Bureau of the fallacy of lumping bank credit and trade credit and treating them as if they were one and the same.
Recommended Citation
Joseph O'Meara,
Mimeograph 6209 and the Ceiling on Bad-Debt Reserves for Banks,
19 U. Cin. L. Rev. 1 (1950).
Available at:
https://scholarship.law.nd.edu/law_faculty_scholarship/1001
