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11 (...continued)
(1) General rule.--For purposes of subsection
(a), the reasonable addition to the reserve for bad
debts of any financial institution to which this
section applies shall be an amount determined by the
taxpayer which shall not exceed the addition to the
reserve for losses on loans determined under the
experience method as provided in paragraph (2).
(2) Experience method.--The amount determined
under this paragraph for a taxable year shall be the
amount necessary to increase the balance of the reserve
for losses on loans (at the close of the taxable year)
to the greater of--
(A) the amount which bears the same ratio to
loans outstanding at the close of the taxable year
as (i) the total bad debts sustained during the
taxable year and the 5 preceding taxable years
(or, with the approval of the Secretary, a shorter
period), adjusted for recoveries of bad debts
during such period, bears to (ii) the sum of the
loans outstanding at the close of such 6 or fewer
taxable years, or
(B) the lower of--
(i) the balance of the reserve at the
close of the base year, or
(ii) if the amount of loans outstanding
at the close of the taxable year is less than
the amount of loans outstanding at the close
of the base year, the amount which bears the
same ratio to loans outstanding at the close
of the taxable year as the balance of the
reserve at the close of the base year bears
to the amount of loans outstanding at the
close of the base year.
For purposes of this paragraph the base year shall be
the last taxable year before the most recent adoption
of the experience method, except that for taxable years
beginning after 1987 the base year shall be the last
taxable year beginning before 1988.
(continued...)
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