Subsec. (1). Pub. L. 88-348 designated existing provisions as par. (1), substituted provisions permitting individuals who were citizens of the United States or resident aliens on Dec. 31, 1958, who sustained any loss of property prior to Jan. 1, 1964, and which was not a loss described in par. (1) or (2) of subsec. (c), to treat such loss as a loss under subsec. (c)(3), except that in cases of tangible property, the property had to be held by the taxpayer, and located in Cuba, on Dec. 31, 1958, for provisions which permitted any loss of tangible property to be treated as a loss from a casualty within subsec. (c) (3), therein, and added pars. (2) and (3).

Pub. L. 88-272, § 238, added subsec. (i). Former subsec. (1), redesignated (j).

Subsec. (j). Pub. L. 88-272, § 238, redesignated former subsec. (1) as (j).

1962 Subsec. (h). Pub. L. 87-426, § 2(a)(2), added subsec. (h), and redesignated former subsec. (h) as (1). Subsec. (1). Pub. L. 87-426, § 2(a)(1), redesignated former subsec. (h) as (1).

1958-Subsec. (g) (3) (B). Pub. L. 85-866, § 7, substituted "rental of" for "rental from".

Subsec. (h) (5). Pub. L. 85-866, § 202 (a), added subsec. (h) (5).

EFFECTIVE DATE OF 1964 AMENDMENTS

Section 208(b) of Pub. L. 88-272 provided that: "The amendment made by subsection (a) [to subsec. (c) (3) of this section] shall apply to losses sustained after December 31, 1963, in taxable years ending after such date."

Section 3(b) of Pub. L. 88-348 provided that: "The amendment made by subsection (a) [to subsec. (1) of this section] shall apply in respect of losses sustained in taxable years ending after December 31, 1958."

EFFECTIVE DATE OF 1962 AMENDMENT

Section 2(b) of Pub. L. 87-426 provided that: "The amendments made by this section [adding subsec. (h) of this section and redesignating former subsec. (h) as (1)] shall be effective with respect to any disaster occurring after December 31, 1961."

EFFECTIVE DATE OF 1958 AMENDMENT Section 1(c) of Pub. L. 85-866 provided that: "Except as otherwise expressly provided

"(1) amendements made by this title to subtitle A of the Internal Revenue Code of 1954 (relating to income taxes) [adding section 558 of this title and amending sections 152 (a) (9), (b) (5), 165 (g) (3) (B), 166 (d) (2) (A), 168 (e) (2) (A), (B), (C), 170 (b) (3), 172 (f) (3), (4), (g) (3), (4), 213 (d) (2) (A), 337 (d), 404 (a), 421 (a), 535 (b) (2), (6) (B), 545 (b) (2), 556 (b) (2), 582 (c), 611 (b) (4), 613 (d), 851 (e) (1), (2), 1015 (d), 1031 (d), 1033 (a) (2), (g), (h), (1) (2), (3), 1053, 1232 (c), 1233 (a), (g), 1234, 1237 (a) (1), 1341 (a), 1341 (b) (2) (last sentence), 1341 (b) (3), 1347 (last sentence), 2501 (b), 3121 (7) (3) and 3122 of this title] shall apply to taxable years beginning after December 31, 1953, and ending after August 16, 1954; and

"(2) amendments made by this title to subtitle F of such Code (relating to procedure and administration) [adding sections 7513 and 7514 of this title and amending sections 6013 (b) (2) (C), 6015 (f), 6212 (b) (1), 6325 (a) (1), (c)—(e), 6338 (c), 6339 (b) (2), 6501 (d), (g) (2), (h), (1), 6504 (15), 6511 (a), (b) (2), (d) (2) (A), 6601 (b), (h), 6652 (a), 6653 (c) (1), 6851 (d), 6871 (a), (b), 7213 (c), (d), 7324 (3), 7325 (3) and 7422 (f) (2) of this title shall take effect as of August 17, 1954, and such subtitle, as so amended, shall apply as provided in section 7851 of the Internal Revenue Code of 1954".

Amendment of section by Pub. L. 85-866, § 57 (c) (1), which added subsec. (h) (3) (4), as applicable with respect to taxable years beginning after Sept. 2, 1958, see section 57 (d) of Pub. L. 85-866, set out as a note under section 243 of this title.

SHORT TITLE

Section 201 of Pub. L. 85-866 provided that title II of Pub. L. 85-866, which is classified to subsec. (h) (5) of this section and to sections 172 (b) (1), (2), (j), (1), 172 note, 179, 179 note, 535 (c) (2), (3), 535 note, 1244, 1551,

6161 (a) (2), 6161 note, 6166, 6503 (d), and 6601 (b) of this title, should be popularly known as the "Small Business Tax Revision Act of 1958".

CROSS REFERENCES

Adjusted gross income as gross income minus, among others, losses from sale or exchange of property, see section 62 of this title.

General rules for determining capital losses, see section 1221 et seq. of this title.

Limitation on deductions allowed to individuals in certain cases, see section 270 of this title.

Loss deductions for nonresident alien individuals, see section 873 (b) of this title.

Losses in transactions between related taxpayers not deductible, see section 267 of this title.

Special rules for determining capital losses, see section 1231 et seq. of this title.

Treatment of capital losses, see section 1211 et seq. of this title.

§ 166. Bad debts.

(a) General rule.

(1) Wholly worthless debts.

There shall be allowed as a deduction any debt which becomes worthless within the taxable year. (2) Partially worthless debts.

When satisfied that a debt is recoverable only in part, the Secretary or his delegate may allow such debt, in an amount not in excess of the part charged off within the taxable year, as a deduction.

(b) Amount of deduction.

For purposes of subsection (a), the basis for determining the amount of the deduction for any bad debt shall be the adjusted basis provided in section 1011 for determining the loss from the sale or other disposition of property.

(c) Reserve for bad debts.

In lieu of any deduction under subsection (a), there shall be allowed (in the discretion of the Secretary or his delegate) a deduction for a reasonable addition to a reserve for bad debts.

(d) Nonbusiness debts.

(1) General rule.

In the case of a taxpayer other than a corporation

(A) subsections (a) and (c) shall not apply to any nonbusiness debt; and

(B) where any nonbusiness debt becomes worthless within the taxable year, the loss resulting therefrom shall be considered a loss from the sale or exchange, during the taxable year, of a capital asset held for not more than 6 months.

(2) Nonbusiness debt defined.

For purposes of paragraph (1), the term "nonbusiness debt" means a debt other than

(A) a debt created or acquired (as the case may be) in connection with a trade or business of the taxpayer; or

(B) a debt the loss from the worthlessness of which is incurred in the taxpayer's trade or business.

(e) Worthless securities.

This section shall not apply to a debt which is evidenced by a security as defined in section 165 (g) (2) (C).

(f) Guarantor of certain noncorporate obligations. A payment by the taxpayer (other than a corporation) in discharge of part or all of his obligation as a guarantor, endorser, or indemnitor of a noncorporate obligation the proceeds of which were used in the trade or business of the borrower shall be treated as a debt becoming worthless within such taxable year for purposes of this section (except that subsection (d) shall not apply), but only if the obligation of the borrower to the person to whom such payment was made was worthless (without regard to such guaranty, endorsement, or indemnity) at the time of such payment.

(g) Cross references.

(1) For disallowance of deduction for worthlessness of debts owed by political parties and similar organizations, see section 271.

(2) For special rule for banks with respect to worthless securities, see section 582.

(3) For special rule for bad debt reserves of certain mutual savings banks, domestic building and loan associations, and cooperative banks, see section 593.

(Aug. 16, 1954, ch. 736, 68A Stat. 50; Sept. 2, 1958, Pub. L. 85-866, title I, § 8, 72 Stat. 1608.)

(b) Use of certain methods and rates.

For taxable years ending after December 31, 1953, the term "reasonable allowance" as used in subsection (a) shall include (but shall not be limited to) an allowance computed in accordance with regulations prescribed by the Secretary or his delegate, under any of the following methods:

(1) the straight line method,

(2) the declining balance method, using a rate not exceeding twice the rate which would have been used had the annual allowance been computed under the method described in paragraph (1),

(3) the sum of the years-digits method, and (4) any other consistent method productive of an annual allowance which, when added to all allowances for the period commencing with the

taxpayer's use of the property and including the taxable year, does not, during the first two-thirds of the useful life of the property, exceed the total of such allowances which would have been used had such allowances been computed under the method described in paragraph (2). Nothing in this subsection shall be construed to limit or reduce an allowance otherwise allowable under subsection (a).

(c) Limitations on use of certain methods and rates. Paragraphs (2), (3), and (4) of subsection (b) shall apply only in the case of property (other than intangible property) described in subsection (a) with a useful life of 3 years or more

(1) the construction, reconstruction, or erection of which is completed after December 31, 1953, and then only to that portion of the basis which is properly attributable to such construction, reconstruction, or erection after December 31, 1953, or

(2) acquired after December 31, 1953, if the original use of such property commences with the taxpayer and commences after such date.

(d) Agreement as to useful life on which depreciation rate is based.

Where, under regulations prescribed by the Secretary or his delegate, the taxpayer and the Secretary or his delegate have, after the date of enactment of this title, entered into an agreement in writing specifically dealing with the useful life and rate of depreciation of any property, the rate so agreed upon shall be binding on both the taxpayer and the Secretary in the absence of facts or circumstances not taken into consideration in the adoption of such agreement. The responsibility of establishing the existence of such facts and circumstances shall rest with the party initiating the modification. Any change in the agreed rate and useful life specified in the agreement shall not be effective for taxable years before the taxable year in which notice in writing by certified mail or registered mail is served by the party to the agreement initiating such change.

(e) Change in method.

(1) Change from declining balance method.

In the absence of an agreement under subsection (d) containing a provision to the contrary, a taxpayer may at any time elect in accordance with regulations prescribed by the Secretary or his delegate to change from the method of depreciation described in subsection (b) (2) to the method described in subsection (b) (1).

(2) Change with respect to section 1245 property. A taxpayer may, on or before the last day prescribed by law (including extensions thereof) for filing his return for his first taxable year beginning after December 31, 1962, and in such manner as the Secretary or his delegate shall by regulations prescribe, elect to change his method of depreciation in respect of section 1245 property (as defined in section 1245 (a) (3)) from any declining balance or sum of the years-digits method to the straight line method. An election may be made under this paragraph notwithstanding any

§ 168

(c) Termination of amortization deduction.

A taxpayer which has elected under subsection (b) to take the amortization deduction provided in subsection (a) may, at any time after making such election, discontinue the amortization deduction with respect to the remainder of the amortization period, such discontinuance to begin as of the beginning of any month specified by the taxpayer in a notice in writing filed with the Secretary or his delegate before the beginning of such month. The depreciation deduction provided under section 167 shall be allowed, beginning with the first month as to which the amortization deduction does not apply and the taxpayer shall not be entitled to any further amortization deduction with respect to such emergency facility.

(d) Definitions.

(1) Emergency facility.

For purposes of this section, the term "emergency facility" means any facility, land, building, machinery, or equipment, or any part thereof, the construction, reconstruction, erection, installation, or acquisition of which was completed after December 31, 1949, and with respect to which a certificate under subsection (e) has been made. In no event shall an amortization deduction be allowed in respect of any emergency facility for any taxable year unless a certificate in respect thereof under this paragraph shall have been made before the filing of the taxpayer's return for such taxable year. (2) Emergency period.

purposes

For section, of this the term "emergency period" means the period beginning January 1, 1950, and ending on the date on which the President proclaims that the utilization of a substantial portion of the emergency facilities with respect to which certifications under subsection (e) have been made is no longer required in the interest of national defense.

(e) Determination of adjusted basis of emergency facility.

In determining, for purposes of subsection (a) or (g), the adjusted basis of an emergency facility(1) Certification on or before August 22, 1957.

In the case of a certificate made on or before August 22, 1957, there shall be included only so much of the amount of the adjusted basis of such facility (computed without regard to this section) as is properly attributable to such construction, reconstruction, erection, installation, or acquisition after December 31, 1949, as the certifying authority, designated by the President by Executive Order, has certified as necessary in the interest of national defense during the emergency period, and only such portion of such amount as such authority has certified as attributable to defense purposes. Such certification shall be under such regulations as may be prescribed from time to time by such certifying authority with the approval of the President. An application for a certificate must be filed at such time and in such manner as may be prescribed by such certifying authority under such regulations, but in no event

shall such certificate have any effect unless an application therefor is filed before March 24, 1951, or before the expiration of 6 months after the beginning of such construction, reconstruction, erection, or installation or the date of such acquisition, whichever is later.

(2) Certifications after August 22, 1957.

In the case of a certificate made after August 22, 1957, there shall be included only so much of the amount of the adjusted basis of such facility (computed without regard to this section) as is properly attributable to such construction, reconstruction, erection, installation, or acquisition after December 31, 1949, as the certifying authority designated by the President by Executive order, has certified is to be used

(A) to produce new or specialized defense items or components of new or specialized defense items (as defined in paragraph (4) during the emergency period,

(B) to provide research, developmental, or experimental services during the emergency period for the Department of Defense (or one of the component departments of such Department), or for the Atomic Energy Commission, as a part of the national defense program, or

(C) to provide primary processing for uranium ore or uranium concentrate under a program of the Atomic Energy Commission for the development of new sources of uranium ore or uranium concentrate,

and only such portion of such amount as such authority has certified is attributable to the national defense program. Such certification shall be under such regulations as may be prescribed from time to time by such certifying authority with the approval of the President. An application for a certificate must be filed at such time and in such manner as may be prescribed by such certifying authority under such regulations but in no event shall such certificate have any effect unless an application therefor is filed before the expiration of 6 months after the beginning of such construction, reconstruction, erection, or installation or the date of such acquisition. For purposes of the preceding sentence, an application which was timely filed under this subsection on or before August 22, 1957, and which was pending on such date, shall be considered to be an application timely filed under this paragraph.

(3) Separate facilities; special rule.

After the completion or acquisition of any emergency facility with respect to which a certificate under paragraph (1) or (2) has been made, any expenditure (attributable to such facility and to the period after such completion or acquisition) which does not represent construction, reconstruction, erection, installation, or acquisition included in such certificate, but with respect to which a separate certificate is made under paragraph (1) or (2), shall not be applied in adjustment of the basis of such facility, but a separate basis shall be computed therefor pursuant to paragraph (1) or (2), as the case may be, as if it were a new and separate emergency facility.

(4) Definitions.

For purposes of paragraph (2)—
(A) New or specialized defense item.

The term "new or specialized defense item" means only an item (excluding services) —

(i) which is produced, or will be produced, for sale to the Department of Defense (or one of the component departments of such Department), or to the Atomic Energy Commission, for use in the national defense program, and

(ii) for the production of which existing productive facilities are unsuitable because of its newness or of its specialized defense features.

(B) Component of new or specialized defense item.

The term component of a new or specialized defense item means only an item

(i) which is, or will become, a physical part of a new or specialized defense item, and (ii) for the production of which existing productive facilities are unsuitable because of its newness or of its specialized defense features.

(5) Limitation with respect to uranium ore or uranium concentrate processing facilities.

No certificate shall be made under paragraph (2) (C) with respect to any facility unless existing facilities for processing the uranium ore or uranium concentrate which will be processed by such facility are unsuitable because of their location. (f) Depreciation deduction.

If the adjusted basis of the emergency facility (computed without regard to this section) is in excess of the adjusted basis computed under subsection (e), the depreciation deduction provided by section 167 shall, despite the provisions of subsection (a) of this section, be allowed with respect to such emergency facility as if its adjusted basis for the purpose of such deduction were an amount equal to the amount of such excess.

(g) Payment by United States of unamortized cost of facility.

If an amount is properly includible in the gross income of the taxpayer on account of a payment with respect to an emergency facility and such payment is certified as provided in paragraph (1), then, at the election of the taxpayer in its return for the taxable year in which such amount is so includible

(1) The amortization deduction for the month in which such amount is so includible shall (in lieu of the amount of the deduction for such month computed under subsection (a)) be equal to the amount so includible but not in excess of the adjusted basis of the emergency facility as of the end of such month (computed without regard to any amortization deduction for such month). Payments referred to in this subsection shall be payments the amounts of which are certified, under such regulations as the President may prescribe, by the certifying authority designated by the President as compensation to the taxpayer for the unamortized cost of the emergency facility made because

(A) a contract with the United States involving the use of the facility has been terminated by its terms or by cancellation, or

(B) the taxpayer had reasonable ground (either from provisions of a contract with the United States involving the use of the facility, or from written or oral representations made under authority of the United States) for anticipating future contracts involving the use of the facility, which future contracts have not been made.

(2) In case the taxpayer is not entitled to any amortization deduction with respect to the emergency facility, the depreciation deduction allowable under section 167 on account of the month in which such amount is so includible shall be increased by such amount, but such deduction on account of such month shall not be in excess of the adjusted basis of the emergency facility as of the end of such month (computed without regard to any amount allowable, on account of such month, under section 167 or this paragraph). (h) Life tenant and remainderman.

In the case of property held by one person for life with remainder to another person, the deduction shall be computed as if the life tenant were the absolute owner of the property and shall be allowable to the life tenant.

(i) Termination.

No certificate under subsection (e) shall be made with respect to any emergency facility after December 31, 1959.

(j) Cross reference.

For special rule with respect to gain derived from the sale or exchange of property the adjusted basis of which is determined with regard to this section, see section 1238. (Aug. 16, 1954, ch. 736, 68A Stat. 52; Aug. 26, 1957, Pub. L. 85-165, § 4, 71 Stat. 414; Sept. 2, 1958, Pub. L. 85-866, title I, § 9 (a), (b), 72 Stat. 1608, 1609.) AMENDMENTS

1958-Subsec. (e) (2) (C). Pub. L. 85-866, § 9 (a), added subsec. (e) (2) (C).

Subsec. (e) (5). Pub. L. 85-866, § 9(b), added subsec. (e) (5).

1957-Subsec. (e) (1). Pub. L. 85-165, § 4(a), limited authorization to certifications made on or before Aug. 22,

1957.

Subsec. (e) (2). Pub. L. 85-165, § 4(b), added subsec. (e) (2) and redesignated former subsec. (e) (2) as (e)(3). Subsec. (e) (3). Pub. L. 85-165, § 4(b), redesignated former subsec. (e) (2) as (e) (3) and inserted "or (2)" following "paragraph (1)" wherever appearing and "as the case may be."

Subsec. (e) (4). Pub. L. 85-165, § 4(b), added subsec. (e) (4).

Subsec. (i). Pub. L. 85-165, § 4 (c), added subsec. (1) and redesignated former subsec. (i) as (j). Subsec. (j). Pub. L. 85-165, § 4(c), redesignated former subsec. (1) as (j).

EFFECTIVE DATE OF 1958 AMENDMENT Subsec. (e) (2) (C) of this section applicable to taxable years beginning after Dec. 31, 1953, and ending after Aug. 16, 1954, see section 1 (c) of Pub. L. 85-866, set out as a note under section 165 of this title.

AVAILABILITY OF EMERGENCY AMORTIZATION DEDUCTION Section 9 (c) of Pub. L. 85-866 provided that: "In the case of any certificate which is made under section 168 (e) of the Internal Revenue Code of 1954 for any facility to which the amendment made by subsection (a) [which added subsec. (e) (2) (C) of this section] applies, if application for such certificate was filed before the date of