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TITLE 26-INTERNAL REVENUE CODE (B) a loan to a domestic branch of a for- eign corporation to which subsection (a)(2) applies, (C) a loan secured by a deposit (I) in the lending bank, or (ii) in an institution de- scribed in subparagraph (A) or (B) if the lending bank has control over withdrawal of such deposit, (D) a loan to or guaranteed by the United States, a possession or instrumentality thereof, or a State or a political subdivision thereof, (E) a loan evidenced by a security as de- fined in section 165(g)(2)(C), (F) a loan of Federal funds, and (G) commercial paper, including short- term promissory notes which may be pur- chased on the open market. (Added Pub. L. 91-172, title IV, § 431(a), Dec. 30, 1969, 83 Stat. 616, and amended Pub. L. 94- 455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834.) AMENDMENTS 1976-Subsecs. (b)(3), (4). Pub. L. 94-455 struck out "or his delegate" following "Secretary". EFFEcTIvE DATE Section 431(d) of Pub. L. 91-172 provided that: "The amendments made by subsections (a) (enacting this section and section 586 of this title] and (c) [adding par. (4) to section 166(h) of this title] shall apply to taxable years beginning after July 11, 1969." SECTION REWERED TO IN OTEN SECTIONS This section is referred to in sections 57, 166, 172, 582, 593 of this title. § 586. Reserves for losses on loans of small business investment companies, etc. (a) Institutions to which section applies This section shall apply to the following fi- nancial institutions: (1) any small business investment company operating under the Small Business Invest- ment Act of 1958, and (2) any business development corporation. For purposes of this section, the term "business development corporation" means a corporation which was created by or pursuant to an act of a State legislature for purposes of promoting, maintaining, and assisting the economy and in- dustry within such State on a regional or statewide basis by making loans to be used in trades and businesses which would generally not be made by banks (as defined in section 581) within such region or State in the ordinary course of their business (except on the basis of a partial participation), and which is operated primarily for such purposes. (b) Addition to reserves for bad debts (1) General rule For purposes of section 166(c), except as provided in paragraph (2) the reasonable ad- dition to the reserve for bad debts of any fi- nancial institution to which this section ap- plies shall be an amount determined by the taxpayer which shall not exceed the amount necessary to increase the balance of the re- serve for bad debts (at the close of the tax- able 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 ap- proval 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 out- standing 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 subparagraph, the term "base year" means the last taxable year beginning on or before July 11, 1969. (2) New financial institutions In the case of any taxable year beginning not more than 10 years after the day before the first day on which a financial institution (or any predecessor) was authorized to do business as a financial institution described in subsection (a), the reasonable addition to the reserve for bad debts of such financial institu- tion shall not exceed the larger of the amount determined under paragraph (1) or the amount necessary to increase the balance of the reserve for bad debts at the close of the taxable year to the amount which bears the same ratio (as determined by the Secre- tary) to loans outstanding at the close of the taxable year as (i) the total bad debts sus- tained by all institutions described in the ap- plicable paragraph of subsection (a) during the 6 preceding taxable years (adjusted for recoveries of bad debts during such period), bears to (ii) the sum of the loans by all such histitutions outstanding at the close of such taxable years. (Added Pub. L. 91-172, title IV, § 431(a), Dec. 30, 1969, 83 Stat. 618, and amended Pub. L. 94- 455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834.) REFERENCEs IN TEXT The Small Business Investment Act of 1958, referred to in subsec. (a)(1), is Pub. L. 85-699, Aug. 21, 1958, 72 Stat. 689, as amended, which is classified principally to chapter 14B (§ 681 et seq.) of Title 15, Commerce and Trade. For complete classification of this Act to the Code, see Short Title note set out under section 661 of Title 15 and Tables volume. AMENDMENTS 1976-Subsecs. (b)(1)(A), (2). Pub. L. 94-455 struck out "or his delegate" following "Secretary". ErFEcTIVE DATE Section applicable to taxable years beginning after July 11, 1969, see section 431(d) of Pub. L. 91-172. set out as an Effective Date note under section 585 of this title. § 586 Page 434