Judge Rosemary Pooler
After buying Carteret Savings Bank FA, AmBase Corp. filed consolidated federal income tax returns. Carteret calculates its bad debt deduction under the "reserve method." In 1992 the Office of Thrift Supervision seized Carteret, and placed it in receivership. AmBase's March 2000 amended return for 1992 sought to increase Carteret's bad debt deduction, and generate a net operating loss. AmBase's amended return for 1989, sought to apply the 1992 net operating loss and create a refund. The IRS denied the refund claim. District court granted only AmBase's deduction claim to the extent it offset Carteret's post-seizure additional income in 1992. Guided by Smith Electric v. United States, Second Circuit held the court should have granted AmBase's deduction derived from Carteret's post-seizure bad debts for 1992. Bad debts must be accounted for in the year they become worthless. A reserve method taxpayer must charge off a specific debt against the reserve in the year such debt goes bad. By reducing the reserve amount, the bad debts increase the otherwise allowable "Reasonable Addition." Thus the circuit held that reserve method taxpayers must also be allowed to increase the Reasonable Addition to account for such increase.
