Non-business bad debt deduction


S

Steve B

This is a about a personal debt secured by a promissory note (not
between relatives) that went into default in 2006 and was settled in
2007 after lengthy, expensive legal negotiations. The settlement
included an initial cash payment of about 40% of the original debt,
followed by a new, 5 year promissory note for about 25% of the original
debt, with the remaining 35% uncollectible by the settlement agreement.

We are advised that this is a non-business bad debt (section 166) and
may be deductible (to the extent of the 35% uncollectible) as a
short-term capital loss. However, in reading the tax materials,
searching the tax cases and reviewing other opinions we have found that
we may not meet the requirement of "totally worthless" debt to qualify
for the deduction. The tax regulations (CFR Title 26 section
1.166-5(a)(2)) and the frequently referenced "Buchanan vs US" case seem
to indicate that. Yet we have seen CPA postings suggesting otherwise
and have found the same in reputable references like Sidney Kess' "1040
Preparation and Planning Guide", p.296 ¶2405 (I think).

We would greatly appreciate some clarification on this matter. In
particular, if there have been subsequent cases or regulations regarding
this matter we would greatly appreciate knowing of them so that we can
be prepared in the event of an audit in the future. We have searched
extensively the resources available to us on the 'net but can't find any
references in support of the deduction.

Thanks for any help you can provide.

Steve B.
 
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B

Benjamin Yazersky CPA

This is a about a personal debt secured by a promissory note (not
between relatives) that went into default in 2006 and was settled in
2007 after lengthy, expensive legal negotiations. The settlement
included an initial cash payment of about 40% of the original debt,
followed by a new, 5 year promissory note for about 25% of the original
debt, with the remaining 35% uncollectible by the settlement agreement.

We are advised that this is a non-business bad debt (section 166) and
may be deductible (to the extent of the 35% uncollectible) as a
short-term capital loss. However, in reading the tax materials,
searching the tax cases and reviewing other opinions we have found that
we may not meet the requirement of "totally worthless" debt to qualify
for the deduction. The tax regulations (CFR Title 26 section
1.166-5(a)(2)) and the frequently referenced "Buchanan vs US" case seem
to indicate that. Yet we have seen CPA postings suggesting otherwise
and have found the same in reputable references like Sidney Kess' "1040
Preparation and Planning Guide", p.296 ¶2405 (I think).

We would greatly appreciate some clarification on this matter. In
particular, if there have been subsequent cases or regulations regarding
this matter we would greatly appreciate knowing of them so that we can
be prepared in the event of an audit in the future. We have searched
extensively the resources available to us on the 'net but can't find any
references in support of the deduction.

Thanks for any help you can provide.

Steve B.

--


You need to do your research & document your facts & circumstances
with regard to the existing case law, code & regs

This does sound like the type of position that needs to be disclosed.

If you have sound research & doucmentation - take the deduction
But just be prepared for the IRS to challenge it.





<<< Benjamin Yazersky, CPA [NJ & NY] >>>
-----> real address on hobokeni or hobokenx <-----





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