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Posted by BobG on November 23, 2006, 2:12 am
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Unfortunately, I'm owed a substantial amount as an unsecured
creditor of an entity which is currently in Chapter 11.
Even more unfortunately, the loan is a "non-business" debt.
It turns out that the unsecured creditors are likely to get
recoveries of 5-10% of their claim amounts.
My understanding is that, if the loan turns out to be
completely worthless, I would be able to take a "nonbusiness
bad debt deduction" and treat my loss as a capital loss. If
I get even a single cent of recovery, there's no tax
deduction. Does this sound right?
Does anyone know of a way to ameliorate this problem?
Do I get a capital loss if I sell the loan for FMV? How
about if I donate to charity?
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Posted by Herb Smith on November 24, 2006, 2:08 am
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BobG wrote:
> Unfortunately, I'm owed a substantial amount as an unsecured
> creditor of an entity which is currently in Chapter 11.
> Even more unfortunately, the loan is a "non-business" debt.
>
> It turns out that the unsecured creditors are likely to get
> recoveries of 5-10% of their claim amounts.
>
> My understanding is that, if the loan turns out to be
> completely worthless, I would be able to take a "nonbusiness
> bad debt deduction" and treat my loss as a capital loss. If
> I get even a single cent of recovery, there's no tax
> deduction. Does this sound right?
>
> Does anyone know of a way to ameliorate this problem?
>
> Do I get a capital loss if I sell the loan for FMV?
Who is going to buy your worthless loan? For any amount?
How about if I donate to charity?
If the loan is worthless, that is the extent of your
"donation".
<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>
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Posted by Phil Marti on November 24, 2006, 2:08 am
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> Unfortunately, I'm owed a substantial amount as an unsecured
> creditor of an entity which is currently in Chapter 11.
> Even more unfortunately, the loan is a "non-business" debt.
>
> It turns out that the unsecured creditors are likely to get
> recoveries of 5-10% of their claim amounts.
>
> My understanding is that, if the loan turns out to be
> completely worthless, I would be able to take a "nonbusiness
> bad debt deduction" and treat my loss as a capital loss. If
> I get even a single cent of recovery, there's no tax
> deduction. Does this sound right?
You misunderstood. The portion of the debt wiped out by the
approved plan is a deductible bad debt.
--
Phil Marti
Clarksburg, MD
<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>
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Posted by dpb on November 24, 2006, 2:08 am
Please log in for more thread options BobG wrote:
> Unfortunately, I'm owed a substantial amount as an unsecured
> creditor of an entity which is currently in Chapter 11.
> Even more unfortunately, the loan is a "non-business" debt.
>
> It turns out that the unsecured creditors are likely to get
> recoveries of 5-10% of their claim amounts.
>
> My understanding is that, if the loan turns out to be
> completely worthless, I would be able to take a "nonbusiness
> bad debt deduction" and treat my loss as a capital loss. If
> I get even a single cent of recovery, there's no tax
> deduction. Does this sound right?
...
The way I read Pub 17 and 550 on non-business bad debts, the
"totally worthless" section applies only so long as there is
any reasonable possibility of any repayment. Once there is
a payout from the bankruptcy, my interpretation would be
that the note at that time really does become totally
worthless and the remaining balance can be deducted as a
short-term capital loss in the tax year that occurs. That,
of course, assumes that all the other provisions making it a
valid loan are met.
<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>
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Posted by Bill Brown on November 24, 2006, 2:08 am
Please log in for more thread options BobG wrote:
> Unfortunately, I'm owed a substantial amount as an unsecured
> creditor of an entity which is currently in Chapter 11.
> Even more unfortunately, the loan is a "non-business" debt.
>
> It turns out that the unsecured creditors are likely to get
> recoveries of 5-10% of their claim amounts.
>
> My understanding is that, if the loan turns out to be
> completely worthless, I would be able to take a "nonbusiness
> bad debt deduction" and treat my loss as a capital loss. If
> I get even a single cent of recovery, there's no tax
> deduction. Does this sound right?
You don't quite have the rule right. You cannot deduct a
non-business bad debt until the unpaid balance on the
receivable is worthless. Once you receive that 5-10% and the
bankruptcy referee says that's all there is going to be,
THEN you have a reportable short-term capital loss of the
unpaid portion.
<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>
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