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Posted by Herb Smith on November 28, 2006, 9:22 pm
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Mike20878 wrote:
> dpb wrote:
>> ...
>>
>> 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.
> Since when is a non-business bad debt deductible? If no
> income was reported on a prior return for the receivable -
> which would be the case with a non-business (i.e. personal)
> receivable or loan - then there is no deduction when the
> receivable/loan becomes uncollectable. Am I off here?
I believe so. Your receivable is the loan note (which you
should have). No income is reported because you are a cash
basis taxpayer and no payments of interest were made. Once
the note is deemed uncollectable, either through bankruptcy,
insolvency or court order (Small Claims Court) you have a
loss claim. After all, you used after-tax money to make the
loan, didn't you? This is NOT the same as claiming a
deduction for unpaid salary (for which you never paid tax).
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Posted by BobG on December 5, 2006, 9:28 pm
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As a long time lurker in this newsgroup, I recognize that
someone who is asking for free advice can't complain if no
useful advice is forthcoming. I've seen some remarkable
expertise on display here, so I was optimistic that someone
had encountered this issue before.
Non-business bad debts are common, although ones with any
recovery are certainly less so.
I think there are two separate issues:
a) Whether I can take a deduction if I have a 90% loss
rather than 100%; and
b) if there is any way to mitigate the impact if the answer
to a) is no.
CAN I DEDUCT A PARTIAL LOSS:
Several people commented that I *could* take a deduction for
the remaining portion of my debt once the bankruptcy was
concluded and it was clear that no further recoveries were
forthcoming.
This was also my original impression. Unfortunately, I have
it on good authority that the IRS apparently takes a hard
line that for a *non-business* bad debt only a 100% loss
qualifies for any deduction.
I also googled this and came up with this case with that
holding:
http://www.projectposner.org/case/1996/87F3d197/
I don't like this answer, so I'd be happy with a different one.
Unfortunately, the guesses of newsgroup particants aren't
good authority. Unless someone comes up with a cite to a
case that supports the deduction please just assume that the
rule is as I stated.
IS THERE A WAY TO CREATE A DEDUCTION?:
If the rule is as I stated, is there action that I can take
to generate a tax benefit?
One thought was to sell the claim for cash. That would give
me a capital loss. Unfortunately, since the original loan
was not for investment purposes, the capital loss might not
be deductible at all. Any thoughts?
So far, the only response to that idea was some obviously
didn't bother to read my post since he asked:
"Who is going to buy your worthless loan? For any amount? "
As I said in the OP, the whole issue is that the loan
*isn't* worthless. If it were, I wouldn't be posting here.
I've subsequently researched the charitable donation idea
and it doesn't work since the donation is limited to FMV.
A new idea is to contribute the asset to a corporation I
control in return for stock. Although I wouldn't get an
immediate deduction, if my basis in the stock were my old
basis in the loan rather than FMV, that would be a benefit.
Any thoughts?
Moderator:
I do not recall any prior posts on this. You may want to
restate the actual situation. I will buy your bad debt for
a nickel cash, but I won't come to court for you unless my
expemses are piad up front. ALSO Buchanan v. US is a very
convoluted set of facts and circumstances.
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<< 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. >>
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Posted by Gil Faver on December 6, 2006, 2:04 am
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> As a long time lurker in this newsgroup, I recognize that
> someone who is asking for free advice can't complain if no
> useful advice is forthcoming. I've seen some remarkable
> expertise on display here, so I was optimistic that someone
> had encountered this issue before.
>
> Non-business bad debts are common, although ones with any
> recovery are certainly less so.
>
> I think there are two separate issues:
> a) Whether I can take a deduction if I have a 90% loss
> rather than 100%; and
> b) if there is any way to mitigate the impact if the answer
> to a) is no.
>
> CAN I DEDUCT A PARTIAL LOSS:
>
> Several people commented that I *could* take a deduction for
> the remaining portion of my debt once the bankruptcy was
> concluded and it was clear that no further recoveries were
> forthcoming.
>
> This was also my original impression. Unfortunately, I have
> it on good authority that the IRS apparently takes a hard
> line that for a *non-business* bad debt only a 100% loss
> qualifies for any deduction.
>
> I also googled this and came up with this case with that
> holding:
>
> http://www.projectposner.org/case/1996/87F3d197/
>
> I don't like this answer, so I'd be happy with a different one.
> Unfortunately, the guesses of newsgroup particants aren't
> good authority. Unless someone comes up with a cite to a
> case that supports the deduction please just assume that the
> rule is as I stated.
I read that case pretty quickly, but I think it is not
saying that you cannot have a deduction unless you loose the
entire amount of your loan. I think it simply says that the
taxpayers in that case were trying to take the deduction
before it was fair to say that the remaining amount of the
loan no longer had any possibility of recovery.
In other words, if you get some recovery from the bankruptcy
court, and then it is clear the remaining amount is
nonrecoverable, that is the amount you may claim as a tax
loss, and that is the year in which you can claim the tax
loss.
The Buchanans claimed a tax loss in 1986, and yet in subsequent years
received some payment on the loan.
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Posted by BobG on December 7, 2006, 8:30 am
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> I read that case pretty quickly, but I think it is not
> saying that you cannot have a deduction unless you loose the
> entire amount of your loan. I think it simply says that the
> taxpayers in that case were trying to take the deduction
> before it was fair to say that the remaining amount of the
> loan no longer had any possibility of recovery.
Unfortunately, you did read it too quickly. (Although there
was a bunch of unusual stuff going on.)
The tax issue wasn't WHICH year to claim the loss but
WHETHER they were EVER allowed to claim ANY loss given that
they had received a 23% recovery. They were denied ANY
deduction for ANY year. The bankruptcy had long since been
resolved by the time the tax issue was litigated so there
was no question that there would never be any additional
recoveries.
I'm really hoping that people can help to see if there's a
creative way to get some tax benefit from this loss rather
than continue to assert (without any proof) that it is
deductible.
According to Posner the relevant law was;
debt...was worthless on June 30, 1986, within the meaning of
the applicable provision of the Internal Revenue Code, if on
that date he had (1) no reasonable prospect, Kugel v. Ryan,
289 F.2d 329 (2d Cir. 1961); Oatman v. Commissioner, 45 Tax
Ct. Mem. Dec. (CCH) 214 (1982), of recovering (2) a
significant, though in the sense merely of nontrivial,
fraction of this amount. Rev. Rul. 71-577, supra (more than
"one or two cents on the dollar"); cf. Rodgers v.
Commissioner, 49 Tax Ct. Mem. Dec. (CCH) 1434 (1985).
Recovery of a trivial fraction of the debt would be unlikely
to cover the costs of collection, while a miraculous,
unforeseen, unforeseeable, totally unexpected recovery of
part or even the whole of a debt properly written off as
worthless years before...would be consistent with the debt's
having properly been deemed worthless in the year it was
written off. See Crown v. Commissioner, 77 T.C. 582, 598
(1981); Wolfson v. Commissioner, 45 Tax Ct. Mem. Dec. (CCH)
244 (1982).
The judgement (which restates the law) was:
Neither condition for the deduction of a nonbusiness bad
debt - a merely trivial repayment, or a miraculous repayment
- was satisfied here (a third condition, that the debt be
bona fide, we are assuming is satisfied); and so clear is
this that the government was entitled to summary judgment.
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<< that may be imposed upon the taxpayer. >>
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Posted by Stuart A. Bronstein on December 8, 2006, 2:26 am
Please log in for more thread options nospam@nospam.org (BobG) wrote:
> The tax issue wasn't WHICH year to claim the loss but
> WHETHER they were EVER allowed to claim ANY loss given that
> they had received a 23% recovery. They were denied ANY
> deduction for ANY year. The bankruptcy had long since been
> resolved by the time the tax issue was litigated so there
> was no question that there would never be any additional
> recoveries.
The statute and regulations only talk of a debt which
becomes wholly worthless in any year. To me that means that
it didn't have to be wholly and completely worthless - just
the balance that was due in the year it became worthless.
So I'd interpret that to mean that yes, you can take the
loss on a non-business bad debt in the year the balance
becomes worthless, in the amount that it becomes worthless.
I did a quick review of cases but didn't find much. But
here's one case that is an indication that the IRS takes the
position I have determined to be correct.
Stahl v. United States, 441 F.2d 999 (D.C. Cir. 1970). In
that case the taxpayer either invested in or lent (the
structure of the transaction makes it unclear which it was)
money to a securities firm that subsequently went bankrupt.
The total loss was $127,000 but in the bankruptcy she
expected a distribution of about $40,000.
The issue was whether it was a business or non-business bad
debt. The court observed,
"The taxpayer and the Government agree that the loss is
deductible in some manner at some point in time; the dispute
is over the proper characterization of the loss and hence
its proper tax treatment."
So even though the debt wasn't 100% worthless, a portion of
the debt became completely worthless. And the IRS agreed
she was entitled to a deduction of the worthless amount.
Stu
<< ======================================================= >>
<< 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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