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Posted by Drew Edmundson on December 7, 2006, 8:30 am
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ospam@nospam.org (BobG) wrote:
> 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.
You are misunderstanding the rule. It is true that a
nonbusiness bad debt cannot be deducted until it is wholly
worthless - see Code Section 166. But wholly worthless does
not mean you can't have received any payments. It means the
remaining balance is wholly worthless. BNA cites to these
cases - Pierson v. Comr., 27 T.C. 330 (1956); Feltex Corp.
v. Comr., T.C. Memo (Apr. 9, 1953); Smith v. Comr., T.C.
Memo (Feb. 12, 1953); Faegeol v. Comr., T.C. Memo 1961-178.
I have not read them so YMMV.
For certain business bad debts the part that is worthless
can be written off and the collectible balance is not. This
is a partially worthless debt.
---
Drew Edmundson, CPA
Cary, NC
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