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Posted by Benjamin Yazersky CPA on January 16, 2008, 9:03 am
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> 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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