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Discussion Forum Index --> Advanced Tax Questions --> Non-Business Bad Debt
Discussion Forum Index --> Tax Questions --> Non-Business Bad Debt
Skhyatt (talk|edits) said:
| 18 March 2008
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| I have a client who loaned her Son approx 60K for his business back in 2002. His business went bankrupt and she is asking me if she can write this off. As I read Section 166, I cannot see a reason why she can't. Am I possibly missing/forgetting something here?
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Michaelstar (talk|edits) said:
| 18 March 2008
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| Was this debt listed in the business bankruptcy? In order to be able to deduct this as a non-business bad debt (unless client is in the business of making loans this is non-business) there needed to be a legitimte loan. If it was listed in the bankruptcy that provides credence that this was a true loan and not a gift. Also, did your client ever receive and/or report interest income from payments made on the loan?
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Skhyatt (talk|edits) said:
| 18 March 2008
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| No it wasn't listed in the bankruptcy. She did mention that to me. There was a promissory note that they had drawn up by an attorney calling for annual interest payments to be made @ 7%. No payments were ever made. The note became fully due and payable on 12/31/06.
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Larry0434 (talk|edits) said:
| 18 March 2008
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| Gee. If it is not listed in the bankruptcy. She not stopped from collections.
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Death&Taxes (talk|edits) said:
| 18 March 2008
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| Was the business incorporated? The bankruptcy of a corporation, and its failure to be listed as a debt there, might have little to do with the personal debt if he has not filed for personal bankruptcy. Yet, I would think a little more has to be done than simply tearing up the note and writing it off.
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Skhyatt (talk|edits) said:
| 18 March 2008
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| My understanding is that even if you took the Son to court and obtained a judgment, that wouldn't exclude you from writing off the bad debt, if you can show it would still be uncollectible. Having said that, you guys have made good points. I need to ask the client a couple more questions. Thanks for the replies.
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RoyDaleOne (talk|edits) said:
| 18 March 2008
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| I think the IRS position is that if you don't act in a reasonable manner, (sue for your money) that with a relative you end up making a gift of the money loaned, because, you did not pursue any collection activity, a son and all that.
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Lancermc (talk|edits) said:
| 18 March 2008
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| Yes, if you are in the business of loaning money, then the customary collection measures would be taken. Has the client loaned money to anyone else? I'm concerned that there was no effort to collect "no payments were ever made", even though the note called for them. There are times when what you describe here sounds like a gift, and that is the presumption you need to overcome. You have either a business bad debt, a non business loss of capital, or a gift.
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Scottycoyote (talk|edits) said:
| 18 March 2008
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| i believe without making every effort to collect (court, judgement) it would be deemed a gift.
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