Federal Tax

Bad Debts (Portfolio 538)

  • Bad Debts discusses the problems that may arise in taking full advantage of debts that become worthless or partially worthless.

Description

Bloomberg Tax Portfolio, Bad Debts, No. 538, discusses the problems that may arise in taking full advantage of debts that become worthless or partially worthless. It includes a complete discussion of the Internal Revenue Code provisions that govern the deduction of worthless debts and the application of these provisions to normally recurring situations. In addition, IRS rulings and court decisions pertaining to this subject are examined.

The Portfolio also addresses problems which often arise in connection with bad debts, including: (1) whether a debt was worthless when incurred and, hence, not deductible under §166; (2) the application of §166 to obligations that arise by operation of law and to executory contracts; (3) status as debt, including the debt-equity issue in the §166 context; (4) the distinction between bad debts and losses; (5) determining when §165(g) (worthless securities) and §1271(a) (retirement or sale or exchange of debt instruments) apply instead of §166; (6) factors which establish worthlessness, and the distribution of the burden of proving worthlessness; (7) the consequences of repossessions and foreclosures; (8) the application of the tax benefit rule to recoveries of previously deducted bad debts; and (9) the application of the seven-year statute of limitations for refund claims on bad debts.

Table of Contents

I. Overview
II. Legislative History
III. Existence and Nature of Debt
IV. Business Versus Nonbusiness Bad Debts
V. Guarantee Obligations
VI. Worthlessness of a Debt
VII. Claiming the Deductions
VIII. Methods of Claiming the Deduction
IX. Recovery of Bad Debts: § 111
X. Tax Consequences to the Debtor of Discharge of Indebtedness

John McCoy
John McCoy
Partner (Retired)
Arent Fox, LLP
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