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Nonbusiness Bad Debt Deduction Denied

by IRS HelpDirectory on 10/16/2012 - 12:43 pm

The IRS recently denied a nonbusiness bad debt deduction for a taxpayer on a loan that went bad.  The issue was appealed and taken to Tax Court.  The Court indicated that there is no standard test to determine worthlessness.  It must be based on the facts and circumstances.  Generally, the year of worthlessness must be fixed by identifiable events establishing reasonable grounds for the creditor to abandon any prospect of recovery.  A creditor’s decision must be based on the exercise of sound business judgment that is made with information that is as complete as what is reasonably possible to obtain.  A debt is not going to be found worthless just because it is difficult, or uncomfortable to collect.  The Court found that the taxpayer’s decision to not enforce the collection was for personal rather than financial reasons, which denies him the deduction at dispute.


TC Summary Opinion 2012-44