Non-business bad debt deduction

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.

Reply to
Steve B
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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.

-----> real address on hobokeni or hobokenx

Reply to
Benjamin Yazersky CPA

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