Printer Friendly

Court Denies Bad-Debt Business Deduction.

* A taxpayer formed a corporation to acquire and rehabilitate financially distressed companies. He lent the corporation millions of dollars, but eventually it became financially distressed. On his personal income tax return, the taxpayer deducted the unpaid loans as a business bad debt. The IRS denied the deduction. It argued the taxpayer was not in the business of lending money. The taxpayer countered that the loans related to his business of "buying, rehabilitating and reselling corporations."

The circuit court agreed with the IRS, finding that the taxpayer was merely an investor who provided working capital to the corporation. There was no evidence, the court said, that the taxpayer actively managed the corporation or provided any services to the distressed companies. Therefore, the court denied the company's bad debt deduction and held the loans were nonbusiness debts (Commissioner v. Melvyn L. Bell, 8th Cir.,1-5-00).

--Michael Lynch, CPA, Esq., professor of tax accounting at Bryant College, Smithfield, Rhode Island.
COPYRIGHT 2000 American Institute of CPA's
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2000, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
Printer friendly Cite/link Email Feedback
Author:Lynch, Michael
Publication:Journal of Accountancy
Date:Apr 1, 2000
Previous Article:Lump Sum Payment Not Tax Exempt.
Next Article:Calculating insolvency.

Related Articles
Thrift NOL carrybacks may be in jeopardy.
Family loans and loan guarantees.
Tax Court upholds 1978 regulations on calculating the bad debt deduction.
Tax enforcement issue causing stir.
When can losses be deducted against S corporation basis?
Capital loss vs. ordinary loss.
Interest deductions for bankrupt corporations.
Repayments of business debt after business ceases.
When to write off bad debt.
The bad-debt reserve: opportunity for partial current deduction.

Terms of use | Privacy policy | Copyright © 2020 Farlex, Inc. | Feedback | For webmasters