The Tax Court held that a taxpayer properly took a deduction for a business bad debt
Careful tax planning that maximizes the business bad debt
deduction can help minimize the taxpayer's overall economic loss.
On the other hand, if the dominant motive behind the loan or loan guarantee was to protect the shareholder's status as an employee, the loss is a business bad debt
, which is fully deductible when the debt becomes worthless.
A deduction for the partial worthlessness of a business bad debt
is also permitted.
Cooper did not report the loan as a bad debt in the amount of $750,000 on his original return but included it as a business bad debt
deduction in an amended return he filed in 2010.
On his personal income tax return, the taxpayer deducted the unpaid loans as a business bad debt
The shareholder can claim a business bad debt
loss when the loss from a worthless debt is incurred in the shareholder's trade or business (Sec.
He deducted the loss as an ordinary loss under IRC section 165(a) and (c)(1) and as a business bad debt
under IRC section 166(a).
Whether a taxpayer can claim a business bad debt
or a nonbusiness bad debt is particularly important and can lead to a different result on the tax return.
If the note is issued by a noncorporate, nongovernmental entity, and it is a business bad debt
for a noncorporate holder, the loan is not a security under Sec.
A business bad debt
arises from a debt created or acquired in connection with a taxpayer's trade or business, or from the worthlessness of a debt incurred in the taxpayer's trade or business.
The taxpayer claimed business bad debt
losses on his personal income tax returns (Forms 1040, U.