reg. 1.166–2(d)(1). §§1.166–2, 1.585–1. (Secs.
166, 585; ’86 Code.)
Rev. Rul. 79-214, 1979-2 C.B. 90.
46.5 Banks; charged off; instructions of
national bank examiner. Where a national bank
charges off a debt in obedience to a written report
of a national bank examiner, or in obedience to an
examiner’s oral instructions which are confirmed
in writing, the debt will be treated as properly
charged off in compliance with the “specific
order” of a “supervisory authority”. §1.166–2.
(Sec. 166, ’86 Code.)
Rev. Rul. 66-335, 1966-2 C.B. 58.
46.6 Banks; charged off; instructions of
supervisory federal authority. A bank charged
off the entire outstanding balance of a loan in
accordance with a specific order by the bank’s
supervisory federal authority and deducted the
balance on that year’s tax return as a bad debt. In
a later year, the authority reconsidered its charge
off action and took the position that only twothirds of the balance should be classified as a loss.
The bank’s bad debt deduction was proper and the
later action by the authority does not constitute a
recovery. §§1.111-1, 1.166-2. (Secs. 111, 166;
’86 Code.)
Rev. Rul. 80-180, 1980-2 C.B. 66.
46.7 Banks; charged off; presumption of
worthlessness. For purposes of determining the
existence of a bad debt deduction. reg.
1.166–2(d)(1) does not create a conclusive presumption of worthlessness when the amount that
the Comptrol Currency requires to be written
down and charged off is not based on bad debt criteria under section 166. §1.166–2. (Sec. 166, ’86
Code.)
Rev. Rul. 84-95, 1984-2 C.B. 53.
46.8 Banks; deposits in other banks. Losses
incurred by banks, other than domestic building
and loan associations, mutual savings or cooperative banks, with respect to deposits made by them
in other banks may be deducted only under the
Bad debts
specific charge-off method. Rev. Rul. 65–314
(See also: Banks)
superseded. §1.166–1. (Sec. 166, ’86 Code.)
Rev. Rul. 68-3, 1968-1 C.B. 75.
46.1 Accounting change; specific charge-off
46.9
Banks; express determination letter.
to reserve method. Procedures are provided for
taxpayers using an accrual method of accounting This procedure provides a uniform express deterto change their method of accounting for bad debts mination letter for a bank to obtain from its regulafrom the specific charge-off method to the reserve tory authority for purposes of the conformity elecmethod. Rev. Proc. 82–19 clarified, modified and tion of reg. 1.166-1(d)(3). Rev. Proc. 92–18
superseded. §§1.166-4 1.44-1, 1.481-1, modified and superseded. §1.166–2. (Sec.
1.585-2, 1.586-2, 1.593-2. (Sec. 601.204, S.P.R.; 601.105, S.P.R.; Sec. 166, ’86 Code.)
Rev. Proc. 92-84, 1992–2 C.B. 489.
Secs. 166, 446, 585, 586, 593, ’86 Code.)
Rev. Proc. 85–8, 1985–1 C.B. 495.
46.10 Banks; property sold at foreclosure
sale. A bank made loans secured by real proper46.2 Accounting change; specific charge-off ties. The borrowers defaulted and the bank
to reserve method. A taxpayer who timely files acquired the properties at foreclosure sales by bidForm 3115 to change its accounting method for ding them in at prices below the unpaid mortgages.
bad debts from the direct charge-off method to the Held, for purposes of determining gain or loss
reserve method under the provisions of Rev. Proc. under reg. 1.166-6, the fair market values of the
64–51, but fails to spread the initial reserve over properties equal the bid prices. The bank properly
the required period, is deemed to have initiated a calculated the bad debt deduction resulting from
change of accounting method without the Com- the foreclosures. § 1.166-6. (Sec. 166, ’86 Code.)
missioner’s consent and may not change to the
Community Bank, 62 T.C. 503; Acq. issue 1,
reserve method for the year of attempted change Acq. in result issue 2; 1975-1 C.B. 1.
or the following year upon audit of the returns for 46.11 Banks; uncollected interest; charged
those years. § 1.446–1. (Sec. 446, ’86 Code.)
off; Federal Home Loan Bank Board regulaRev. Rul. 78-237, 1978-1 C.B. 135.
tions. Earned but uncollected interest that was
accrued and reported in income by a sav46.3 Banks; allocated transfer risk reserve. properly
This ruling informs banks of the treatment of ings and loan association in 1978 and that was
off in 1979 in accordance with Federal
amounts allocated to allocated transfer risk charged
reserves for purposes of the conclusive presump- Home Loan Bank Board regulations is conclution of worthlessness under reg. 1.166-2(d)(3). sively presumed worthless under reg. 1.166-2(d)
Rev. Rul. 84–94 amplified and superseded. if claimed as a bad debt deduction for 1979. Such
interest, when due after 1978, is not required to be
§§1.166-2, 1.585-2. (Secs. 166, 585; ’86 Code.)
accrued under section 451 provided no bad debt
Rev. Rul. 92-14, 1992–1 C.B. 93.
deduction is claimed for the interest. §§1.166-2,
1.451-1. (Secs. 166, 451; ’86 Code.)
46.4 Banks; charged off; classified by FDIC
Rev. Rul. 81-18, 1981-1 C.B. 295.
examiner. Loans classified as losses by FDIC
examiners and charged off by a commercial bank 46.12 Building and loan association;
are conclusively presumed to be worthless under reserves; capital stock account. The permanent
Bad debts
nonwithdrawable capital stock account of a
domestic building and loan association is not a
reserve for bad debts. Current earnings credited to
such account, by way of stock dividends or otherwise, are not credited to a reserve for bad debts,
and, therefore, are not deductible from gross
income. §1.593–7. (Sec. 593, ’86 Code.)
Rev. Rul. 66-82, 1966-1 C.B. 155.
debt deductible only as a capital loss. (Secs. 23(e),
25(k), ’39 Code; Secs. 165, 166, ’86 Code.)
J. C. Bradford, 22 T.C. 1057, Acq., 1955–2 C.B.
4.
ited partnership formed to manufacture and sell
prefabricated houses. Loans made by him for use
in the business became worthless and were
deducted as business bad debts. Held, the loans
were proximately related to the partner’s business
46.19 Business; reserve method; election. A and were deductible as business, rather than nontaxpayer may adopt the reserve method of business, bad debts. (Sec. 23(k), ’39 Code; Sec.
accounting for bad debts for the first taxable year 166, ’86 Code.)
in which he is entitled to a bad debt deduction
George A. Butler, 36 T.C. 1097, Acq., 1962-1
46.13 Business; advances to clients. Taxpayer,
without prior permission of the Commissioner. C.B. 3.
a minority shareholder in the client’s business, §1.166-1. (Sec. 166, ’86 Code.)
46.26 Business v. nonbusiness; payments for
Rev. Rul. 69-548, 1969-2 C.B. 32.
loaned funds to the client that later became insolinsolvent corporation. A partnership, engaged in
vent. Held, the loans were related to the taxpayer’s
advertising business and the losses thereon were 46.20 Business; stockholder’s advances to the construction business, owned stock in a corpodeductible as business bad debts. The loans were related corporation. Advances to a corporation, ration with which it contracted to build houses,
made to retain the client, hold other clients who formed by the taxpayer-shareholder to provide guaranteeing lien-free completion and agreeing to
advertised in the insolvent’s publication, and to bananas for his grocery business, were proxi- purchase bank loans made the corporation on each
maintain the taxpayer’s credit and reputation. mately related to his business and deductible as lot if not paid at maturity. Costs exceeded the loans
business rather than nonbusiness bad debts; and the partnership advanced funds to the insol(Sec. 23(k), ’39 Code; Sec. 166, ’86 Code.)
advances to another corporation, of which tax- vent corporation to pay the excess costs. Held, the
Stuart Bart, 21 T.C. 880, Acq., 1954-1 C.B. 3.
payer was majority shareholder, prior to a decision advances were not capital contributions but were
46.14 Business; advances to mining corpora- to liquidate due to financial difficulties, were deductible either as business expenses or business
tion. The taxpayer made several advances in the deductible business bad debts and not contribu- bad debts. (Secs. 162, 166; ’86 Code.)
Ray A. Myers, 42 T.C. 195, Acq. in result,
form of loans and received interest bearing notes tions to capital. (Sec. 23(g), ’39 Code; Sec. 165,
1964-2 C.B. 6.
and, as a bonus, stock in the debtor corporation ’86 Code.)
from its parent. When repayment became doubtJ. T. Dorminey, 26 T.C. 940, Acq., 1957-1 C.B.
46.27 Child support payments. A taxpayer is
ful, the taxpayer surrendered its stock, partially 4 .
not entitled to a bad debt deduction for the amount
recovered the advances and claimed a deduction
for the losses. Held, the advances were loans, not 46.21 Business v. nonbusiness; advances to of the taxpayer’s own payment in support of the
capital contributions, and a worthless debt deduc- controlled corporation. Losses from worthless taxpayer’s children caused by an arrearage in
tion was allowable. (Sec. 23(k), ’39 Code.; Sec. promissory notes received by a writer as evidence court-ordered child support payments owed by a
of advances he made to a publishing company that former spouse. §1.166-1. (Sec. 166, ’86 Code.)
166, ’86 Code.)
Rev. Rul. 93-27, 1993-1 C.B. 32.
National Lead Co., 23 T.C. 988, Acq., 1965-2 he had established and operated, in part, to provide
a ready outlet for his own works and enhance his 46.28 Collateral declined in value; debtor
C.B. 6.
reputation, were deductible as business bad debts. going concern. No bad debt deduction is allow46.15 Business; guarantee payments. A home (Sec. 23(k), ’39 Code; Sec. 166, ’86 Code.)
to an individual for the taxable year in which
construction partnership, formed by a real estate
Wilfred J. Funk, 35 T.C. 42, Acq., 1961-2 C.B. able
a debtor is a going concern with assets that could
partnership and a partner-corporation, purchased 4.
be reached to satisfy a part of the debt, even though
land from the home construction partnership’s
property on which an individual had a third
wholly owned corporation. Loans to the corpora- 46.22 Business v. nonbusiness; advances to real
mortgage securing a note that evidenced the
tion were guaranteed by the real estate partnership insolvent corporation. The taxpayer corpora- trust
indebtedness had declined in value until the
which paid the notes upon the corporation’s tion’s partnership made secured loans to an unre- amount
that would be received in the event of forelated corporation which was to furnish the partnerdefault. Held, the loan guarantees were directly
would not be sufficient to reach any part of
related to the real estate partnership’s business, ship new business with third parties. Unbeknown closure
debt. A.R.R. 365 superseded. §1.166-2. (Sec.
wholly apart from its interest as a stockholder to the taxpayer, the corporation was insolvent. the
166, ’86 Code.)
through the construction partnership, and the Held, the loans were bona fide, proximately
Rev. Rul. 71–37, 1971-1 C.B. 78.
losses resulting from the guarantee were a busi- related to the taxpayer’s business, and were
ness bad debt. (Sec. 166, ’86 Code.)
deductible as business bad debts. (Sec. 23(k), ’39 46.29 Contract to merge creditor and stock
Louis Lesser, 42 T.C. 688, Acq., 1966-2 C.B. 5. Code; Sec. 166, ’86 Code.)
interest in a corporation; death prior to
S. E. Maitland Brenhouse, 37 T.C. 326, Acq., completion. A taxpayer who had entered into a
46.16 Business; loan guaranteed; conditionof 1962-2 C.B. 4.
contract to merge his creditor interest in a corporaemployment. An employee who, as a condition of
tion with his stock interest died before the contract
his employment, guaranteed a loan obtained by an 46.23 Business v. nonbusiness; advances to was carried out. Held, following sale of taxpayer’s
officer of his corporate employer is entitled to a son-in-law; guaranteed debt obligations. Tax- entire interest in the corporation, a bad debt deducbusiness bad debt deduction when the loan payers’ son-in-law was required to provide a bond tion was allowable on the final return for his credibecomes worthless in his hands. §1.166-1. (Sec. to assure faithful and prompt accounting and pay- tor interest. (Sec. 23(k), ’39 Code; Sec. 166, ’86
ment of all funds he received as operator of a live- Code.)
166, ’86 Code.)
stock auction barn. In addition to agreeing to
Rev. Rul. 71-561, 1971-2 C.B. 128.
W. D. Bartlett, 22 T.C. 1228, Acq., 1955-2 C.B.
indemnify the bonding company for payments it 4.
46.17 Business; loans to corporation; share- might be required to make under the bond, the taxholder sole proprietor. Taxpayer operated a road payers advanced the son-in-law $8,500 which he 46.30 Cooperative’s allocation certificates.
construction company as a sole proprietorship and was unable to repay. The business failed and the Where an allocation in document form is made by
was required to submit surety bonds to obtain con- taxpayers, rather than indemnifying both surety a cooperative to its patrons, the type of instrument
tracts. In mid-1965 he became the sole share- payments and fees, advanced funds directly in liq- will indicate whether a loss due to worthlessness,
holder of a corporation engaged in oil well servic- uidation of claims against the business.Held, the upon dissolution or insolvency of the cooperative
ing. The corporation ceased operating in $8,500 advance was deductible as a nonbusiness which issued it, should be treated as a bad debt or
December 1965, but in January 1966 taxpayer debt loss; the claims advance was deductible as a a capital loss. §§39.23(g)-1, 39.23 (k)-1. (Secs.
advanced funds from his road construction busi- business debt loss. (Sec. 166, ’86 Code.)
23(g), 23(k), ’39 Code; Secs. 165, 166, ’86 Code.)
ness to enable the corporation to pay off its crediGiffin Andrew, 54 T.C. 239, Acq., 1970-2 C.B.
Rev. Rul. 55–66, 1955-1 C.B. 282.
tors. Held, the taxpayer’s advance was motivated XVIII.
46.31
Dishonored note; cause of action
to protect his credit rating for bonding purposes,
was proximately related to his trade or business, 46.24 Business v. nonbusiness; guaranty pay- against seller. A taxpayer purchased an unsecured
and is deductible as a business bad debt. (Sec. 166, ments. The taxpayer guaranteed a bank loan to a bearer promissory note. On the due date, the note
corporation he had participated in organizing and was presented for payment, but was dishonored.
’86 Code.)
Oddee Smith, 60T.C. 316, Acq., 1973-2 C.B. 3. deducted a nonbusiness bad debt loss when the Legal action to enforce payment on the note
corporation failed. Held, the taxpayer was would, in all probability, not result in satisfaction
46.18 Business; payment for discharge from engaged in organizing, financing, and operating of execution on a judgment. The taxpayer has a
liability as endorser; subrogation. Taxpayer, in corporations and business ventures and the guar- cause of action against the seller that may require
the business of making speculative loans, made anty payment constituted a business bad debt, not the seller to return the purchase price of the note.
The taxpayer was entitled to a bad debt deduction
part payment to a bank to release himself from a capital loss. (Sec. 166, ’86 Code.)
liability as an endorser on a note he executed for
in the year the note was dishonored. If amounts are
Glenn E. Alexander, 34 T.C. 758, Acq., 1961-1
recovered from the seller, they will be ordinary
a bank loan. State law prevented subrogation since C.B. 3.
income. §§1.61–1, 1.66-2. (Secs. 61, 166; ’86
the bank, which still held the note, had not been
paid in full. Held, the payment as endorser was a 46.25 Business v. nonbusiness; partner’s Code.)
Rev. Rul. 80-24, 1980-1 C.B. 47.
deductible business expense, not a worthless bad loans. A practicing attorney participated in a lim-
Bad debts
46.32 Election for banks to establish a conclusive presumption of worthlessness for bad
debts. This notice provides relief to banks that on
or before December 1, 1993, filed or files a federal
income tax return for a year ending on or after
December 31, 1991, but did not make an election
to use a method of accounting that establishes a
conclusive presumption of worthlessness.
Notice 93-50, 1993-2 C.B.
46.33 Foreign expropriation losses; domestic
corporations. The tax treatment of expropriations
by foreign countries of properties in such countries owned by domestic corporations is
explained. Clarified by Rev. Rul. 75–501.
§§1.165-1, 1.166-1, 1.172-11, 1.1231-1. (Sec.
165, 166, 172, 1231; ’86 Code.)
Rev. Rul. 72-1, 1972–1 C.B. 52.
46.34 Guarantor of corporate obligation.
Where a controlling stockholder guarantees the
payment of his corporation’s promissory notes,
executed in obtaining bank loans, the loss which
he sustains upon the corporation’s insolvency and
his payment of the notes is deductible as a shortterm capital loss for nonbusiness bad debt, not as
an ordinary nonbusiness loss. §39.23(k)-6. (Sec.
23(k), ’39 Code; Sec. 166, ’86 Code.)
Putman, 352 U.S. 82, Ct. D. 1800, 1957-1 C.B.
501.
46.35 Guarantor of corporate obligation. A
loss incurred by an individual as guarantor from
the worthlessness of an insolvent corporation’s
debts is deductible only as a bad debt, not as a loss
sustained in the transaction entered into for profit.
§§1.165-1, 1.166-8. (Secs. 165, 166; ’86 Code.)
Rev. Rul. 60-48, 1960-1 C.B. 112; Abraham
Greenspon, 8 T.C. 431, Nonacq., 1960-1 C.B. 7.
46.36 Guarantor of defunct corporation. A
corporation’s manager gave his personal note as
security for a debt of the corporation. Six years
after the corporation’s financial collapse, he
settled the debt and took a bad debt deduction.
Held, the nonbusiness bad debt deduction was
allowed. (Sec. 23(k), ’39 Code; Sec. 166, ’86
Code.)
George Aftergood, 21 T.C. 60, Acq., 1954-1
C.B. 3.
ment accounts receivable and the basis is the
repurchase price. Accounts which have been or
are to be sold should not be considered in computing additions to the reserve for bad debts. Commitment fees incurred do not constitute interest but
are deductible as ordinary and necessary business
expenses. §§39.23(a)–1, 39.23(b)–1, 39.23(f)-1,
39.113(a)-2. 39.117(a)-1. (Secs. 23(a), 23(b),
23(f), 113(a), 117(a), '39 Code; Secs. 162, 163,
165, 1012, 1221, ’86 Code.)
Rev. Rul. 54-43, 1954-1 C.B. 119.
46.40 Interest accrued on uncollectible loan.
An accrual method taxpayer must include in gross
income for the taxable year in which a loan payable to the taxpayer becomes uncollectible the
interest that accrues on the loan for the part of that
year prior to the time the loan becomes uncollectible. If the accrued interest subsequently becomes
uncollectible, the taxpayer may be entitled to a bad
debt deduction under section 166. §§1.61-1,
1.166-1, 1.451-1. (Secs. 61, 166, 451; ’86 Code.)
Rev. Rul. 80-361, 1980-2 C.B. 164.
46.41 Land contracts purchased by finance
company; cancellation. Taxpayer who purchased
real estate contracts, made between a vendor of
land and individual purchasers, and took possession of the land upon default and the resultant contract cancellation is allowed a bad debt deduction
if the property value was less than the unrecovered
costs. §§1.61–1, 1.166–1, 1.453-6, 1.1038–1
(Secs. 61, 166, 453, 1038; ’86 Code.)
Rev. Rul. 68–523, 1968-2 C.B. 82.
46.42 Liquidation of subsidiary. A merger of
a wholly owned subsidiary into its parent at a time
when the subsidiary’s indebtedness to the parent
exceeded the fair market value of the subsidiary’s
assets does not qualify as a nontaxable distribution
or tax-free reorganization, since no part of the
transfer is attributable to the stock interest of the
parent. The parent is entitled to a bad debt deduction. Amplified to provide that where a parent continues to operate the subsidiary’s business as a
branch it is entitled to the bad debt deduction and,
in addition, is entitled to a deduction for loss on
worthless stock of the subsidiary. §§1.165–5,
1.166-2, 1.332-2, 1.368-2. (Secs. 165, 166, 332,
368; ’86 Code.)
Rev. Rul. 59-296, 1959-2 C.B. 87; Rev. Rul.
70-489, 1970-2 C.B. 53.
46.37 Guarantor-shareholder; profit share in
management contract. Taxpayer, a member of a
partnership which for a percentage of premium 46.43 Loan to corporation and guaranty payincome, contracted to manage the underwriting ment. The taxpayer, engaged in manufacturing
aspects of an insurance company of which the tax- springs as a sole proprietor, made loans and guarpayer was a shareholder and director, guaranteed anteed obligations of a corporation organized to
bank loans to the insurance company and made provide fabrics to customers of his spring busiguaranty payments when the company became ness. Held, the taxpayer was entitled to a business
insolvent. Held, the managerial services were part bad debt deduction rather than a capital loss for
of a separate business and the guaranty of notes claims against the corporation resulting from the
constituted an extension of the credit to the insur- uncollectible loans and guaranty payments, even
ance company whose success would have though subsequent to writing-off the claims, he
increased the taxpayer’s profits under the contract; received a token payment for such claims from a
therefore, the guaranty payments were deductible prospective purchaser of the corporation. (Secs.
23(g), 23(k), ’39 Code; Sec. 165, 166, ’86 Code.)
as business bad debts. (Sec. 166, ’86 Code.)
Mac Levine, 31 T.C. 1121, Acq., 1959-2 C.B. 5.
R. B. Cowden, 34 T.C. 819, Acq., 1961-1 C.B.
4.
46.44 Merchandise purchased for a corpora-
46.38 Indemnifying payments; loan to sever tion by an individual. Taxpayer-president
obtained merchandise for sale by his corporation.
business relationships. Indemnifying payments
made by a guarantor of a loan to his partner in a The purchases were invoiced to the taxpayer but
partnership are not deductible where the proceeds paid by the corporation until it became insolvent.
of such loan were used to purchase the guarantor’s The supplier obtained a judgment against the taxpartnership interest. The decision in Max Axelrod payer for the amounts owed. Held, the judgment
will not be followed. §1.166–8. (Sec. 166, ’86 and related cost amounts were deductible as a loss
not a non-business bad debt. (Secs. 165, 166; ’86
Code.)
Rev. Rul. 68–616, 1968-2 C.B. 89.
Code.)
Harry Horner, 35 T.C. 231, Acq., 1961-1 C.B.
46.39 Installment accounts sold on commit4.
ment basis. A merchant who sells his installment
accounts receivable to a bank at a discount under 46.45 Nonbusiness; advances to controlled
a commitment agreement may sustain an ordinary corporation. The activities of an individual in
loss. Defaulted accounts repurchased at their connection with his organization and management
unpaid balance again become part of his install- of several corporations, in which he held control-
ling interest, do not, of themselves, constitute a
trade or business, even though he devoted his full
time and energies to them, particularly since there
was no intention of developing the corporations as
going businesses for sale to customers in the ordinary course of affairs. Therefore, a loss resulting
from advances which he made to one of such corporations is not a business bad debt. §§39.23(k)-4,
1.166-5. (Sec. 23(k), ’39 Code; Sec. 166, ’86
Code.)
Whipple, 373 U.S. 193, Ct. D. 1882, 1963-2
C.B. 641.
46.46 Nonbusiness; advances to symphony
orchestra. Taxpayer advanced cash through his
business to the symphony orchestra for operating
expenses during his 3 year tenure as president.
After an unsuccessful fund raising campaign to
repay the taxpayer and provide for operational
costs, the taxpayer wrote the advances off as nonbusiness bad debts. Held, the advances constituted
loans, not contributions, and were deductible in
the year of the unsuccessful campaign. (Sec.
23(k), ’39 Code; Sec. 166, ’86 Code.)
Dallas Rupe & Son, 20 T.C. 363, Acq., 1953-2
C.B. 6.
46.47 Nonbusiness; deposits; embezzlement
causing insolvency. The loss incurred by a depositor as a result of a bank being declared insolvent
due to embezzlement by a bank employee is a nonbusiness bad debt loss rather than a theft loss. The
loss is deductible only as a short term capital loss
and only when there is no longer a likelihood of
recovery. §§1.165–8, 1.166–5. (Secs. 165, 166;
’86 Code.)
Rev. Rul. 77–383, 1977–2 C.B. 66.
46.48 Nonbusiness;
loan
evidence of
destroyed by fire. Documentary evidence to substantiate a loan made by the taxpayer was
destroyed and the borrower disappeared after the
loan was made. Held taxpayer’s testimony that a
loan was made, that the debt had value when
created, and that the debt became worthless in the
year claimed was accepted and a short-term capital loss deduction of the loan amount was allowed.
(Sec. 166, ’86 Code.)
I. Hal Millsap, Jr., 46 T.C. 751, Acq., 1967-1
C.B. 2.
46.49 Nonbusiness; home mortgage loan;
default by subsequent purchaser. A nonbusiness
bad debt deduction is allowable with respect to an
uncollectible claim for amounts paid by a taxpayer
to the V.A. and to a mortgagee arising from the
settlement of a home mortgage loan initiated by
the taxpayer with the V.A. and assumed by a subsequent purchaser who defaulted on the loan.
§ 1.166-5. (Sec. 166, ’86 Code.)
Rev. Rul. 70-222, 1970-1 C.B. 40.
46.50 Nonbusiness; involuntary debt by subrogation. Mechanics and materialmen liens, filed
against the house which the taxpayers had
engaged a builder to erect under a fixed-cost contract, were paid by the taxpayers to prevent foreclosure when the builder became insolvent.Held,
the payments for the liens were deductible as nonbusiness bad debts. (Sec. 23(k), ’39 Code; Sec.
166, ’86 Code.)
Haywood P. Martin, 38 T.C. 188, Acq., 1963-1
C.B. 4.
46.51 Nonbusiness; legatee; unrecoverable
tax attributable to included insurance proceeds. A legatee whose share of the estate bears
the burden of estate tax attributable to insurance
proceeds that the executor is unable to recover
from an insurance beneficiary is entitled to a bad
debt deduction under section 166(d)(1). However,
no deduction is allowable under section 2054 to
the estate by reason of the executor’s inability to
recover the amount of such tax from the beneficiary. §1.166-1. (Secs, 166, 2054; ’86 Code.)
Rev. Rul. 69–411, 1969-2 C.B. 177.
Bad debts
46.52 Nonbusiness; loan to family corporation. The taxpayer loaned $92,350 to a corporation controlled by her then husband, for which she
took demand notes. In 1944 she was divorced from
her husband and received $2,500 in settlement of
the notes from the corporation, which had become
insolvent prior to that year. Held, the taxpayer sustained a nonbusiness bad debt loss in 1944. (Sec.
23(k), ’39 Code; Sec. 166, ’86 Code.)
Miriam C. Pierson, 27 T.C. 330, Acq., 1957-1
C.B. 4.
sents an equity interest of the borrower in the
association. §1.166-4. (Sec. 166, ’86 Code.)
Rev. Rul. 70-138, 1970-1 C.B. 39.
46.60 Recovery; sale of property acquired in
partial satisfaction. A creditor who sells property
acquired in partial satisfaction of an indebtedness
cannot exclude from gross income the gain from
such sale as representing income attributable to a
recovery of the unsatisfied portion of the original
indebtedness which he previously deducted without tax benefit. §1.111-1. (Sec. 111, ’86 Code.)
Rev. Rul. 66-320, 1966-2 C.B. 37.
46.53 Nonbusiness; loan to son-in-law. Taxpayer, as surety for his minor son-in-law’s loan,
paid the balance due the bank after the son-in-law
separated from his wife, defaulted on the loan pay- 46.61 Recovery; worthless stock; charitable
ments, and then disappeared. Held, no gift was donation. When a guarantor of obligations held
intended and the amount paid by the taxpayer was by the taxpayer entered bankruptcy proceedings,
deductible as a nonbusiness bad debt. (Sec. 166, taxpayer received stock in the face amount of its
claim and in complete satisfaction of it. Taxpayer
’86 Code.)
determined the stock to be worthless and charged
Morris Cohen, 39 T.C. 886, Acq., 1974-1 C.B.
the face amount to its bad debt reserve, resulting
1.
in a tax benefit. Taxpayer’s subsequent deduction
46.54 Nonbusiness; loans to corporation; of the appreciated stock’s fair market value upon
shareholder employee. The loss sustained from donating it to a charitable organization in 1968
advances made to a closely held corporation in was a separate transaction, not a recovery that
which the taxpayer was a shareholder employee is must be returned to income under the tax benefit
treated as a nonbusiness bad debt since the proxi- rule. (Secs. 111, 1221; ’86 Code.)
Continental Illinois National Bank and Trust
mate motive for making the loans was to protect a
capital investment and not his status as an Co. of Chicago, 69 T.C. 357, Acq., 1978-2 C.B. 1.
employee. In determining whether a bad debt has
a proximate relation to the taxpayer’s trade or 46.62 Reserves; addition for extraordinary
business, the proper standard is that of dominant loss; subsequent recovery. An accrual-method
motivation. §1.166–5. (Sec. 166, ’86 Code.)
taxpayer who uses the reserve method of accountGeneres, 405 U.S. 93, Ct. D. 1952, 1972-1 C.B. ing for its bad debt losses and who sustains in its
61.
taxable year a large and unpredictable bad debt
loss far in excess of its bad debt reserve may not
46.55 Nonbusiness; purchase price of stock properly charge the loss to such reserve account
lost. Losses sustained on purchases of undelivered and then add to the account to restore its normal
stock from a securities corporation that subse- balance. Likewise, the recovery of such an
quently becomes bankrupt are deductible as short- extraordinary loss in a subsequent year should not
term capital losses under the nonbusiness bad debt be handled through the bad debt reserve account,
provisions of section 166 in the taxable year in but should be taken directly into income.
which the debts become worthless. §§1.165–1, §§1.61-1, 1.111-1, 1.166-4. (Secs. 61, 111, 166;
1.166-5. (Secs. 165, 166; ’86 Code.)
’86 Code.)
Rev. Rul. 69-458, 1969-2 C.B. 33.
Rev. Rul. 74-409, 1974-2 C.B. 61.
46.56 Nonbusiness; savings deposit; bankadditions;
debentures
ruptcy. The balance of a savings on deposit in a 46.63 Reserves;
bankrupt savings and loan association is consid- changed from registered to unregistered. For
ered worthless upon notification by the receiver in purposes of the deduction for additions to bad debt
bankruptcy that payment after liquidation of reserve, corporate debentures are effectively
assets is doubtful. However, any amount recov- changed from registered to unregistered form
ered in a subsequent year with respect to the debt when the registration language is actually
is includable in income to the extent a tax benefit removed from the face of the debentures and the
was received in a prior taxable year. §1.166–5. underlying loan contracts. §§1.165–5, 1.166-4.
(Secs. 165, 166; ’86 Code.)
(Sec. 166, ’86 Code.)
Rev. Rul. 73-101, 1973-1 C.B. 78.
Rev. Rul. 71-577, 1971-2 C.B. 129.
46.57 Nonbusiness; unrecoverable deposit
for residence construction. A nonbusiness bad
debt deduction is allowable for unrecoverable
deposits made for the construction of a residence
when the construction company becomes insolvent and fails to fulfill under the contract.
§1.166-5. (Sec. 166, ’86 Code.)
Rev. Rul. 69-457, 1969-2 C.B. 32.
46.58 Partnership; deceased partner’s insolvent estate. The amount of a dissolved general
partnership debt paid by a partner on behalf of a
deceased partner’s insolvent estate is deductible as
a debt that became worthless within the taxable
year. I.T. 1976 superseded. §1.166-1. (Sec. 166,
’86 Code.)
Rev. Rul. 72-505, 1972-2 C.B. 102.
46.59 Production credit association; additions to reserves; invested equity.A production
credit association is not required, in computing
reasonable annual additions to its reserves for bad
debts, to reduce the amount of its outstanding
loans to its members by the amount of equity
reserve, even though the equity reserve serves as
collateral for such loans and reduces the risk
involved. The amount of the equity reserve repre-
46.64 Reserves; additions; reasonableness.
The taxpayer, a real estate developer, made additions to bad debt reserves which were partially disallowed as unreasonable in amount. Held, the
additions were reasonable since they were based
on the advice of a national accounting firm after a
study of the financial position of each debtor,
(Secs. 166, 1033, 1221: ’86 Code.)
Westchester Development Co., 63 T.C. 198,
Acq., 1975-2 C.B. 2.
46.65 Reserves; additions; reasonableness.
The reasonable addition to the reserve for bad
debts may be an amount lesser or greater than the
amount computed under the Black Motor decision
formula as determined in the light of facts existing
at the close of the taxable year. §1.166–1. (Sec.
166, ’86 Code.)
Rev. Rul. 76-362, 1976-2 C.B. 45.
46.66 Reserves; additions; reasonableness.
Additions were made to a bad debt reserve that
presupposed a higher charge-off rate than that
experienced in the immediately preceding years.
The Commissioner did not abuse his discretion in
recomputing a reasonable addition according to
the Black Motor formula. §§1.166-4, 1.446-1,
1.471-2. (Secs. 166, 446, 471; ’86 Code.)
Thor Power Tool Co.,435 U.S. 522, Ct. D. 1996,
1979-1 C.B. 167.
46.67 Reserves; additions; year deductible.
An accrual method taxpayer added an amount to
its bad debt reserve for the current taxable year that
was less than the amount determined under its normal and proper method of computing reasonable
additions to the reserve. Such lesser addition does
not entitle the taxpayer to make a correspondingly
larger addition in the following year, and the
amount of the reserve inadequacy that resulted for
the current year is deemed added to the reserve in
that year. Rev. Ruls. 59–83, 65–92, 66-26, and
70-124 modified. §§1.166-1, 1.166-4, 1.446-1,
1.461-1. (Secs. 166, 446, 461; ’86 Code.)
Rev. Rul. 79-88, 1979-1 C.B. 100.
46.68 Reserves; additions for doubtful
account; subsequent collection. The collection
of a specific doubtful account upon which an addition to a bad debt reserve was made should be
reflected in the determination of the reasonable
addition to the reserve rather than as an addition to
income in the collection year. (Sec. 23(k), ’39
Code; Sec. 166, ’86 Code.)
R. Gsell & Co., 34 T.C. 41, Acq., 1960-2 C.B.
5.
46.69 Reserves; bail forfeitures. A taxpayer
engaged in the business of issuing bail and administrative bonds may not establish a reserve for bail
forfeitures similar to that allowed for bad debts.
(Sec. 166, ’86 Code.)
Rev. Rul. 58-305, 1958-1 C.B. 117.
46.70 Reserves; cash-method consumer
finance company. A consumer finance company
using the cash receipts and disbursements method
of accounting and loaning its own money, thus
owning notes and earning interest thereon, may
use the reserve method for bad debts. § 1.166–1.
(Sec. 166, ’86 Code.)
Rev. Rul. 74-604, 1974-2 C.B. 60.
46.71 Reserves; change in method after
merger of thrift institution into bank. The
integration under section 381(c)(4) of a distressed
thrift institution’s bad debt reserve computed
under section 539 into an acquiring commercial
bank’s bad debt reserve computed under section
585 results in a change in method of accounting.
Therefore, an adjustment under section 481(a) is
required. Rev. Ruls. 75-445 and 79–123 distinguished. §§1.166-4, 1.381(c)(4)–1, 1.446-1,
1.585-1, 1.593-1. (Secs, 166, 381, 446, 585, 593;
’86 Code.)
Rev. Rul. 85–171, 1985–2 C.B. 148.
46.72 Reserves; change in method; building
and loan associations. A building and loan
association that computes its addition to the bad
debt reserve for the current year under the percentage of loans method provided by section 593(b)(3)
may subsequently change to either the percentage
of taxable income method or the experience
method provided by section 593(b)(2) and (4) for
that year without obtaining the Commissioner’s
consent. §1.593–6A. (Sec. 593, ’86 Code.)
Rev. Rul. 79-123, 1979-1 C.B. 215.
46.73 Reserves; dealers; withheld by finance
company. Credits to a dealers reserve by banks or
finance companies to cover possible losses on
notes purchased from dealers constitute income to
the dealers employing the accrual method of
accounting at the time such credits are made;
losses sustained by the dealers on such notes are to
be separately established. (Sec. 61, ’86 Code.)
Rev. Rul. 57-2, 1957-1 C.B. 17.
46.74 Reserves; guaranteed debt obligations.
After agreeing to a determination disallowing a
deduction for additions to a bad debt reserve for
guaranteed debt obligations, the taxpayer filed a
refund claim contending entitlement to maintain
such reserves. Held, the taxpayer is entitled to
reserves for tax years open for deficiency assessment. (Sec. 166, ’86 Code.)
United Surgical Steel Co., Inc., 54 T.C. 1215,
Acq., 1971-2 C.B. 3.
46.75 Reserves; guaranteed debtobligations.
Rev. Rul. 62–214, relating to the deductibility of
additions to bad debt reserves covering losses on
guaranteed debt obligations, is revoked.
§1.166-1. (Sec. 166, ’86 Code.)
Rev. Rul. 68-313, 1968–1 C.B. 75.
46.76 Reserves; installment sales; personal
property. A domestic corporation that reports
income from the sale of personal property on the
installment method of accounting may use the
reserve method for bad debts with respect to the
sales and may deduct reasonable additions to the
reserve. I.T. 3957 superseded. §§1.166-4,
1.453-1. (Secs. 166, 453; ’86 Code.)
Rev. Rul. 70-139, 1970-l C.B. 39.
46.77 Reserves; liquidating corporation. The
complete liquidation, to which sections 332(a) and
336 apply, of a subsidiary that used the accrual
method of accounting and the reserve method of
treating bad debts results in income to the liquidating corporation to the extent that the fair market
value of accounts receivable, the basis of which in
the hands of the transferee determined under section 334(b)(2) is equal to its fair market value,
exceeds the face amount of the receivables less the
amount of the reserve for bad debts, additions to
which had resulted in tax benefits in prior years.
Rev. Rul. 65-258 revoked. §§1.61-1, 1.332-1,
1.334-1, 1.336-1. (Secs. 61, 332, 334, 336; ’86
Code.)
Rev. Rul. 78-278, 1978-2 C.B. 134.
46.81 Reserves; transfer to controlled corporation. A reserve for bad debts is not includable in
income when accounts receivable are transferred
to a controlled corporation in exchange for securities equal in value to the accounts receivable less
the reserve. §1.351-1. (Sec. 351, ’86 Code.)
Nash, 398 U.S. 1, Ct. D. 1941, 1970-1 C.B. 72.
mine the reasonableness of further additions to the
reserve. After 1968 an average loss experience of
the small business investment industry will be
used as a basis for such reserves as to a new company or one which is without adequate loss experience data. Clarified to provide that reserves for
bad debts in excess of ten percent may be established where reasonable. §1.166-4. (Sec. 166, ’86
Code.)
Rev. Rul. 64-48, 1964-1 (Part 1) C.B. 104; Rev.
Rul. 65-88, 1965–1 C.B. 112.
46.83 Small business investment companies;
convertible debentures. Loan agreements which
are evidenced by numbered convertible debentures payable to a company licensed under the
Small Business Investment Act or to its registered
assigns, or which require that such debentures be
fully registered, are “securities” as defined in section 165(g)(2)(C); therefore, section 166 relating
to bad debts does not apply to debts evidenced by
such loan agreements by reason of section 166(e).
However, under section 1243, losses from the sale,
exchange, or worthlessness of convertible debentures shall be treated as ordinary losses.
§l.165-5, 1.166-4, 1.1243-1. (Secs. 165, 166,
1243; ’86 Code.)
Rev. Rul. 66-321.1966-2 C.B. 59.
46.78 Reserves; liquidating corporation. The
sale, pursuant to a plan of complete liquidation
under section 337, of accounts receivable by a cor- 46.84 Small business investment companies;
poration that had used the accrual method of reserves. No adjustment is required for a reasonaccounting and the reserve method of treating bad
debts from which it had received a tax benefit able addition to the bad debt reserve in computing
results in income to the extent that the amount
received exceeds the face amount of the receivables less the amount of the reserve for bad debts.
Rev. Rul. 57-482 superseded. §§1.61-1, 1.337-1.
(Secs. 61, 337; ’86 Code.)
Rev. Rul. 78-279, 1978-2 C.B. 139.
46.79 Reserves; production credit association. In computing annual additions to its reserve
for bad debts, a production credit association is not
required to reduce the amount of its outstanding
loans by (1) the amount of class B stock which it
holds as collateral for such loans or (2) the amount
of promisory notes received therefor and transferred to the Federal Intermediate Credit Bank as
collateral on loans to the association under an
agreement making the association primarily liable
for payment of all funds loaned to it by the bank.
§1.166-4. (Sec. 166, ’86 Code.)
Rev. Rul. 65-315, 1965-2 C.B. 51; Rev. Rul.
67-32, 1967-1 C.B. 52.
46.80 Reserves; receivables transferred to
controlled corporation. The proper method is
shown for determining the transferor’s and transferee’s basis in transferred accounts receivable
and the treatment of these receivables by a transferee using either the reserve method of treating
bad debts or the specific charge-off method, in a
situation involving the transfer of accounts receivable by a sole proprietor, who had used the reserve
method and bad gained a tax benefit in prior years
from the use of such method, to a newly formed
corporation in exchange for all the stock of the corporation. Rev. Rul. 62-128 revoked. §§1.351-1,
1.358-1, 1.362-1, 301.7805-1. (Secs. 351, 358,
362, 7805; ’86 Code.)
Rev. Rul. 78-280, 1978-2 C.B. 139.
46.86 Subordinated claim; loan to corporation. Taxpayer corporation advanced funds in
return for promissory notes to a related corporation for a 2-year period at the end of which the borrower filed a bankruptcy petition and the taxpayer
agreed to subordinate its claim to the allowed
claims of all general, unsecured creditors. After
the bankrupt’s assets were sold insufficient funds
were available for allowed claims and expenses.
Held, the subordination of the claim did not convert the debt into a capital advance; taxpayer was
entitled to deduct bad debt losses, (Sec. 23(k), ’39
Code; Sec. 166, ’86 Code.)
Giles E. Bullock, 26 T.C. 276, Acq., 1957-2
C.B. 4.
46.87 Worthless mortgage note; insurance
companies. A note evidencing a loan made by an
insurance company, secured by a second mortgage
that was eliminated by foreclosure of the first
mortgage, qualifies as a bill receivable and is
deductible as a bad debt. I.T. 2920 superseded.
§1.832-5. (Sec. 832, ’86 Code.)
Rev. Rul. 70-35, 1970-1 C.B. 154.