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 two-
thirds 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 pre-
sumption of worthlessness when the amount that
the Comptrol Currency requires to be written
down and charged off is not based on bad debt cri-
teria 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 coopera-
tive 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(See also: Banks) superseded.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
to reserve method. Procedures are provided for 46.9 Banks; express determination letter.
taxpayers using an accrual method of accounting This procedure provides a uniform express deter-
to change their method of accounting for bad debts mination letter for a bank to obtain from its regula-
from the specific charge-off method to the reserve tory authority for purposes of the conformity elec-
method. 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superseded.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.)
Secs. 166, 446, 585, 586, 593, ’86 Code.) Rev. Proc. 92-84, 1992–2 C.B. 489.
Rev. Proc. 85–8, 1985–1 C.B. 495. 46.10 Banks; property sold at foreclosure
sale. A bank made loans secured by real proper-
46.2 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 bid-
Form 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 regula-
Rev. Rul. 78-237, 1978-1 C.B. 135. tions. Earned but uncollected interest that was
46.3 Banks; allocated transfer risk reserve. properly accrued and reported in income by a was sav-
This ruling informs banks of the treatment of ings and loan association in 1978 and that
amounts allocated to allocated transfer risk charged off in 1979 in accordance with conclu- Federal
reserves for purposes of the conclusive presump- Home Loan Bank Board regulations is
tion 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
§§1.166-2, 1.585-2. (Secs. 166, 585; ’86 Code.) interest, when due after 1978, is not required to be
Rev. Rul. 92-14, 1992–1 C.B. 93. accrued under section 451 provided no bad debt
deduction is claimed for the interest. §§1.166-2,
46.4 Banks; charged off; classified by FDIC 1.451-1. (Secs. 166, 451; ’86 Code.)
examiner. Loans classified as losses by FDIC Rev. Rul. 81-18, 1981-1 C.B. 295.
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 debt deductible only as a capital loss. (Secs. 23(e),
ited partnership formed to manufacture and sell
domestic building and loan association is not a 25(k), ’39 Code; Secs. 165, 166, ’86 Code.) prefabricated houses. Loans made by him for use
reserve for bad debts. Current earnings credited to J. C. Bradford, 22 T.C. 1057, Acq., 1955–2 C.B. in the business became worthless and were
such account, by way of stock dividends or other- 4. deducted as business bad debts. Held, the loans
wise, are not credited to a reserve for bad debts, were proximately related to the partner’s business
and, therefore, are not deductible from gross 46.19 Business; reserve method; election. A and were deductible as business, rather than non-
income. §1.593–7. (Sec. 593, ’86 Code.) taxpayer may adopt the reserve method of business, bad debts. (Sec. 23(k), ’39 Code; Sec.
Rev. Rul. 66-82, 1966-1 C.B. 155. 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.)
loaned funds to the client that later became insol- Rev. Rul. 69-548, 1969-2 C.B. 32. 46.26 Business v. nonbusiness; payments for
vent. Held, the loans were related to the taxpayer’s insolvent corporation. A partnership, engaged in
advertising business and the losses thereon were 46.20 Business; stockholder’s advances to the construction business, owned stock in a corpo-
deductible 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
(Sec. 23(k), ’39 Code; Sec. 166, ’86 Code.) business rather than nonbusiness bad debts; and the partnership advanced funds to the insol-
Stuart Bart, 21 T.C. 880, Acq., 1954-1 C.B. 3. advances to another corporation, of which tax- vent corporation to pay the excess costs. Held, the
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.)
form of loans and received interest bearing notes tions to capital. (Sec. 23(g), ’39 Code; Sec. 165, Ray A. Myers, 42 T.C. 195, Acq. in result,
and, as a bonus, stock in the debtor corporation ’86 Code.) 1964-2 C.B. 6.
from its parent. When repayment became doubt- J. T. Dorminey, 26 T.C. 940, Acq., 1957-1 C.B.
ful, the taxpayer surrendered its stock, partially 4 . 46.27 Child support payments. A taxpayer is
recovered the advances and claimed a deduction not entitled to a bad debt deduction for the amount
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
166, ’86 Code.) of advances he made to a publishing company that former spouse. §1.166-1. (Sec. 166, ’86 Code.)
National Lead Co., 23 T.C. 988, Acq., 1965-2 he had established and operated, in part, to provide Rev. Rul. 93-27, 1993-1 C.B. 32.
C.B. 6. a ready outlet for his own works and enhance his 46.28 Collateral declined in value; debtor
reputation, were deductible as business bad debts. going concern. No bad debt deduction is allow-
46.15 Business; guarantee payments. A home (Sec. 23(k), ’39 Code; Sec. 166, ’86 Code.)
construction partnership, formed by a real estate taxable year in
Wilfred J. Funk, 35 T.C. 42, Acq., 1961-2 C.B. able to an individual for the with assets thatwhich
a debtor is a going concern 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 individual had a third
wholly owned corporation. Loans to the corpora- 46.22 Business v. nonbusiness; advances to real property on which annote that evidenced the
securing a
tion were guaranteed by the real estate partnership insolvent corporation. The taxpayer corpora- trust mortgagehad declined in value until the
indebtedness
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 fore-
default. Held, the loan guarantees were directly lated corporation which was to furnish the partner-
be
related to the real estate partnership’s business, ship new business with third parties. Unbeknown closure would not 365sufficient to reach any part of
wholly apart from its interest as a stockholder to the taxpayer, the corporation was insolvent. the debt. Code.)
166, ’86
A.R.R. superseded. §1.166-2. (Sec.
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 corpora-
employment. 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 deduc-
business 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 credi-
becomes 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
166, ’86 Code.) ment of all funds he received as operator of a live- Code.)
Rev. Rul. 71-561, 1971-2 C.B. 128. stock auction barn. In addition to agreeing to 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 tax-
holder 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 credi- Giffin 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.
to protect his credit rating for bonding purposes, 46.31 Dishonored note; cause of action
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
’86 Code.) corporation he had participated in organizing and was presented for payment, but was dishonored.
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.
part payment to a bank to release himself from a capital loss. (Sec. 166, ’86 Code.) The taxpayer was entitled to a bad debt deduction
liability as an endorser on a note he executed for Glenn E. Alexander, 34 T.C. 758, Acq., 1961-1 in the year the note was dishonored. If amounts are
a bank loan. State law prevented subrogation since C.B. 3. recovered from the seller, they will be ordinary
the bank, which still held the note, had not been income. §§1.61–1, 1.66-2. (Secs. 61, 166; ’86
paid in full. Held, the payment as endorser was a 46.25 Business v. nonbusiness; partner’s Code.)
deductible business expense, not a worthless bad loans. A practicing attorney participated in a lim- Rev. Rul. 80-24, 1980-1 C.B. 47.
Bad debts
46.32 Election for banks to establish a conclu- ment accounts receivable and the basis is the ling interest, do not, of themselves, constitute a
sive presumption of worthlessness for bad repurchase price. Accounts which have been or trade or business, even though he devoted his full
debts. This notice provides relief to banks that on are to be sold should not be considered in comput- time and energies to them, particularly since there
or before December 1, 1993, filed or files a federal ing additions to the reserve for bad debts. Commit- was no intention of developing the corporations as
income tax return for a year ending on or after ment fees incurred do not constitute interest but going businesses for sale to customers in the ordi-
December 31, 1991, but did not make an election are deductible as ordinary and necessary business nary course of affairs. Therefore, a loss resulting
to use a method of accounting that establishes a expenses. §§39.23(a)–1, 39.23(b)–1, 39.23(f)-1, from advances which he made to one of such cor-
conclusive presumption of worthlessness. 39.113(a)-2. 39.117(a)-1. (Secs. 23(a), 23(b), porations is not a business bad debt. §§39.23(k)-4,
Notice 93-50, 1993-2 C.B. 23(f), 113(a), 117(a), '39 Code; Secs. 162, 163, 1.166-5. (Sec. 23(k), ’39 Code; Sec. 166, ’86
165, 1012, 1221, ’86 Code.) Code.)
46.33 Foreign expropriation losses; domestic Rev. Rul. 54-43, 1954-1 C.B. 119. Whipple, 373 U.S. 193, Ct. D. 1882, 1963-2
corporations. The tax treatment of expropriations C.B. 641.
by foreign countries of properties in such coun- 46.40 Interest accrued on uncollectible loan.
tries owned by domestic corporations is An accrual method taxpayer must include in gross 46.46 Nonbusiness; advances to symphony
explained. Clarified by Rev. Rul. 75–501. income for the taxable year in which a loan pay- orchestra. Taxpayer advanced cash through his
§§1.165-1, 1.166-1, 1.172-11, 1.1231-1. (Sec. able to the taxpayer becomes uncollectible the business to the symphony orchestra for operating
165, 166, 172, 1231; ’86 Code.) interest that accrues on the loan for the part of that expenses during his 3 year tenure as president.
Rev. Rul. 72-1, 1972–1 C.B. 52. year prior to the time the loan becomes uncollect- After an unsuccessful fund raising campaign to
ible. If the accrued interest subsequently becomes repay the taxpayer and provide for operational
46.34 Guarantor of corporate obligation. uncollectible, the taxpayer may be entitled to a bad costs, the taxpayer wrote the advances off as non-
Where a controlling stockholder guarantees the debt deduction under section 166. §§1.61-1, business bad debts. Held, the advances constituted
payment of his corporation’s promissory notes, 1.166-1, 1.451-1. (Secs. 61, 166, 451; ’86 Code.) loans, not contributions, and were deductible in
executed in obtaining bank loans, the loss which Rev. Rul. 80-361, 1980-2 C.B. 164. the year of the unsuccessful campaign. (Sec.
he sustains upon the corporation’s insolvency and 23(k), ’39 Code; Sec. 166, ’86 Code.)
his payment of the notes is deductible as a short- 46.41 Land contracts purchased by finance Dallas Rupe & Son, 20 T.C. 363, Acq., 1953-2
term capital loss for nonbusiness bad debt, not as company; cancellation. Taxpayer who purchased C.B. 6.
an ordinary nonbusiness loss. §39.23(k)-6. (Sec. real estate contracts, made between a vendor of
23(k), ’39 Code; Sec. 166, ’86 Code.) land and individual purchasers, and took posses- 46.47 Nonbusiness; deposits; embezzlement
Putman, 352 U.S. 82, Ct. D. 1800, 1957-1 C.B. sion of the land upon default and the resultant con- causing insolvency. The loss incurred by a depos-
501. tract cancellation is allowed a bad debt deduction itor as a result of a bank being declared insolvent
if the property value was less than the unrecovered due to embezzlement by a bank employee is a non-
46.35 Guarantor of corporate obligation. A costs. §§1.61–1, 1.166–1, 1.453-6, 1.1038–1 business bad debt loss rather than a theft loss. The
loss incurred by an individual as guarantor from (Secs. 61, 166, 453, 1038; ’86 Code.) loss is deductible only as a short term capital loss
the worthlessness of an insolvent corporation’s Rev. Rul. 68–523, 1968-2 C.B. 82. and only when there is no longer a likelihood of
debts is deductible only as a bad debt, not as a loss recovery. §§1.165–8, 1.166–5. (Secs. 165, 166;
sustained in the transaction entered into for profit. 46.42 Liquidation of subsidiary. A merger of ’86 Code.)
§§1.165-1, 1.166-8. (Secs. 165, 166; ’86 Code.) a wholly owned subsidiary into its parent at a time Rev. Rul. 77–383, 1977–2 C.B. 66.
Rev. Rul. 60-48, 1960-1 C.B. 112; Abraham when the subsidiary’s indebtedness to the parent 46.48 Nonbusiness; loan
evidence of
Greenspon, 8 T.C. 431, Nonacq., 1960-1 C.B. 7. exceeded the fair market value of the subsidiary’s destroyed by fire. Documentary evidence to sub-
assets does not qualify as a nontaxable distribution stantiate a loan made by the taxpayer was
46.36 Guarantor of defunct corporation. A or tax-free reorganization, since no part of the destroyed and the borrower disappeared after the
corporation’s manager gave his personal note as transfer is attributable to the stock interest of the loan was made. Held taxpayer’s testimony that a
security for a debt of the corporation. Six years parent. The parent is entitled to a bad debt deduc- loan was made, that the debt had value when
after the corporation’s financial collapse, he tion. Amplified to provide that where a parent con- created, and that the debt became worthless in the
settled the debt and took a bad debt deduction. tinues to operate the subsidiary’s business as a year claimed was accepted and a short-term capi-
Held, the nonbusiness bad debt deduction was branch it is entitled to the bad debt deduction and, tal loss deduction of the loan amount was allowed.
allowed. (Sec. 23(k), ’39 Code; Sec. 166, ’86 in addition, is entitled to a deduction for loss on (Sec. 166, ’86 Code.)
Code.) worthless stock of the subsidiary. §§1.165–5, I. Hal Millsap, Jr., 46 T.C. 751, Acq., 1967-1
George Aftergood, 21 T.C. 60, Acq., 1954-1 1.166-2, 1.332-2, 1.368-2. (Secs. 165, 166, 332, C.B. 2.
C.B. 3. 368; ’86 Code.)
Rev. Rul. 59-296, 1959-2 C.B. 87; Rev. Rul. 46.49 Nonbusiness; home mortgage loan;
46.37 Guarantor-shareholder; profit share in 70-489, 1970-2 C.B. 53. default by subsequent purchaser. A nonbusiness
management contract. Taxpayer, a member of a bad debt deduction is allowable with respect to an
partnership which for a percentage of premium 46.43 Loan to corporation and guaranty pay- uncollectible claim for amounts paid by a taxpayer
income, contracted to manage the underwriting ment. The taxpayer, engaged in manufacturing to the V.A. and to a mortgagee arising from the
aspects of an insurance company of which the tax- springs as a sole proprietor, made loans and guar- settlement of a home mortgage loan initiated by
payer was a shareholder and director, guaranteed anteed obligations of a corporation organized to the taxpayer with the V.A. and assumed by a sub-
bank loans to the insurance company and made provide fabrics to customers of his spring busi- sequent purchaser who defaulted on the loan.
guaranty payments when the company became ness. Held, the taxpayer was entitled to a business § 1.166-5. (Sec. 166, ’86 Code.)
insolvent. Held, the managerial services were part bad debt deduction rather than a capital loss for Rev. Rul. 70-222, 1970-1 C.B. 40.
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 46.50 Nonbusiness; involuntary debt by sub-
ance company whose success would have though subsequent to writing-off the claims, he rogation. Mechanics and materialmen liens, filed
increased the taxpayer’s profits under the contract; received a token payment for such claims from a against the house which the taxpayers had
therefore, the guaranty payments were deductible prospective purchaser of the corporation. (Secs. engaged a builder to erect under a fixed-cost con-
as business bad debts. (Sec. 166, ’86 Code.) 23(g), 23(k), ’39 Code; Sec. 165, 166, ’86 Code.) tract, were paid by the taxpayers to prevent fore-
R. B. Cowden, 34 T.C. 819, Acq., 1961-1 C.B. Mac Levine, 31 T.C. 1121, Acq., 1959-2 C.B. 5. closure when the builder became insolvent.Held,
4. the payments for the liens were deductible as non-
46.44 Merchandise purchased for a corpora- business bad debts. (Sec. 23(k), ’39 Code; Sec.
46.38 Indemnifying payments; loan to sever tion by an individual. Taxpayer-president 166, ’86 Code.)
business relationships. Indemnifying payments obtained merchandise for sale by his corporation. Haywood P. Martin, 38 T.C. 188, Acq., 1963-1
made by a guarantor of a loan to his partner in a The purchases were invoiced to the taxpayer but C.B. 4.
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 tax- 46.51 Nonbusiness; legatee; unrecoverable
partnership interest. The decision in Max Axelrod payer for the amounts owed. Held, the judgment tax attributable to included insurance pro-
will not be followed. §1.166–8. (Sec. 166, ’86 and related cost amounts were deductible as a loss ceeds. A legatee whose share of the estate bears
Code.) not a non-business bad debt. (Secs. 165, 166; ’86 the burden of estate tax attributable to insurance
Rev. Rul. 68–616, 1968-2 C.B. 89. Code.) proceeds that the executor is unable to recover
Harry Horner, 35 T.C. 231, Acq., 1961-1 C.B. from an insurance beneficiary is entitled to a bad
46.39 Installment accounts sold on commit- 4. debt deduction under section 166(d)(1). However,
ment basis. A merchant who sells his installment no deduction is allowable under section 2054 to
accounts receivable to a bank at a discount under 46.45 Nonbusiness; advances to controlled the estate by reason of the executor’s inability to
a commitment agreement may sustain an ordinary corporation. The activities of an individual in recover the amount of such tax from the benefi-
loss. Defaulted accounts repurchased at their connection with his organization and management ciary. §1.166-1. (Secs, 166, 2054; ’86 Code.)
unpaid balance again become part of his install- of several corporations, in which he held control- Rev. Rul. 69–411, 1969-2 C.B. 177.
Bad debts
46.52 Nonbusiness; loan to family corpora- sents an equity interest of the borrower in the the Black Motor formula. §§1.166-4, 1.446-1,
tion. The taxpayer loaned $92,350 to a corpora- association. §1.166-4. (Sec. 166, ’86 Code.) 1.471-2. (Secs. 166, 446, 471; ’86 Code.)
tion controlled by her then husband, for which she Rev. Rul. 70-138, 1970-1 C.B. 39. Thor Power Tool Co.,435 U.S. 522, Ct. D. 1996,
took demand notes. In 1944 she was divorced from 1979-1 C.B. 167.
her husband and received $2,500 in settlement of 46.60 Recovery; sale of property acquired in
the notes from the corporation, which had become partial satisfaction. A creditor who sells property 46.67 Reserves; additions; year deductible.
insolvent prior to that year. Held, the taxpayer sus- acquired in partial satisfaction of an indebtedness An accrual method taxpayer added an amount to
tained a nonbusiness bad debt loss in 1944. (Sec. cannot exclude from gross income the gain from its bad debt reserve for the current taxable year that
23(k), ’39 Code; Sec. 166, ’86 Code.) such sale as representing income attributable to a was less than the amount determined under its nor-
Miriam C. Pierson, 27 T.C. 330, Acq., 1957-1 recovery of the unsatisfied portion of the original mal and proper method of computing reasonable
C.B. 4. indebtedness which he previously deducted with- additions to the reserve. Such lesser addition does
not entitle the taxpayer to make a correspondingly
out tax benefit. §1.111-1. (Sec. 111, ’86 Code.) larger addition in the following year, and the
46.53 Nonbusiness; loan to son-in-law. Tax- Rev. Rul. 66-320, 1966-2 C.B. 37.
payer, as surety for his minor son-in-law’s loan, amount of the reserve inadequacy that resulted for
paid the balance due the bank after the son-in-law the current year is deemed added to the reserve in
separated from his wife, defaulted on the loan pay- 46.61 Recovery; worthless stock; charitable that year. Rev. Ruls. 59–83, 65–92, 66-26, and
ments, and then disappeared. Held, no gift was donation. When a guarantor of obligations held 70-124 modified. §§1.166-1, 1.166-4, 1.446-1,
intended and the amount paid by the taxpayer was by the taxpayer entered bankruptcy proceedings, 1.461-1. (Secs. 166, 446, 461; ’86 Code.)
deductible as a nonbusiness bad debt. (Sec. 166, taxpayer received stock in the face amount of its Rev. Rul. 79-88, 1979-1 C.B. 100.
’86 Code.) claim and in complete satisfaction of it. Taxpayer
Morris Cohen, 39 T.C. 886, Acq., 1974-1 C.B. determined the stock to be worthless and charged 46.68 Reserves; additions for doubtful
1. the face amount to its bad debt reserve, resulting account; subsequent collection. The collection
in a tax benefit. Taxpayer’s subsequent deduction of a specific doubtful account upon which an addi-
46.54 Nonbusiness; loans to corporation; of the appreciated stock’s fair market value upon tion to a bad debt reserve was made should be
shareholder employee. The loss sustained from donating it to a charitable organization in 1968 reflected in the determination of the reasonable
advances made to a closely held corporation in was a separate transaction, not a recovery that addition to the reserve rather than as an addition to
which the taxpayer was a shareholder employee is must be returned to income under the tax benefit income in the collection year. (Sec. 23(k), ’39
treated as a nonbusiness bad debt since the proxi- rule. (Secs. 111, 1221; ’86 Code.) Code; Sec. 166, ’86 Code.)
mate motive for making the loans was to protect a Continental Illinois National Bank and Trust R. Gsell & Co., 34 T.C. 41, Acq., 1960-2 C.B.
capital investment and not his status as an Co. of Chicago, 69 T.C. 357, Acq., 1978-2 C.B. 1. 5.
employee. In determining whether a bad debt has 46.69 Reserves; bail forfeitures. A taxpayer
a proximate relation to the taxpayer’s trade or 46.62 Reserves; addition for extraordinary engaged in the business of issuing bail and admin-
business, the proper standard is that of dominant loss; subsequent recovery. An accrual-method istrative bonds may not establish a reserve for bail
motivation. §1.166–5. (Sec. 166, ’86 Code.) taxpayer who uses the reserve method of account- forfeitures similar to that allowed for bad debts.
Generes, 405 U.S. 93, Ct. D. 1952, 1972-1 C.B. ing for its bad debt losses and who sustains in its (Sec. 166, ’86 Code.)
61. taxable year a large and unpredictable bad debt Rev. Rul. 58-305, 1958-1 C.B. 117.
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 46.70 Reserves; cash-method consumer
lost. Losses sustained on purchases of undelivered and then add to the account to restore its normal finance company. A consumer finance company
stock from a securities corporation that subse- balance. Likewise, the recovery of such an using the cash receipts and disbursements method
quently becomes bankrupt are deductible as short- extraordinary loss in a subsequent year should not of accounting and loaning its own money, thus
term capital losses under the nonbusiness bad debt be handled through the bad debt reserve account, owning notes and earning interest thereon, may
provisions of section 166 in the taxable year in but should be taken directly into income. use the reserve method for bad debts. § 1.166–1.
which the debts become worthless. §§1.165–1, §§1.61-1, 1.111-1, 1.166-4. (Secs. 61, 111, 166; (Sec. 166, ’86 Code.)
1.166-5. (Secs. 165, 166; ’86 Code.) ’86 Code.) Rev. Rul. 74-604, 1974-2 C.B. 60.
Rev. Rul. 69-458, 1969-2 C.B. 33. Rev. Rul. 74-409, 1974-2 C.B. 61.
46.71 Reserves; change in method after
46.56 Nonbusiness; savings deposit; bank- merger of thrift institution into bank. The
ruptcy. The balance of a savings on deposit in a 46.63 Reserves; additions; debentures
integration under section 381(c)(4) of a distressed
bankrupt savings and loan association is consid- changed from registered to unregistered. For thrift institution’s bad debt reserve computed
ered worthless upon notification by the receiver in purposes of the deduction for additions to bad debt under section 539 into an acquiring commercial
bankruptcy that payment after liquidation of reserve, corporate debentures are effectively bank’s bad debt reserve computed under section
assets is doubtful. However, any amount recov- changed from registered to unregistered form 585 results in a change in method of accounting.
ered in a subsequent year with respect to the debt when the registration language is actually Therefore, an adjustment under section 481(a) is
is includable in income to the extent a tax benefit removed from the face of the debentures and the required. Rev. Ruls. 75-445 and 79–123 distin-
was received in a prior taxable year. §1.166–5. underlying loan contracts. §§1.165–5, 1.166-4. guished. §§1.166-4, 1.381(c)(4)–1, 1.446-1,
(Sec. 166, ’86 Code.) (Secs. 165, 166; ’86 Code.)
Rev. Rul. 73-101, 1973-1 C.B. 78. 1.585-1, 1.593-1. (Secs, 166, 381, 446, 585, 593;
Rev. Rul. 71-577, 1971-2 C.B. 129. ’86 Code.)
Rev. Rul. 85–171, 1985–2 C.B. 148.
46.57 Nonbusiness; unrecoverable deposit 46.64 Reserves; additions; reasonableness.
for residence construction. A nonbusiness bad The taxpayer, a real estate developer, made addi- 46.72 Reserves; change in method; building
debt deduction is allowable for unrecoverable tions to bad debt reserves which were partially dis- and loan associations. A building and loan
deposits made for the construction of a residence allowed as unreasonable in amount. Held, the association that computes its addition to the bad
when the construction company becomes insol- additions were reasonable since they were based debt reserve for the current year under the percent-
vent and fails to fulfill under the contract. on the advice of a national accounting firm after a age of loans method provided by section 593(b)(3)
§1.166-5. (Sec. 166, ’86 Code.) study of the financial position of each debtor, may subsequently change to either the percentage
Rev. Rul. 69-457, 1969-2 C.B. 32. (Secs. 166, 1033, 1221: ’86 Code.) of taxable income method or the experience
Westchester Development Co., 63 T.C. 198, method provided by section 593(b)(2) and (4) for
46.58 Partnership; deceased partner’s insol- Acq., 1975-2 C.B. 2. that year without obtaining the Commissioner’s
vent estate. The amount of a dissolved general consent. §1.593–6A. (Sec. 593, ’86 Code.)
partnership debt paid by a partner on behalf of a 46.65 Reserves; additions; reasonableness. Rev. Rul. 79-123, 1979-1 C.B. 215.
deceased partner’s insolvent estate is deductible as The reasonable addition to the reserve for bad
a debt that became worthless within the taxable debts may be an amount lesser or greater than the 46.73 Reserves; dealers; withheld by finance
year. I.T. 1976 superseded. §1.166-1. (Sec. 166, amount computed under the Black Motor decision company. Credits to a dealers reserve by banks or
’86 Code.) formula as determined in the light of facts existing finance companies to cover possible losses on
Rev. Rul. 72-505, 1972-2 C.B. 102. at the close of the taxable year. §1.166–1. (Sec. notes purchased from dealers constitute income to
166, ’86 Code.) the dealers employing the accrual method of
46.59 Production credit association; addi- accounting at the time such credits are made;
tions to reserves; invested equity.A production Rev. Rul. 76-362, 1976-2 C.B. 45. losses sustained by the dealers on such notes are to
credit association is not required, in computing be separately established. (Sec. 61, ’86 Code.)
reasonable annual additions to its reserves for bad 46.66 Reserves; additions; reasonableness. Rev. Rul. 57-2, 1957-1 C.B. 17.
debts, to reduce the amount of its outstanding Additions were made to a bad debt reserve that
loans to its members by the amount of equity presupposed a higher charge-off rate than that 46.74 Reserves; guaranteed debt obligations.
reserve, even though the equity reserve serves as experienced in the immediately preceding years. After agreeing to a determination disallowing a
collateral for such loans and reduces the risk The Commissioner did not abuse his discretion in deduction for additions to a bad debt reserve for
involved. The amount of the equity reserve repre- recomputing a reasonable addition according to guaranteed debt obligations, the taxpayer filed a
refund claim contending entitlement to maintain 46.81 Reserves; transfer to controlled corpo- deductible as a bad debt. I.T. 2920 superseded.
such reserves. Held, the taxpayer is entitled to ration. A reserve for bad debts is not includable in §1.832-5. (Sec. 832, ’86 Code.)
reserves for tax years open for deficiency assess- income when accounts receivable are transferred Rev. Rul. 70-35, 1970-1 C.B. 154.
ment. (Sec. 166, ’86 Code.) to a controlled corporation in exchange for securi-
United Surgical Steel Co., Inc., 54 T.C. 1215, ties equal in value to the accounts receivable less
Acq., 1971-2 C.B. 3. the reserve. §1.351-1. (Sec. 351, ’86 Code.)
Nash, 398 U.S. 1, Ct. D. 1941, 1970-1 C.B. 72.
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 mine the reasonableness of further additions to the
property. A domestic corporation that reports reserve. After 1968 an average loss experience of
income from the sale of personal property on the the small business investment industry will be
installment method of accounting may use the used as a basis for such reserves as to a new com-
reserve method for bad debts with respect to the pany or one which is without adequate loss experi-
sales and may deduct reasonable additions to the ence data. Clarified to provide that reserves for
reserve. I.T. 3957 superseded. §§1.166-4, bad debts in excess of ten percent may be estab-
1.453-1. (Secs. 166, 453; ’86 Code.) lished where reasonable. §1.166-4. (Sec. 166, ’86
Rev. Rul. 70-139, 1970-l C.B. 39. Code.)
Rev. Rul. 64-48, 1964-1 (Part 1) C.B. 104; Rev.
46.77 Reserves; liquidating corporation. The Rul. 65-88, 1965–1 C.B. 112.
complete liquidation, to which sections 332(a) and
336 apply, of a subsidiary that used the accrual 46.83 Small business investment companies;
method of accounting and the reserve method of convertible debentures. Loan agreements which
treating bad debts results in income to the liquidat- are evidenced by numbered convertible deben-
ing corporation to the extent that the fair market tures payable to a company licensed under the
value of accounts receivable, the basis of which in Small Business Investment Act or to its registered
the hands of the transferee determined under sec- assigns, or which require that such debentures be
tion 334(b)(2) is equal to its fair market value, fully registered, are “securities” as defined in sec-
exceeds the face amount of the receivables less the tion 165(g)(2)(C); therefore, section 166 relating
amount of the reserve for bad debts, additions to to bad debts does not apply to debts evidenced by
which had resulted in tax benefits in prior years. such loan agreements by reason of section 166(e).
Rev. Rul. 65-258 revoked. §§1.61-1, 1.332-1, However, under section 1243, losses from the sale,
1.334-1, 1.336-1. (Secs. 61, 332, 334, 336; ’86 exchange, or worthlessness of convertible deben-
Code.) tures shall be treated as ordinary losses.
Rev. Rul. 78-278, 1978-2 C.B. 134. §l.165-5, 1.166-4, 1.1243-1. (Secs. 165, 166,
1243; ’86 Code.)
46.78 Reserves; liquidating corporation. The Rev. Rul. 66-321.1966-2 C.B. 59.
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 reason-
accounting 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 receiv-
ables 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 associa-
tion. 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 trans-
ferred 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. 46.86 Subordinated claim; loan to corpora-
§1.166-4. (Sec. 166, ’86 Code.) tion. Taxpayer corporation advanced funds in
Rev. Rul. 65-315, 1965-2 C.B. 51; Rev. Rul. return for promissory notes to a related corpora-
67-32, 1967-1 C.B. 52. tion for a 2-year period at the end of which the bor-
rower filed a bankruptcy petition and the taxpayer
46.80 Reserves; receivables transferred to agreed to subordinate its claim to the allowed
controlled corporation. The proper method is claims of all general, unsecured creditors. After
shown for determining the transferor’s and trans- the bankrupt’s assets were sold insufficient funds
feree’s basis in transferred accounts receivable were available for allowed claims and expenses.
and the treatment of these receivables by a trans- Held, the subordination of the claim did not con-
feree using either the reserve method of treating vert the debt into a capital advance; taxpayer was
bad debts or the specific charge-off method, in a entitled to deduct bad debt losses, (Sec. 23(k), ’39
situation involving the transfer of accounts receiv- Code; Sec. 166, ’86 Code.)
able by a sole proprietor, who had used the reserve Giles E. Bullock, 26 T.C. 276, Acq., 1957-2
method and bad gained a tax benefit in prior years C.B. 4.
from the use of such method, to a newly formed
corporation in exchange for all the stock of the cor- 46.87 Worthless mortgage note; insurance
poration. Rev. Rul. 62-128 revoked. §§1.351-1, companies. A note evidencing a loan made by an
1.358-1, 1.362-1, 301.7805-1. (Secs. 351, 358, insurance company, secured by a second mortgage
362, 7805; ’86 Code.) that was eliminated by foreclosure of the first
Rev. Rul. 78-280, 1978-2 C.B. 139. mortgage, qualifies as a bill receivable and is