bad debt / tax accounting

bad debt / tax accounting

March 11, 2005

Jane Brown
200 Lincoln Center,
Omaha, NE 68182


Dear Ms. Brown:

This letter is in response to your inquiry about a possible nonbusiness bad debt deduction in the amount of $18,000 you paid in support of your three children caused by your ex-husband’s (Mr. Bob Smith) partial failure to make the court-ordered child support payments. This letter stating my conclusions will take into consideration the facts that you gave me. If any of these facts change, my results may no longer be the same.

According to the Code S166 (d)(2)(A)(B) it appears that you could possibly qualify for a bad non business debt deduction, since your debt was neither created/acquired in connection with a trade/business activity nor incurred as part of this sort of activities.

Under the Code S 166(a)(1), a deduction is allowed for any debt that becomes worthless within the taxable year. Your debt is classified as a bad debt under the Reg § 1.166-8 (2) as a debt becoming wholly worthless under the section 166 (a)(1) resulting from your ex-husband’s payments in discharge of only part of his obligation.

Although according to the Code S 166 (a)(d), it appears that you should be entitled to a nonbusiness bad debt deduction, your case does not qualify for this deduction for the following reasons:

According to the Rev. Rul. 93-27 the custodial parent may not claim a nonbusiness bad debt deduction under the Code S 166(a)(1) for the amount she was forced to spend when the noncustodial parent failed to make the court-ordered payments.  
In the Imeson v. Comm. case, similar to yours, a divorced taxpayer was denied a bad debt deduction for unpaid child support payments due to her. The deduction was denied on the grounds that the taxpayer had no basis in the debt created by the child support obligation.
In the Dale A. Swenson, the court found the uncollectible child support payments not a “debt” because the funds used to create the debt were not derived...