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Rev. Rul. 71-577


Rev. Rul. 71-577; 1971-2 C.B. 129

DATED
DOCUMENT ATTRIBUTES
  • Cross-Reference

    26 CFR 1.166-5: Nonbusiness debts.

  • Code Sections
  • Language
    English
  • Tax Analysts Electronic Citation
    not available
Citations: Rev. Rul. 71-577; 1971-2 C.B. 129
Rev. Rul. 71-577

Advice has been requested as to when a loss for Federal income tax purposes is incurred by a taxpayer under the circumstances described below.

The taxpayer has his personal savings on deposit in a savings and loan association that as a result of business reverses went bankrupt and was placed in receivership. After the taxpayer received payments amounting to 50 percent of his deposit he was notified by the receiver in bankruptcy that the savings and loan association had few assets remaining and after liquidation it was doubtful that anything would remain for distribution except for possibly one or two cents on the dollar.

Section 166(d)(1) of the Internal Revenue Code of 1954 provides that nonbusiness bad debts are deductible as short term capital losses in the year in which such nonbusiness bad debts become worthless. Section 166(d)(2) of the Code defines a nonbusiness bad debt as a debt other than (1) a debt created or acquired in connection with the taxpayer's trade or business, or (2) a debt the loss from the worthlessness of which is incurred in the taxpayer's trade or business.

Section 1.166-2(a) of the Income Tax Regulations provides, in part, that in determining whether a debt is worthless in whole or in part the district director will consider all pertinent evidence, including the financial condition of the debtor. Section 1.166-2(c) of the regulations provides that bankruptcy is generally an indication of the worthlessness of at least part of an unsecured and unpreferred debt. The debt may become worthless before settlement in some cases; at settlement in others. In either case, the mere fact that proceedings terminate in a later year does not authorize the shifting of the deduction to that year.

Section 1.166-5(a)(2) of the regulations provides, in part, that a loss on a nonbusiness debt shall be treated as sustained only if and when the debt has become totally worthless, and no deduction shall be allowed for a nonbusiness debt which is recoverable in part during the taxable year.

In the instant case, the taxpayer was notified by the receiver in bankruptcy that the savings and loan association had few assets remaining and after liquidation it was doubtful that anything would remain for distribution except for possibly one or two cents on the dollar. Under these circumstances, since there is little or no chance of further payments of the debt as represented by the balance of the taxpayer's deposit with the savings and loan association, such debt is considered to be worthless. See United States v. White Dental Manufacturing Co., 274 U.S. 398 (1927), T.D. 4059, C.B. VI-2, 198 (1927). Accordingly, in the instant case, the taxpayer is entitled to deduct the unpaid balance of the deposit as a short term capital loss under section 166(d) of the Code, in the taxable year in which he was so notified.

However, any amount recovered in a subsequent year with respect to the debt is includible in the taxpayer's gross income as ordinary income to the extent that a tax benefit was received in a prior taxable year. See section 1.111-1(a) of the regulations.

DOCUMENT ATTRIBUTES
  • Cross-Reference

    26 CFR 1.166-5: Nonbusiness debts.

  • Code Sections
  • Language
    English
  • Tax Analysts Electronic Citation
    not available
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