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With respect to a delinquent loan that had been made in the
prior tax year and where the repossession of the automobile
occurred in the current tax year but after the filing of the
corporate Federal income tax return for the prior tax year, the
related bad debt deduction would be claimed by petitioners on the
tax return for the current tax year.
For example, for the tax year ending May 31, 1990,
petitioner ABC Autos, Inc. (ABC), in November of 1990 (before
filing its corporate Federal income tax return for its tax year
ending May 31, 1990), charged off as bad debts $237,795 in
automobile loans that were outstanding as of May 31, 1990, even
though the automobiles securing the loans were repossessed
between June and November of 1990. In ABC’s journal entry of
November 17, 1990, reflecting the above chargeoff of $237,795, a
written notation is made to the effect that the related loans
“went bad in June-Nov. ‘90’”.
Also, on ABC’s corporate Federal income tax returns for its
tax years ending May 31, 1990 and 1992, ABC’s yearend total basis
in its used automobile inventory was written down under sections
1.471-2(c) and 1.471-4(c), Income Tax Regs. No records were
maintained by ABC to substantiate how these inventory write-downs
were calculated.
After respondent’s audits were completed, on February 28,
1997, respondent issued to each petitioner a separate notice of
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