- 14 -
decide whether a creditor may deduct a bad debt where the
creditor’s actions contributed to the debtor’s default.
We proceed by explaining the general legal principles
surrounding partial bad debt deductions under section 166(a)(2).
We then analyze and distinguish a Court of Federal Claims case
concerning a similar issue.
General Rules Under Section 166
Whether a debt has become partially worthless is a facts and
circumstances determination. Sec. 166(a)(2); sec. 1.166-2(a),
Income Tax Regs. A taxpayer can establish worthlessness by
showing that a debt has neither current nor potential value.
Dustin v. Commissioner, 53 T.C. 491, 501 (1969), affd. 467 F.2d
47 (9th Cir. 1972).
Though the Commissioner’s determination is generally
presumed correct, the Commissioner must reasonably exercise his
discretion. Brimberry v. Commissioner, 588 F.2d 975, 977 (5th
Cir. 1979), affg. T.C. Memo. 1976-209; Portland Mfg. Co. v.
Commissioner, 56 T.C. 58, 72 (1971), affd. on other grounds 35
AFTR 2d 75-1439, 75-1 USTC par. 9449 (9th Cir. 1975). The
Commissioner’s exercise of discretion regarding a bad debt should
not be reversed unless it is plainly arbitrary and unreasonable.
Ark. Best Corp. & Subs. v. Commissioner, 800 F.2d 215, 221 (8th
Cir. 1986), affg. in part and revg. in part 83 T.C. 640 (1984),
affd. on other grounds 485 U.S. 212 (1988); Brimberry v.
Page: Previous 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 NextLast modified: May 25, 2011