Agenda - Council - 05/12/1981 - Laserfiche WebLink

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~, ;I'F1E WEEK IN REVIEW- 81-19 -7- MayS, 1981 request access to tax accrual workpapers. However, the new procedures do not override an exam- ining agent's access to the workpapers in cases when unusual circumstances require they be re- viewe~l in order to complete an examination. The guidelines will be distributed to IRS field personnel by the middle of May and will be effective on the date of issuance. TREASURY ISSUES BANKRUPTCY TAX ACT REGULATIONS The Bankruptcy Tax Act of 1980 substantially altered the tax treatment of discharges of indebted- ness for both solvent and insolvent taxpayers (TW/R 12/26/80). Treasury has issued temporary regulations in the following areas: · Elections relating to reduction of basis of property in connection with dis- charges of indebtedness: o To apply reduction first against depreciable property o To treat certain indebtedness as qualified business in- . debtedness o To treat certain inventory as depreciable property. · Election by individual taxpayers to terminate a taxable year when related to bankruptcy liquidations or reorganizations · Election to have the provisions of the Act apply retroactively to September 30, 1979 in the case of a debtor in bankruptcy. The regulations prescribe complex and detailed rules that are designed to prov. ide immediate guid- ance needed to comply with the Act. Personal Business Thoughts 'TAX TREATMENT OF NONBUSINESS BAD DEBTS An individual taxpayer should be aware of the tax consequences of lending money or guaranteeing loans should these amounts subsequently become uncollectible. Generally, a bus[ness bad debt is deductible in full. However, a nonbus[nes$ bad debt may not be deductible in full since it is treat- ed as a short-term capital loss, subject to a $3,000 annual deduction limitation with certain carry- over rights. A nonbusiness bad debt is any debt except one created or acquired in a taxpayer's trade or business or one related to a taxpayer's trade or business when the debt becomes worthless. The question of whether a debt meets the "trade or business" requirement is a matter of fact, but the courts gen- erally have narrowly defined 'this term. A nonbusiness bad debt is deductible only if: · A true creditor-debtor relationship exists. Generally, there must be a legal obligation to pay a fixed sum of money. · The debt is totally worthless and will remain totally worthless. You may not deduct partial worthlessness of nonbus[ness bad debts.