Bad debt deductions limited for long-term receivables

Article Abstract:

In the case of Beneficial Corp. v. U.S., 56 A.F.T.R.2d 85-6356 (Cls. Ct. 1985), the court ruled that only debts expected to go bad in the coming year may be included in a deduction for bad debts, even though the company's average length of receivables is longer than one year. In the ruling, the court pointed out that by allowing the inclusion of anticipated losses, a distortion would be created between the taxpayer's income and deductions for the year. There will be no disadvantage to the taxpayer, as amounts in excess of those deducted in the immediate year can be taken in a succeeding year, increasing the reserves in that year. 10

Laws, regulations and rules, Tax accounting, Tax planning, Tax deductions, Accounts receivable, Beneficial Corp.

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Passive activity loss

Article Abstract:

The Tax Reform Act of 1986 established the concept of 'passive activities' and established limitations to the deductibility of losses connected with passive activity against ordinary income. Regulations associated with passive activity losses are presented which are contained in the second of three installments. The second installment was released in May 1989 and is called 'Passive Activity Loss II.' Specific topics covered in the second installment include: defining the term 'activity'; defining and discussing the term 'undertaking'; and identifying the rules related to rental and nonrental operations.

Analysis, Passive activity (Taxation)

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Cash boot received treated as capital gain

Article Abstract:

In Clark (86 TC No. 10), the tax court has made a ruling that affects the taxation of boot in a tax-free reorganization. In the ruling, the court said that cash received by Clark as part of the acquisition of Basin Surveys, Inc., of which Clark was the only shareholder, by NL Corp., should be treated by the acquiring corporation as a redemption, not a dividend. As a result, it will now be easier for acquiring companies to offer cash to stockholders, of closely held companies without causing hardship to the stockholders as the cash received will not be treated as dividends but as capital gains.

Dividends, Corporate reorganizations, Capital gains tax

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