Norwich bulletin., 1920-02-23
COLLECTOR WALSH TELLS
 WHAT BAD DEBTS ARE

In connection with income tax re- turns Collector of Internal Revenue James J. Walsh has given out the following information regarding bad debts:
 Before making any deductions for bad debts on an income tax return, the taxpayer should make sure that bad debts are of such nature that they are clearly deductible items.
 Just because the personal income tax form provides spaces in which to claim an allowance against income for uncollectible debts does not mean that the taxpayer may search his memory for a fiack of personal loans and put them down on this return.
 The Space in Block A for bad debts is for use only by business and pro- fessional men who are entitled to ad- just their income. And such adjust ment can be made only in cases where certain accounts have been in cluded in the gross income and have since, during the taxable year, been found to be uncollectible.
 In other words, only those who re- port their gross income on the ac- crual basis, that is, include their en- tire sales or chargers, are entitled to an adjustment to cover sales or
 
 termined to be worthless. A return on the basis of cash receipts and dis bursements must not show a deduc- tion for worthless debts; for the tax payer has shown as income only the accounts which have proven to be good.
 Arbitrarily writing down" debts or bills receivable is not tolerated. Such anticipated losses, which the reserve for bad debts constitutes, are wholly contrary to the spirit of the law. The individual debt itself, together with the circumstances in respect to it's becoming worthless, will also be talk en into consideration when determin- ing whether it is deductible. One other fact with respect to un- ! collectible accounts is emphasized by the internal revenue officials. That is, that any bad debt charged off and | later recovered is taxable income for the year when recovery is made. MT. Walsh went on to explain some other bad debts. About these l he said:
 Bad debts may arise, not only in a | business or profession but also | through bonds, notes, loans, mort l gages and other items of indebted ness, wherein the assets of the tax payer sustain an actual determined l loss. In these latter items any act 1 ual losses sustained by an individua may be claimed as a, deduction as Item 5, Block I, of his return. Holders of bonds which have be- come worthless because of dissolution l and utter bankruptcy of the issuing corporation revealing no assets for 1 distribution to the bondholders are entitled to deduct the loss sustained The amount of such loss will be de l termined by the actual loss; or ii '! purchased prior to March l, 1913, the i fair market value on that date.
 As to notes, loans, etc, which a taxpayer deems uncoIectible the facts in each case will determine whether they are proper deductions They must be ascertained to be worthless and must be charged on as an asset within the year. If a debt is forgiven it cannot be deducted. fol it thus becomes a gift and as such i does not constitute a deductible item | Int case of a loan to a relative oI close personal friend, it's character as a true debt must be proven. if any l deduction is claimed when it becomes worthless
 1 Worthless debts arising from un paid wages. salaries, rents, or similar 1 items of income will not be allowed as a deduction unless the income such items represent has been in | cluded in the return of income for the 1 year in which the deduction as a bac debt is sought to be made or in 2