The Waterbury Democrat., 1944-02-16
DEDUCTIONS FOR BAD DEBTS
 (PART n


 (PART 1)
 If debt has become worthless during the year, the amount may, with certain exceptions, be taken as a deduction from income in com- putting Federal normal tax and sur- tax.
 Bad debts arising from sales and services are shown in Schedule C(2) on page 2 of the return, Form 1040, to arrive at net profit Cor loSs) from business or profession. Nonbusiness bad debts, and losses from worth less bond and inilar obligations which are in registered form or accompanied by interest coupons, should be included in Schedule B and in item 6 on page l of the Form 1c40 as losses on capital assets, the nonbusineSs debts being treated as capital assets held for not more than six months. On short Form 1040A, no deduction for bad debts should be entered, because the tax table on this form already allows the benefit of an average amount for such deductions.
 In all cases of a deduction for bad debt the explanation must show (a) of what the debt consisted, (b) name and family relationship, if any, of the debtor, Co when the debt was created, (d) when it be- came due, (e) what efforts have been made to collect the debt. and (f) how it was determined to be worthless. A precise statement is required because of the many diff ferent transactions out of which the relationship of debtor and cred itor may arise and the consequently numerous definitions of the word debt.
 In order to be an allowable deduc- ton, debt must become worth less within the year for which the return is made. The determinatio of worthlessness is an important provision in establishing the allow ability of the deduction. The tax. payer must take reasonable step. to determine that there is no prob ability of payment or collection and must have prima facle evidence to prove that the debt has no value If, in the exercise of sound bushes! judgment, a taxpayer concludes after making every reasonable effort to determine whether there is like lihood of recovery, that the debt is of no value, deduction for sucE debt may be allowable. Court &C., tion, such as 8 legal judgment ol adjudication in bankruptcy, is not necessary as proof that the debt is worthless.
 Since the deduction must be taker for the taxable year in which the debt becomes worthless. the fact that a debt is still held open on tht books of the taxpayer does not near that 1t has value. The law does no, permit taxpayer to defer claiming a deductible allowance on that ac. count, beyond the year in which il becomes worthless.
 A further requirement. regarding deductibility for bad debts is that a debt must have existed in fac and in law. If debtor was no legally liable to the taxpayer, ther there was no debt to become worth less. Advances to relatives to tidt them over financial straits, mad. out of moral considerations ant without understandings regarding repayment, are frequently held tt be in the nature of a gift rather than a loan, and consequently nt deduction would be allowable fol nonpayment. However, when loar is made to relative in a bona fidt business transaction, deduction may be allowed because of uncol lectibility.
 In computing victory tax. onl those bad debts are allowable whicl have been incurred in the course c trade or business. They shoul be shown in Schedule C(2) in al irving at the net profit Cor loss from business or profession.