Purchased business asset-never delivered

[JenMO]

Client ordered a trailer from a dealer in another state. Went to the bank, borrowed the money, sent it, never received the trler. It's been over a year, and no trler. To hire a lawyer and try to force the issue would cost about as much as the trler, and client doesn't think he will ever see the trler or the money. (Why pour more money into a dark hole?) This would have been a depreciable business asset. The note at the bank will have to be paid back with business money. Where is this deducted? On the Sch C (so to be a deduction from SE also)?

[erchess]

Business Bad Debt is an Ordinary Loss

A business bad debt of a Sch C Business is deducted on the Sch C. However I think he needs to be able to show that he consulted an attorney before simply concluding on his own that going to court would not be productive.

[S T]

Question

Hmm, would it be a business bad debt, or a theft loss?

Sandy

[solomon]

Assuming the dealer is in violation of his state law, I think §165(c)(1) would be the appropriate treatment. This then would go in Sec. B of Form 4684 and thus end up as an ordinary loss on Form 4797.

[erchess]

Puzzled

Assuming the dealer is in violation of his state law, I think §165(c)(1) would be the appropriate treatment. This then would go in Sec. B of Form 4684 and thus end up as an ordinary loss on Form 4797.

I looked up the referenced code section and all I found was the bare statement that a transaction having a profit motive or made in the course of business is a deductible business loss. I didn't see where the other party has to be in violation of State Law and I didn't see how to deduct.

[solomon]

I looked up the referenced code section and all I found was the bare statement that a transaction having a profit motive or made in the course of business is a deductible business loss. I didn't see where the other party has to be in violation of State Law and I didn't see how to deduct.

From IRB 2004-16:

Whether a loss constitutes a theft loss is determined by examining the law of the state where the alleged theft occurred. Edwards v. Bromberg, 232 F.2d 107, 111 (5th Cir. 1956); Viehweg v. Commissioner, 90 T.C. 1248, 1253 (1988). Thus, to claim a theft loss, the taxpayer must prove that the “loss resulted from a taking of property that is illegal under the law of the state where it occurred and that the taking was done with criminal intent.” Rev. Rul. 72-112, 1972-1 C.B. 60.

Regarding where to report this type of theft (assuming it is theft), that is part of the reason for Sec. B of Form 4684.

[Zee]

As indicated in other threads, If he can't hire an attorney, why not use Small Claims Court? The cost is minimal. However, I would think if the contract was completed where he lives, he would use a local Small Claims court. Obviously, the seller won't show up and he'll be granted a judgement. Then, he can contact the Sheriff where the seller does business to collect. If it's uncollectible, it will be well established and documented at that point and deductible on the Schedule C as a business loss(IMHO).
Wherever it's deducted, there must have been a reasonable to attempt to collect.

[kaimana]

This is clearly theft by fraud...he should report it to the police and deduct it as a theft on Sch C.

[Jesse]

Still learning.....

This is clearly theft by fraud...he should report it to the police and deduct it as a theft on Sch C.

Is there a special rule for theft by fraud? If not, I respectfully disagree in the deduction on Sch C.

Assuming the dealer is in violation of his state law, I think §165(c)(1) would be the appropriate treatment. This then would go in Sec. B of Form 4684 and thus end up as an ordinary loss on Form 4797.

From Form 4797 it is then entered on page one of Form 1040; you do not enter the amount on Schedule C.

[Zee]

I suppose it could be fraud, but that information isn't available from the post. The seller may have simply closed, filed for bankruptcy, etc. But, it wouldn't hurt to try both approaches to document the loss.

[solomon]

From Form 4797 it is then entered on page one of Form 1040; you do not enter the amount on Schedule C.

I was giving the poster the benefit of the doubt in knowing that much.

[JenMO]

The client told me when we did 07's return that he had ordered this trler and had not yet been delivered. The trler mfger is several states away, I believe he ordered on line ( and was probably too trusting). He took out a note at the bank for this trler which I would think would be documentation for it, anyway. He says he has made calls, I don't know if he went to the manufacturer, but I will find out. If it is a viable loss, I think it should be deductible on the Sch C, as it will be paid for with Sch C funds. I will make sure he has or will make attempts to collect and have documentation for this. thanks for the imput.

[solomon]

The client told me when we did 07's return that he had ordered this trler and had not yet been delivered. The trler mfger is several states away, I believe he ordered on line ( and was probably too trusting). He took out a note at the bank for this trler which I would think would be documentation for it, anyway. He says he has made calls, I don't know if he went to the manufacturer, but I will find out. If it is a viable loss, I think it should be deductible on the Sch C, as it will be paid for with Sch C funds. I will make sure he has or will make attempts to collect and have documentation for this. thanks for the imput.

There are no "Sch C" funds as such with a disregarded entity.

[kaimana]

"Will be paid for" if it hasn't yet been paid for then why pay for it. If it has been paid for and not delivered perhaps the payment can be pulled. I don't see how you can expense it on Sch C if you never got it; Or take a deduction for it unless and until there is some proof that it will not be delivered.

You don't have a loss until you have some documentation that the order will not be honored and the money has not been returned. Criminal action, civil action or other attempts to be reimbursed for any monies paid is necessary before this item can be deducted in any way on the tax return.

[newbie]

Client ordered a trailer from a dealer in another state. Went to the bank, borrowed the money, sent it, never received the trler. It's been over a year, and no trler. To hire a lawyer and try to force the issue would cost about as much as the trler, and client doesn't think he will ever see the trler or the money. (Why pour more money into a dark hole?) This would have been a depreciable business asset. The note at the bank will have to be paid back with business money. Where is this deducted? On the Sch C (so to be a deduction from SE also)?

This is clearly theft by fraud...he should report it to the police and deduct it as a theft on Sch C.

"Will be paid for" if it hasn't yet been paid for then why pay for it. If it has been paid for and not delivered perhaps the payment can be pulled. I don't see how you can expense it on Sch C if you never got it; Or take a deduction for it unless and until there is some proof that it will not be delivered.

You don't have a loss until you have some documentation that the order will not be honored and the money has not been returned. Criminal action, civil action or other attempts to be reimbursed for any monies paid is necessary before this item can be deducted in any way on the tax return.

OP said: Went to the bank, borrowed the money, sent it, never received the trler.

If deprec starts when placed in service it was not or should not have been expensed on sched C. Where does "Will be paid for" come into the picture?

So are you saying if theft by fraud sched C? If no proof SOL?