Debt forgiveness - Charitable contribution

[Charlie Miller]

Taxpayers made a $125,000 loan to a non-profit performing arts organization (a 501(c)(3)). The organization ran into financial difficulties and in 2007 they forgave $50,000 of the loan and deducted it as a charitable contribution on their 2007 return. IRS disallowed the deduction (for lack of verification) but we are contesting the disallowance.

The remaining $75,000 has also become uncollectable. How do I handle that? 2008? 2009? If they take it as a charitable contribution in 2008 it would carry over to 2009.

[JohnH]

Without addressing the validity of the deduction itself, I follow the general rule that anytime there's a question about when to take a deduction, it should be taken in the earliest year possible. That way you don't run into a situation in which the return is audited at a critical time (just after the SOL has run on the earlier year, for example). If you find yourself in that situation, it's too easy for IRS to say you COULD have taken the deduction in the earlier year, but since the SOL has run, you're out of luck.

[MAMalody]

I am not sure that it would meet the requirements for being a contribution. However, setting that aside, you may have some contribution documentation rules issues here if you try to claim it in 2008 as a contribution.