Client had a ATV that they carried to a motorcycle shop to have repaired.Shop owner ask for downpayment for parts which client paid.Shop owner disassembled ATV to repair then closed his shop and filed bankruptcy.Client has gone to small claims court to get payment for ATV which now can't be found but small claims court couldn't do anything due to the bankruptcy.ATV had a fmv of $3000.Client has been named in shop owner's bankruptcy as a creditor.Question is, would you take the loss as a bad debt, site the bankruptcy case number on Sch D.
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Don't think so
To have a bad debt there has to be a loan and proof of such. Here there was no debt relationship between the two parties. I think it is a casualty loss. -
Well, there is a debtor relationship created here by the courts, who have ruled the shop owner owes money to the client.
The problem here, though, is that it is more in the nature of a cash basis taxpayer with a bad debt. A cash basis taxpayer with a bad debt cannot deduct the loss because the debt has not yet been included in income. You can't take the $3,000 FMV of the ATV and call that a bad debt because the taxpayer has yet to include that $3,000 in income. You would have to go by cost basis under this scenario (which could be higher or lower).
The other issue I have a problem trying to resolve is that we have personal use property. The ATV is not business or investment property, and you cannot deduct a loss on the disposition of personal use property. So why would you get to under this situation? You could if it was a casualty loss, but your client is not going to benefit from a casualty loss due to the 10% AGI rule.
So I'm not sure you have anything here to work with.Comment
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I'm not sure
I'm not sure from original post if this bankruptcy is closed yet. Filing as a creditor does not necessarily mean that the debt is worthless. For that matter, it doesn't even mean that the debt exists. As a preparer, I would want to see what the court said about it before I allowed a deduction. Then I would probably treat it as a casualty loss, though I'm not sure how much a broken-down ATV is really worth.Comment
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I'm going to assume everybody means theft loss, since it's obviously not a casualty loss. However, unless there's fraud involved, which is possible it doesn't qualify as a theft loss either.Comment
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I tend to agree that it is a theft loss even if not fraud. However, I would expect that the remains of the vehicle may have been returned?Originally posted by UnregisteredComment
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