Mom loans son $20,000 and has documentation to prove this. Son does not and will not ever pay. Mom claims a non business bad debt on her 1040. The son is not insolvent or in bankruptcy. Is he required to report the $20,000 as income?
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No, mom's required to file an amended return and withdraw the deduction for the bad debt.Originally posted by Kram BergGold
I have kids. I wish I could transfer money that way. It won't fly. No true debtor/creditor relationship, no efforts to collect the debt, no arm's length characteristics. -
What? even if documentation in form of a promissory note was signed by son?Originally posted by Armando Beaujolais
And even if she had made attempts to collect?
Holiday ChEAr$,
Harlan Lunsford, EA n LAChEAr$,
Harlan Lunsford, EA n LAComment
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Obviously we can't know all the details. The only information about collectibility is that the son is not insolvent or in bankruptcy. Just that the son "does not and will not" pay. That's a far cry from "cannot pay."Originally posted by ChEAr$
The first hurdle to jump through is that there must be a bona fide debtor/creditor relationship. I don't care how many documents they make up, if the situation is that the son "does not and will not pay," and the mom just says "Oh well, I'm out the money," it's not a bad debt. Would a bank or other lending institution just say "Oh, well."
Certainly, if there was a "real" attempt to collect, you could have a bad debt. I didn't see anything in the original posting that indicated any bona fide collection activity. Is the mom going to make sure this goes on the son's credit report? I doubt it.
If all it takes is a document, I'm going to write one up right now and "loan" a bundle to my daughter who's in college. Later on I'll write up a document where she says she won't and will never pay me back. Heck, I'll do it by the end of the year, and I'll bet I save 50% in taxes on $25,000. And I'll be able to take the education credits too, because the $25,000 was a "loan" (nod nod, wink wink), and wasn't actually an amount paid for tuition.
Sorry to be sarcastic, but there was not one thing in the orginal post that indicated anything bona fide about that loan, other than a "document" was prepared. Nothing in the information presented gave any indication of an arm's length characteristic or a true debtor/creditor relationship.Comment
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assign that 20K to me
Even if she has a valid promissory note, it's not a bad debt until it is totally worthless. And if he's really got the money, I'll give her a C-note to assign that 20K to me!Comment
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Oh, that's alright. Just know that my question didn't just concern the OP, but to allOriginally posted by Armando Beaujolais
such affairs.
If mom did have a valid promissory note, and did make reasonable efforts to collect the
debt, and that she could take the matter to court (even if she didn't, knowing it would
do no good) I would still consider it a bad debt, with income to son of course.
Unless of course, she still had him under roof! (grin)
Holiday ChEAr$,
Harlan Lunsford, EA n LAChEAr$,
Harlan Lunsford, EA n LAComment
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Also, if there were never any payments made that is a strong indicator of a "gift loan".Comment
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Except
that all loans are not structured as installment loans.
Holiday ChEAr$,
Harlan Lunsford, EA n LAChEAr$,
Harlan Lunsford, EA n LAComment
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Hence the word "indicator".Originally posted by ChEAr$Comment
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