Alabama ~ Personal Income Tax: Taxpayers’ Bad Debt Deduction Claim Denied

CCH Tax Day Report

A married couple (taxpayers) was properly denied a bad debt deduction claimed on their joint Alabama personal income tax return because they failed to take reasonable steps to collect the debt due from their son. The taxpayer-husband (taxpayer) regularly lent his son money to support his son’s business but stopped doing so after the business began to struggle financially. The taxpayers’ CPA advised them to claim a bad debt deduction on their 2012 return believing the debt to be worthless because the son had no prospect of gainful employment and had zero net worth. However, the taxpayer in fact knew that his son was gainfully employed in 2012. The taxpayer also failed to get information about his son’s income, and doing so would have enabled him to attempt recovering at least a part of the amount due in the subsequent years. Consequently, the taxpayers were found to have failed to employ all reasonable means to collect the debt in order to be allowed a bad debt reduction.

Byal, et. al. v. Alabama Department of Revenue, Alabama Tax Tribunal, No. INC. 15-1208, August 8, 2016, ¶201-879

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