No Partial Bad Debt Deduction Allowed Taxpayer Had a Reserve For Anticipated Collections.

In this Field Attorney Advice from the IRS, the taxpayer loaned money against real estate that subsequently declined in value.  The real estate was foreclosed upon and the taxpayer lost money.  The taxpayer determined the loss in value of the remaining loans it held by estimating the date it expected to receive cash from the sale of the note or the sale of the real estate at foreclosure and then discounting that amount by the current appraised value to the present by using the discount rate of interest on the loan.  The IRS determined that a partial bad debt deduction was not allowed because Treas. Reg. Sec. 1.166-3(a)(2) requires the deduction be tied to an amount that is charged off during the year.  Here, the taxpayer had merely increased its reserve account for bad debts, which decreased its balance sheet assets.  It is insufficient to expect that some debts will be repaid at less than what the underlying note lists as the repayment terms.  An amount must actually be charged off.  F.A.A. 20153501F (Apr. 22, 2015).