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Duly Noted

When deducting bad debts, conduct and timing matters. George Saadian and his mother loaned $200,000 to a distantly related businessman in 1988 and expected repayment within 12 years. They did not get it, but they refrained from legal action because they were reluctant to sue a fellow member of southern California’s Iranian Jewish community. The borrower died in 2004. After trying unsuccessfully to collect the money from his sons, Saadian claimed a capital loss for the bad debt on his 2006 tax return. But he was out of luck once again. The IRS denied his deduction, and Saadian’s appeal to the Tax Court failed as well. Judge Lewis Carluzzo ruled that the lender’s failure to take legal action “for personal rather than financial reasons, in and of itself, operates to deny him the deduction.” Moreover, the judge concluded, the debt became worthless prior to 2006, and could not be deducted on that year’s tax return. George Saadian v. Commissioner, T.C. Summ. Op. 2012-44.

A bad sequence of steps produces a bad tax result. Young Kim left his position as partner in a law firm in 2005, at age 56, and elected to roll over his account from the firm’s retirement plan to an IRA. Kim withdrew $240,000 from the IRA the following year. He paid tax on the withdrawal but not the 10 percent penalty that applies to most distributions prior to age 59 1/2. Kim took the position that because he was over age 55 when he left the law firm, the 10 percent penalty did not apply. But his argument was rejected by the IRS, the Tax Court, and ultimately the U.S. Seventh Circuit Court of Appeals. The appeals court noted that although Kim could have taken the distribution without penalty directly from the law firm’s plan, the statutory exception does not apply to distributions from IRAs - even when the IRA was funded by a rollover from a qualified plan. “Kim insists that this makes no sense,” Chief Judge Frank H. Easterbrook wrote for a unanimous three-judge panel. “Why should it matter that the money went from the law firm’s plan to an IRA before being withdrawn? The answer is that the Internal Revenue Code says that it matters.” Young Kim v. Commissioner, No. 11-3390.

Tax day is a good day to stay off the roads. U.S. traffic deaths typically increase by 6 percent on April 15, when most personal income tax returns are due, according to a study recently published in the Journal of the American Medical Association. Researchers said increased stress may cause drivers to make mistakes that lead to accidents. The study compared deaths on tax deadline day in the years from 1980 through 2009 with deaths on control dates that fell one week before and one week after the deadline. The study recommends that authorities make extra efforts to remind motorists to wear seat belts and to avoid speeding and distractions. Of course, another option is to stay home on tax day. 2012 TNT 71-7.

If you enjoyed this article, be sure to check out Palisades Hudson’s book, Looking Ahead: Life, Family, Wealth and Business After 55, now available in paperback and as an e-book.

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