Writing off uncollectable debt

[seaweedotter]

What is the name of your state (only U.S. law)? virginia

I entered into a rather large contract with a home improvement contractor back in 2004. Around the end of 2006, after many delays, he abandoned the project, leaving much work undone. He was cited for numerous violations of contractor code in the State of Virginia, and his license is suspended.

I obtained a judgment against his company (one person corporation, llc) for $80,000. This is uncollectible, as the IRS is after him and they are first in line. He is not going to file bankruptcy at this time due to the IRS debt that cannot be discharged. The interogatories are complete, nothing to be found.

How can I best write off this debt on my taxes? Can forgiveness of debt be used and write it off all at once (or across multiple years) and send him a 1099c? I suspect I will be limited to declaring a short term loss and having the cap gains limitations, a percentage of the 80k and 3k limit per year (for the rest of my life).

Any thoughts or ideas?What is the name of your state (only U.S. law)?

[davew128]

Originally Posted by seaweedotter

What is the name of your state (only U.S. law)? virginia

I entered into a rather large contract with a home improvement contractor back in 2004. Around the end of 2006, after many delays, he abandoned the project, leaving much work undone. He was cited for numerous violations of contractor code in the State of Virginia, and his license is suspended.

I obtained a judgment against his company (one person corporation, llc) for $80,000. This is uncollectible, as the IRS is after him and they are first in line. He is not going to file bankruptcy at this time due to the IRS debt that cannot be discharged. The interogatories are complete, nothing to be found.

How can I best write off this debt on my taxes?

What is your basis in the debt? Is this money you paid or simply damages for incomplete work?

Can forgiveness of debt be used and write it off all at once (or across multiple years) and send him a 1099c?

What makes you think that forgiving the debt helps your interests? Or that sending a 1099C hurts them? If they're already insolvent, writing off the debt on your part isn't going to give them taxable income.

I suspect I will be limited to declaring a short term loss and having the cap gains limitations, a percentage of the 80k and 3k limit per year (for the rest of my life).

You should meet with a local tax professional and see if maybe the facts might not be more favorable and fit into the theft category. Not saying it is a theft but based on the little information you provided about the contractor, its not beyond the realm of imagination. Research would likely be required into prior cases and rulings on the matter.

[seaweedotter]

This was money that I paid to have work done, that was the basis of the judgment.

He did bounce a check to a gazebo store (where some of that money was targeted) and never made good on the check. With the delay in waiting for him to complete the payment, and the process of getting a lawyer and moving forward, the statute of limitations ran out on charging him with fraud. Thus, I have no easy way of claiming theft, since I have no clear burden of proof.

Doing the cancellation of debt was not to punish him, it was to accelerate my write-off, which appears to not be an option. The 1099c would have been a requirement.

[davew128]

Originally Posted by seaweedotter

He did bounce a check to a gazebo store (where some of that money was targeted) and never made good on the check. With the delay in waiting for him to complete the payment, and the process of getting a lawyer and moving forward, the statute of limitations ran out on charging him with fraud. Thus, I have no easy way of claiming theft, since I have no clear burden of proof.

Sure you do. Just because SOL ran out on charging him criminally doesn't mean there wasn't probable cause to say it wasn't a theft in the first place, if in fact you think it was a theft. The facts are what they are. Are they sufficient to say you have a theft loss? You need to review the entirety of the facts with someone capable of researching the issue. As you already corrected noted, you would have a short-term capital loss if you wrote off the debt but it may be more advantageous in the short run as a theft loss.

Based on what you have said, it looks like the LLC owes employment taxes to the IRS (by the way he also does personally no doubt) and well if there are no LLC assets, you are probably SOL (different acronym) where it comes to collecting. I am assuming you have used a collection attorney to get to this point.

[seaweedotter]

Is there a process to try to get the IRS to approve the "theft" case up front, or do I have to claim it, let them challenge it and risk the penalties, interest, etc?

I haven't been to a tax professional yet. Is there a particular specialty I should look for? It won't make any sense to spend a lot of money proving this (theft).

[davew128]

Originally Posted by seaweedotter

Is there a process to try to get the IRS to approve the "theft" case up front, or do I have to claim it, let them challenge it and risk the penalties, interest, etc?

It would cost you over $10k up front for the ruling, not including the fee for the professional who writes the request.

I haven't been to a tax professional yet. Is there a particular specialty I should look for? It won't make any sense to spend a lot of money proving this (theft).

It's not a specialty issue.