Melvyn L. Bell v. Commissioner of Internal Revenue

LOKEN, Circuit Judge.

The Internal Revenue Code allows taxpayers to deduct “bad debts.” An individ ual taxpayer may deduct from ordinary income a business debt if it becomes totally or partially worthless during the tax year. Any unused portion of that deduction increases the taxpayer’s net operating losses that may be carried back to offset taxable income in earlier tax years. However, an individual’s nonbusiness bad debts are only recognized when they become totally worthless, and they are treated as short-term capital losses, which means they may offset no more than $3,000 of ordinary…