In a recent tax court case it was revealed that taking a large bad debt deduction leads to IRS scrutiny in this case.
Through his S corporation, an investor advanced funds to small companies in return for financial control and a minority equity interest. (I am curious on who held the ownership the S-Corp or the taxpayer; S-Corps are limited in what they can own as far as other companies are concerned)
Later, the S corporation claimed on its return a $10-million bad debt write-off, which IRS nixed on audit.
The Tax Court agreed, saying the advances were equity contributions and not loans.
There were no written notes, interest wasn’t charged, and there was no fixed date for repayment. Additionally, the S corporation continued to finance the companies after the year in which the bad debt deduction was taken.
I have to agree with this judgement.
Sensenig, TC Memo. 2017-1