Editor’s Note: this is a good case for illustrating the oft stated principle that until a bad debt becomes worthless, it is not deductible.
In a case not to be cited as precedent, the California State Board of Equalization (SBE) in Consolidated Appeal of Zamora Sod Farm, et al., SBE, Case Nos. 487206; 487208; 487209, 10/25/2011, held that the California Franchise Tax Board (FTB) properly denied appellants a bad debt deduction for 2002 for monies advanced by a sod farm (a C Corporation owned in equal shares by appellants) to a nursery (one-quarter of the common stock of which was owned by each appellant).
Although the taxpayers agreed that the monetary advances from the sod farm to the nursery should be classified as equity contributions and treated as dividends paid to appellants, they claimed that they should be allowed a bad debt deduction in the same amount.
According to the SBE, the taxpayers failed to provide sufficient information for the Board to determine when or if the appellants’ investment in the nursery became worthless. They did not identify any event occurring during 2002 that would cause a reasonable taxpayer to abandon hope of future recovery. In fact, the taxpayers’ evidence seems to contradict their claim that their investment became worthless in 2002. First, the taxpayers’ sale of their interests in the nursery in 2003 for a $200,000 promissory note tends to indicate that their investment was not worthless in 2002. The fact that the nursery did not file for bankruptcy until 2005 also indicates that their investment was not worthless in 2002. (Consolidated Appeal of Zamora Sod Farm, et al., SBE, Case Nos. 487206; 487208; 487209, 10/25/2011 (not to be cited as precedent).)