In year one self-employed Lawyer performs legal services for Client and bills the Client $1,000. Client does not pay Lawyer. In year six it becomes evident the debt will never be paid.

(a)What else must be known in order to determine whether Lawyer is entitled to a bad debt deduction? What will the character of any allowed deduction be?

(b)Assuming that the Commissioner asserts (and Lawyer cannot show otherwise) that the debt in fact became worthless in year two, is Lawyer's use of the bad debt deduction necessarily foreclosed by the statute of limitations? 

(c)Assuming Lawyer was allowed a deduction for year six, what tax consequences to Lawyer if in year seven Client inherits some money and pays the $1,000 obligation? What consequences upon payment in year seven if Lawyer properly was not allowed the deduction in year six

Answer rating: 100% (QA)

a To determine whether the lawyer is entitled to a bad debt deduction additional information is needed Basis for Deduction Whether the lawyer uses the ... View the full answer