The Significant Motivation Test for Determining Business Bad Debt Deductions



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Texas Tech Law Review


Examines the United States Court of Appeals for the Fifth Circuit’s case United States v. Generes. This case was brought by a taxpayer who was engaged in the business of “obtain[ing] bank financing for corporate activities and to secure performance and bid bonds for the corporation’s construction jobs.” The corporation defaulted and the taxpayer, unable to collect from the corporation or the indemnified bonding company, deducted the amount on its tax return as a business bad debt pursuant to section 166 of the Internal Revenue Code. The IRS eventually disallowed this deduction, arguing that this was not a business bad debt because it was not sufficiently connected to the taxpayer’s trade or business. The fifth circuit held that a debt is sufficiently proximate to a taxpayer’s trade or business if it is significantly, even if not primarily, motivated by it. The author suggests that there is still uncertainly as to which test to use across the circuit courts, and predicts that the United States Supreme Court will grant certiorari.



Business bad debt deduction, Tax return deduction, Internal Revenue Code § 166, United States v. Generes, Significant motivation test, Case note


2 Tex. Tech L. Rev. 318