A taxpayer can generally deduct a bad debt in the year it becomes worthless. But these deductions are disallowed if the debt is owed by a political party. One taxpayer claimed a bad debt deduction for an unpaid loan he made to a now-defunct 501(c)4 organization. He stated the organization wasn’t a political party, but existed to advocate for better public education. In Chief Counsel Advice, the IRS said the 501(c)4 was a political party, as it spent money to influence the election of a candidate for public office. The bad debt deduction was denied.
Taxpayers that have a tax dispute may request a hearing before the IRS Office of Appeals. They then raise issues to be considered. One taxpayer was found to owe $39,737. Instead of paying it, he sent a check on a related matter, for $1,396, with a letter instructing the IRS that, if this amount didn’t satisfy his full tax bill, the check shouldn’t be cashed. The check was cashed, and he was sent a notice of deficiency for the balance. The U.S. Tax Court found the taxpayer’s arguments were “meritless,” and that no settlement had been reached.