REVENUE RULE 93-27

1993-1 C.B. 32, 1993-15 I.R.B. 4.

Internal Revenue Service
Revenue Ruling

BAD DEBT DEDUCTION; CHILD SUPPORT PAYMENTS

Published: April 12, 1993

§ 166. Bad Debts, 26 CFR 1.166-1: Bad debts.

Bad debt deduction; child support payments. A taxpayer is not entitled to a bad debt deduction for the amount of the taxpayer's own payment in support of the taxpayer's children caused by an arrearage in court-ordered child support payments owed by a former spouse.

ISSUE

Is a taxpayer entitled to a nonbusiness bad debt deduction under § 166(a)(1) of the Code for the amount of the taxpayer's own payment in support of the taxpayer's children caused by an arrearage in court-ordered child support payments owed by a former spouse?

FACTS

The taxpayer, A, was divorced in 1989 from B and was granted custody of their two minor children. Pursuant to a property settlement and support agreement that was incorporated into the divorce decree, B agreed to pay to A $500 per month for child support. During 1991, B failed to pay $5,000 of this obligation. Because of B's arrearage, A had to spend $5,000 of A's own funds in support of A's children.

LAW AND ANALYSIS

§ 166(a)(1) of the Code allows as a deduction any debt that becomes worthless within the taxable year.

§ 166(b) of the Code provides that for purposes of § 166(a), the amount of the deduction for any worthless debt is the adjusted basis provided in § 1011 for determining the loss from the sale or other disposition of property.

§ 1011 of the Code generally provides that the adjusted basis for determining the gain or loss from the sale or other disposition of property, whenever acquired, is the basis as determined under § 1012.

§ 1012 of the Code provides that the basis of property is the cost of the property.

In Swenson v. Commissioner, 43 T.C. 897 (1965), the taxpayer claimed a bad debt deduction under § 166(a)(1) of the Code for an uncollectible arrearage in child support payments from a former spouse. The Tax Court denied the deduction on the ground that § 166(b) precluded any deduction because the taxpayer had no basis in the debt created by the child support obligation. The taxpayer had argued that her basis consisted of the expenditures for child support she was forced to make from her own funds as a result of the father's failure to make his required payments. The court pointed out, however, that the father's obligation to make the payments had been imposed by the divorce court and was not contingent on the taxpayer's support expenditures. It stated that those expenditures neither created the arrearage nor constituted its cost to the taxpayer. Swenson, at 899.

The Tax Court has followed the decision in Swenson on similar facts in Perry v. Commissioner, 92 T.C. 470 (1989); Meyer v. Commissioner, T.C.M. 1984-487; Pierson v. Commissioner, T.C.M. 1984-452; and Diez-Arguellos v. Commissioner, T.C.M. 1984-356.

In the present case, as in those above, B's obligation to make the child support payments to A was imposed directly by the court. A's own child support expenditures did not create or affect B's obligation to A under the divorce decree. Accordingly, A did not have any basis in B's obligation to pay child support, and A may not claim a bad debt deduction under § 166(a)(1) of the Code with regard to an arrearage in those payments.

The Service does not accept certain arguments relating to basis that were raised in Imeson v. Commissioner, 487 F.2d 319 (9th Cir.1973), cert. denied, 417 U.S. 917 (1974). The Ninth Circuit affirmed an opinion of the Tax Court, Imeson v. Commissioner, T.C.M. 1969-180, which held that a taxpayer was not entitled to a bad debt deduction under § 166 of the Code in a situation in which the taxpayer's spouse had failed to make court-ordered child support payments. However, the Ninth Circuit's per curiam opinion was based on the narrow ground that the taxpayer had failed to prove the amount of her expenditures to support the children. The Ninth Circuit noted (without deciding) possible arguments to support a bad debt deduction for the taxpayer based on an analogy to a homeowner who pays materialmen's liens on a house after the builder has defaulted, or to a guarantor who pays the creditor when the principal debtor defaults. The Tax Court, in its more recent Perry, Meyer, Pierson, and Diez-Arguellos decisions, has distinguished and declined to follow the Ninth Circuit's possible arguments in Imeson. The Service will follow the decisions of the Tax Court on this issue.

HOLDING

A taxpayer is not entitled to a bad debt deduction under § 166(a)(1) of the Code for the amount of the taxpayer's own payment in support of the taxpayer's children caused by an arrearage in court-ordered child support payments owed by a former spouse.

DRAFTING INFORMATION

The principal author of this revenue ruling is G. Channing Horton of the Office of Assistant Chief Counsel (Income Tax and Accounting). For futher information regarding this revenue ruling, contact Mr. Horton on (202) 622- 4920 (not a toll-free call).

Rev. Rul. 93-27, 1993-1 C.B. 32, 1993-15 I.R.B. 4.