421 Week 2 Response Question 2

Directions: Read the response below and simply write 100 words in response to what you read.

The IRS is clear that if you abandon a stock and declare it as worthless on your taxes, you can receive no benefit from it (Losses, 2018). As worthless stock, it would be listed as a capital gains loss. But it appears from the IRS discussion of bad business debt (which I believe this is because it is directly related to the operation of the business) that she should have recorded it as bad business debt. You can record partial worthlessness with bad business debt (Topic #453, 2018).

The ethical issue, of course, is whether Sally should redo her taxes even though the statute of limitations has passed (generally three years after you file or more if the error is more than 25% of your income). She also will presumably pay capital gains taxes on the $40,000 she has received, but this would not make an even exchange not quite right, I would suspect since ordinary loss (as a bad business debt is not taxed the same as a capital loss).

So, in the interest of being genuinely ethical and above board I think she should redo her taxes, whether it works out better or worse for her. Although the IRS will typically only give an individual three years to amend, in the case of worthlessness or bad debt, the IRS will allow you to amend up to seven years and Sally is still within this time frame at four years (Form 1040x, n.d.).

At the heart of ethics for the Christian is not only if something is wrong, but also if you or someone else thinks it is wrong. If we do something we believe is a sin, it is a sin (Romans 14:23, New American Standard.). And if we lead others astray it is wrong (Romans 14:13). Thankfully, as Christians, we are forgiven all these sins (John 3:16). But with our new hearts (2 Corinthians 5:17) we will want to obey, and sinning will not please us: “My eyes shed streams of water, because they do not keep your law” (Psalm 119:136).

References:

Hoffman, W., Raabe, W., Maloney, D., and Young, J (2017). Corporations, Partnerships, Estates & Trusts: 2017 Edition. Stamford, CT: South-Western (Cengage Learning).

Form 1040x amended tax return. (2018). Retrieved from https://www.hrblock.com/tax-center/irs/forms/form-…

Losses (Homes, stocks, other property) 1. (n.d.). Retrieved from https://www.irs.gov/faqs/capital-gains-losses-and-…

Topic No. 453 Bad debt deduction. (2018). Retrieved from https://www.irs.gov/taxtopics/tc453