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Write Off of Debt

Write off of debt is cancellation of a debt in the account books of a creditor.  When a creditor writes off a debt and charges the debtor on the extra amount after the written off debt, it can be taken as evidence that the debtor is discharged from that written off debt.  But it may not be conclusive evidence as to the discharge of the liability.  A debt can be said to be fully discharged when the account as to the debt is settled and all the audit and administrative procedures are finalized without any liability to the debtor.

However, if the debtor makes entry in his/her account books to the effect that a debt is being written off, it can be considered as an evidence of discharge of debt.  However, it may not be considered conclusive evidence.

The resolutions of a corporation stating that some uncollectible debts should be written off are not a discharge of a debt[i]. An entry made in the books of a corporation or other activities of the corporation writing off debts amounts to cancellation of debt[ii].

When a liability is forgiven it will not be added to the income of the debtor in assessing the tax of a debtor[iii].

[i] Sala v. Commissioner, 146 F.2d 228 (2d Cir. 1944).

[ii] Exchange Sec. Bank v. United States, 492 F.2d 1096, 1099 (5th Cir. Ala. 1974).

[iii] K & S Electric Co. v. Commissioner, T.C. Memo 1969-291 (T.C. 1969).

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