
From the U.S. Code Online via GPO Access
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[Laws in effect as of January 2, 2001]
[Document not affected by Public Laws enacted between
  January 2, 2001 and January 28, 2002]
[CITE: 26USC166]

 
                     TITLE 26--INTERNAL REVENUE CODE
 
                        Subtitle A--Income Taxes
 
                  CHAPTER 1--NORMAL TAXES AND SURTAXES
 
               Subchapter B--Computation of Taxable Income
 
      PART VI--ITEMIZED DEDUCTIONS FOR INDIVIDUALS AND CORPORATIONS
 
Sec. 166. Bad debts


(a) General rule

                     (1) Wholly worthless debts

        There shall be allowed as a deduction any debt which becomes 
    worthless within the taxable year.

                    (2) Partially worthless debts

        When satisfied that a debt is recoverable only in part, the 
    Secretary may allow such debt, in an amount not in excess of the 
    part charged off within the taxable year, as a deduction.

(b) Amount of deduction

    For purposes of subsection (a), the basis for determining the amount 
of the deduction for any bad debt shall be the adjusted basis provided 
in section 1011 for determining the loss from the sale or other 
disposition of property.

[(c) Repealed. Pub. L. 99-514, title VIII, Sec. 805(a), Oct. 22, 1986, 
        100 Stat. 2361]

(d) Nonbusiness debts

                          (1) General rule

        In the case of a taxpayer other than a corporation--
            (A) subsection (a) shall not apply to any nonbusiness debt; 
        and
            (B) where any nonbusiness debt becomes worthless within the 
        taxable year, the loss resulting therefrom shall be considered a 
        loss from the sale or exchange, during the taxable year, of a 
        capital asset held for not more than 1 year.

                    (2) Nonbusiness debt defined

        For purposes of paragraph (1), the term ``nonbusiness debt'' 
    means a debt other than--
            (A) a debt created or acquired (as the case may be) in 
        connection with a trade or business of the taxpayer; or
            (B) a debt the loss from the worthlessness of which is 
        incurred in the taxpayer's trade or business.

(e) Worthless securities

    This section shall not apply to a debt which is evidenced by a 
security as defined in section 165(g)(2)(C).

(f) Cross references

            (1) For disallowance of deduction for worthlessness of debts 
        owed by political parties and similar organizations, see section 
        271.
            (2) For special rule for banks with respect to worthless 
        securities, see section 582.

(Aug. 16, 1954, ch. 736, 68A Stat. 50; Pub. L. 85-866, title I, Sec. 8, 
Sept. 2, 1958, 72 Stat. 1608; Pub. L. 89-722, Sec. 1(a), Nov. 2, 1966, 
80 Stat. 1151; Pub. L. 91-172, title IV, Sec. 431(c)(1), Dec. 30, 1969, 
83 Stat. 619; Pub. L. 94-455, title VI, Sec. 605(a), title XIV, 
Sec. 1402(b)(1)(A), (2), title XIX, Sec. 1906(b)(13)(A), Oct. 4, 1976, 
90 Stat. 1575, 1731, 1732, 1834; Pub. L. 98-369, div. A, title X, 
Sec. 1001(b)(1), (e), July 18, 1984, 98 Stat. 1011, 1012; Pub. L. 99-
514, title VIII, Sec. 805(a), (b), title IX, Sec. 901(d)(4)(A), Oct. 22, 
1986, 100 Stat. 2361, 2379; Pub. L. 100-647, title I, Sec. 1008(d)(1), 
(2), Nov. 10, 1988, 102 Stat. 3439.)


                               Amendments

    1988--Subsec. (d)(1)(A). Pub. L. 100-647, Sec. 1008(d)(1), 
substituted ``subsection (a)'' for ``subsections (a) and (c)''.
    Subsecs. (f), (g). Pub. L. 100-647, Sec. 1008(d)(2), made clarifying 
amendment to directory language of Pub. L. 99-514, Sec. 805(b), see 1986 
Amendment note below.
    1986--Subsec. (c). Pub. L. 99-514, Sec. 805(a), struck out subsec. 
(c), reserve for bad debts, which read as follows: ``In lieu of any 
deduction under subsection (a), there shall be allowed (in the 
discretion of the Secretary) a deduction for a reasonable addition to a 
reserve for bad debts.''
    Subsec. (f). Pub. L. 99-514, Sec. 805(b), as amended by Pub. L. 100-
647, Sec. 1008(d)(2), redesignated subsec. (g) as (f) and struck out 
former subsec. (f) which related to reserve for certain guaranteed debt 
obligations, par. (1) thereof providing for allowance of deduction, par. 
(2) disallowing deduction in other cases, par. (3) relating to opening 
balance of reserve, and par. (4) relating to suspense account.
    Subsec. (g). Pub. L. 99-514, Sec. 805(b), as amended by Pub. L. 100-
647, Sec. 1008(d)(2), redesignated subsec. (g) as (f).
    Pub. L. 99-514, Sec. 901(d)(4)(A), struck out pars. (3) and (4) 
which read as follows:
    ``(3) For special rule for bad debt reserves of certain mutual 
savings banks, domestic building and loan associations, and cooperative 
banks, see section 593.
    ``(4) For special rule for bad debt reserves of banks, small 
business investment-companies, etc., see sections 585 and 586.''
    1984--Subsec. (d)(1)(B). Pub. L. 98-369 substituted ``6 months'' for 
``1 year'', applicable to property acquired after June 22, 1984, and 
before Jan. 1, 1988. See Effective Date of 1984 Amendment note below.
    1976--Subsecs. (a)(2), (c). Pub. L. 94-455, Sec. 1906(b)(13)(A), 
struck out ``or his delegate'' after ``Secretary''.
    Subsec. (d)(1)(B). Pub. L. 94-455, Sec. 1401(b)(1)(A), (2), provided 
that ``6 months'' would be changed to ``9 months'' for taxable years 
beginning in 1977, and ``9 months'' would be changed to ``1 year'' for 
taxable years beginning after Dec. 31, 1977.
    Subsec. (f). Pub. L. 94-455, Secs. 605(a), 1906(b)(13)(A), 
redesignated subsec. (g) as (f) and struck out ``or his delegate'' after 
``Secretary'' in pars. (1), (3) and (4)(D). Former subsec. (f), which 
related to treatment of payments made by guarantors of certain 
noncorporate obligations, was struck out.
    Subsecs. (g), (h). Pub. L. 94-455, Sec. 605(a), redesignated 
subsecs. (g) and (h) as (f) and (g), respectively.
    1969--Subsec. (h)(4). Pub. L. 91-172 added par. (4).
    1966--Subsecs. (g), (h). Pub. L. 89-722 added subsec. (g) and 
redesignated former subsec. (g) as (h).
    1958--Subsec. (d)(2)(A). Pub. L. 85-866 substituted ``a trade or 
business of the taxpayer'' for ``a taxpayer's trade or business''.


                    Effective Date of 1988 Amendment

    Amendment by Pub. L. 100-647 effective, except as otherwise 
provided, as if included in the provision of the Tax Reform Act of 1986, 
Pub. L. 99-514, to which such amendment relates, see section 1019(a) of 
Pub. L. 100-647, set out as a note under section 1 of this title.


                    Effective Date of 1986 Amendment

    Section 805(d) of Pub. L. 99-514 provided that:
    ``(1) In general.--The amendments made by this section [amending 
this section and sections 81, 108, 461, and 805 of this title] shall 
apply to taxable years beginning after December 31, 1986.
    ``(2) Change in method of accounting.--In the case of any taxpayer 
who maintained a reserve for bad debts for such taxpayer's last taxable 
year beginning before January 1, 1987, and who is required by the 
amendments made by this section to change its method of accounting for 
any taxable year--
        ``(A) such change shall be treated as initiated by the taxpayer,
        ``(B) such change shall be treated as made with the consent of 
    the Secretary, and
        ``(C) the net amount of adjustments required by section 481 of 
    the Internal Revenue Code of 1986 to be taken into account by the 
    taxpayer shall--
            ``(i) in the case of a taxpayer maintaining a reserve under 
        section 166(f), be reduced by the balance in the suspense 
        account under section 166(f)(4) of such Code as of the close of 
        such last taxable year, and
            ``(ii) be taken into account ratably in each of the first 4 
        taxable years beginning after December 31, 1986.''
    Section 901(e) of Pub. L. 99-514 provided that: ``The amendments 
made by this section [amending this section and sections 172, 291, 582, 
585, 593, 596, 856, 1277, and 1361 of this title and repealing section 
586 of this title] shall apply to taxable years beginning after December 
31, 1986.''


                    Effective Date of 1984 Amendment

    Section 1001(e) of Pub. L. 98-369 provided that: ``The amendments 
made by this section [amending this section and sections 341, 402, 403, 
423, 582, 584, 631, 642, 702, 818, 852, 856, 857, 1222, 1223, 1231, 
1232, 1233, 1234, 1235, 1246, 1247, 1248, 1251, and 1278 of this title] 
shall apply to property acquired after June 22, 1984, and before January 
1, 1988.''


                    Effective Date of 1976 Amendment

    Section 605(c) of Pub. L. 94-455 provided that: ``The amendments 
made by this section [amending this section and section 81 of this 
title] shall apply to guarantees made after December 31, 1975, in 
taxable years beginning after such date.''
    Section 1402(b)(1) of Pub. L. 94-455 provided that the amendment 
made by that section is effective with respect to taxable years 
beginning in 1977.
    Section 1402(b)(2) of Pub. L. 94-455 provided that the amendment 
made by that section is effective with respect to taxable years 
beginning after Dec. 31, 1977.


                    Effective Date of 1969 Amendment

    Amendment by Pub. L. 91-172 applicable to taxable years beginning 
after July 11, 1969, see section 431(d) of Pub. L. 91-172, set out as an 
Effective Date note under section 585 of this title.


                    Effective Date of 1966 Amendment

    Section 2 of Pub. L. 89-722, as amended by Pub. L. 99-514, Sec. 2, 
Oct. 22, 1986, 100 Stat. 2095, provided that:
    ``(a) Except as provided in subsections (b) and (c), the amendments 
made by the first section of this Act [amending this section and section 
81 of this title] shall apply to taxable years ending after October 21, 
1965.
    ``(b) If--
        ``(1) the taxpayer before October 22, 1965, claimed a deduction, 
    for a taxable year ending before such date, under section 166(c) of 
    the Internal Revenue Code of 1986 [formerly I.R.C. 1954] for an 
    addition to a reserve for bad debts on account of debt obligations 
    described in section 166(g)(1)(A) of such Code (as amended by the 
    first section of this Act), and
        ``(2) the assessment of a deficiency of the tax imposed by 
    chapter 1 of such Code for such taxable year and each subsequent 
    taxable year ending before October 22, 1965, is not prevented on 
    December 31, 1966, by the operation of any law or rule of law,

then such deduction on account of such debt obligations shall be allowed 
for each such taxable year under such section 166(c) to the extent that 
the deduction would have been allowable under the provisions of such 
section 166(g)(1)(A) if such provisions applied to such taxable years.
    ``(c) Section 166(g)(2) of the Internal Revenue Code of 1986 (as 
amended by the first section of this Act) shall apply to taxable years 
beginning after December 31, 1953, and ending after August 16, 1954.''


                    Effective Date of 1958 Amendment

    Amendment by Pub. L. 85-866 applicable to taxable years beginning 
after Dec. 31, 1953, and ending after Aug. 16, 1954, see section 1(c)(1) 
of Pub. L. 85-866, set out as a note under section 165 of this title.


 Establishment of Reserve for Taxable Year Ending After Oct. 21, 1965, 
                    and Beginning Before Aug. 2, 1966

    Section 1(c) of Pub. L. 89-722, as amended by Pub. L. 99-514, 
Sec. 2, Oct. 22, 1986, 100 Stat. 2095, provided that: ``If the taxpayer 
establishes a reserve described in section 166(g)(1) of the Internal 
Revenue Code of 1986 [formerly I.R.C. 1954] (as amended by subsection 
(a) of this section) for a taxable year ending after October 21, 1965, 
and beginning before August 2, 1966, the establishment of such reserve 
shall not be considered as a change in method of accounting for purposes 
of section 446(e) of such Code.''

                  Section Referred to in Other Sections

    This section is referred to in sections 108, 165, 172, 271, 582, 
585, 593, 1351, 1367, 6227, 6511 of this title.
