Research Assignment #2
(This assignment should be turned in on Blackboard)
Your client, Chris, has a full-time job, but also works part-time in her friend’s carpet cleaning business. Chris loaned $25,000 to her friend to help get the business started. The written agreement provided for annual interest payments at the prevailing market rate and for repayment of principle in installments beginning two years from the date of the note. Chris has received the interest payments, but has not received any repayments on the principle. Chris believes her friend will likely file bankruptcy in June of this year. She wants to know if there are any tax implications for her if she can’t recover the loan. Specifically, she wants to know whether or not she can deduct the amount as a business bad debt or, if not, is there another way it can be handled. She also wants to know if she can deduct the entire amount or if it is limited.
Required: Please research the issue and write a client letter to Chris with your analysis. Your response should cite at least two primary sources. One of your sources should be a court case AND a copy of the case should accompany your answer (i.e. be turned in to me).
A sample of a client letter can be found in your eBook in Chapter 2. Find the section for Tax Research-Step 5: Document and Communicate the Results. There is an example of a letter in Exhibit 2-9. Please follow the format suggested (1-facts; 2-issues; 3-authority list; 4-conclusion; and 5-analysis) of the letter.