Loss for the Loan

[TAX]

Client Loaned money to a "C" corporation owned by his son.

Corporation closes business in 2007. Father looses "ALL" money as son can not pay back.

Can Father take a Loss on his personal return?

Thank you!

[Bees Knees]

Maybe, if it is not a gift.

How are you going to prove the father didn't just gift the money to the son?

[JON]

If a loan and audited

you have to show it was a loan. Copy of note, terms, payment history and attempts to collect. The better the information the better the chance of getting a short term capital loss for it.

[TAX]

Maybe, if it is not a gift.

How are you going to prove the father didn't just gift the money to the son?

Client says he has documents stating that a loan was given to son's company by his father. Also, he has balance sheet showing loan from.........

He loaned several times for the business but business failed.

This loss would be report on father's Sch D, right?

Thanks!

[erchess]

See the instructions

in TTB for reporting a nonbusiness bad debt. In the edition for 2006 returns they are on page 8-6. Yes it is a short term capital loss on Sch D but there is a statement to be written. I am thinking that about any software should handle the situation.

I believe that you should either see the documentation your client says he has or prepare an engagement letter specifying what he says he has and specifying that he is responsible for any problems that arise if he cannot produce it when the IRS asks or if they are unsatisfied with it. At the very least record in your notes what he says he has and let him know the consequences of not having it when the IRS asks. The reason I think you should be such a pain in the behind on this issue is that in my opinion claiming this bad debt is an audit flag. That does not mean there is a problem claiming it if the support exists but it does mean one wants to be clear with the client.

[JohnH]

I agree - this is a CYA situation

I agree totally that the preparer needs to be careful on this one.

I would not prepare the return at all without seeing at least seeing the original note(s) or copies, satisfactory documentation that the corp is out of business with no opportunity to collect the debt, and documentation that no related parties derived economic benefit from the shut-down. And I'd make copies of all this info for my files. This type of deduction has "audit" written all over it - not a reason to forego the deduction but a very good reason to go the extra mile in doing your homework up front.

[erchess]

My biggest concern

is that I have seen situations where a client tells me a story that justifies a given deduction or credit, then when the IRS letter comes they tell whoever was helping them that they told me some different story that generally comported with the facts of their life but did not justify the deduction or credit. I was pretty good about leaving in the software client notes about what I had been told but in one case where I had not I was contacted and asked to put in writing what I then remembered. It happened that I remembered everything because it was the first and only time I wrote a return claiming the former credit for the purchase of a new diesel car.

[JohnH]

In most cases

Not always the case, but most of the time the size & complexity of the deduction and the resulting tax savings should bear some relation to the amount of time spent to investigate the underlying facts when there is an unusual deduction on the table.

If the client isn't willing to pay for the extra effort when in our judgement it's called for, then they should be satisfied to either: 1) forego the deduction, or 2) find a more gullible preparer.

I'm OK with either outcome..

[Bees Knees]

Ask the client: "If it was anyone other than your son, would you have loaned the money?"

When dad says of course not. Then say: "Tell me again why it isn't a gift?"