Blake Piper and Margarito, Inc. Tax Research Paper

To: Accrual Partner

From: ACC 318 Associate

Date: April 15, 2014

Re: Blake Piper and Margarito, Inc. Tax Research Project

Introduction:

This memorandum discusses the deductibility of certain losses related to Blake Piper’s investment in a local franchise of a national chain of drive-through margarita shops.

Facts:

Blake operated the local shop through Margarito, Inc. from January 1 to September 30, 2013, during which he was required to loan $278,000 to Margarito in order to cover the operating cash flow needs of the business.

The National chain of drive-through margarita shops has abruptly ceased operations due to numerous lawsuits. Neither Blake nor Margarita has any chance of recovering the $50,000 non-refundable franchise fee that he had remitted to the national chain prior to forming Margarito. Blake is distressed that he has essentially forfeited $5000 in legal fees that he had incurred to have the attorney incorporate Margarito.

Margarito will be unable to repay the $278,000 loan to Blake.

Issues:

Can Blake claim a tax reduction for the unpaid loan? Will he be able to deduct the franchise fee and legal fees on his individual income tax return?

Analysis:

There should be a deduction allowed for any uncompensated loss incurred during the taxable year.

A business or transaction entered into for profit in which a loss occurred from an immediate termination of the business or transaction of any non-depreciable property should be allowed a deduction for the taxable year in which the loss was incurred.

Deduction Allowable:

The amount of the loss is the adjusted basis of the property.

For a deduction to be allowable, a loss must be evident by completed transactions, fixed by recognizable events, and incurred during the taxable year. Only a “bona fide loss” is allowable.

In order for the loss of an intangible asset to be deductible, there must be:

1. An intention on the part of the owner to abandon the asset;

2. An...