Submitted by: Submitted by mayersm
Views: 99
Words: 928
Pages: 4
Category: Business and Industry
Date Submitted: 09/09/2014 10:03 AM
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...