Use the template uploaded below and template instructions are written inside, please prepare a professionally drafted memorandum to your client in addressing the following scenario. Be comprehensive in your response. Ensure you include court cases, codes and regulations, rulings, etc. you are permitted to use the internet and other sources to conduct your research.
Case Scenario
Mr. John Moneymaker came to the CPA firm of Mickey, Minnie, and Pluto. John, the client, requested the services of a new hotshot tax pro, Ms. Mulan, CPA. The scenario posed to her was as follows: In seeking to expand his business, John was seeking additional funding via the loan route. The third-party lender requested both his S Corp and John, as co-maker, sign the loan. As a result, both the S Corp and John are now liable to the third-party lender. John asked whether this co-making will increase his debt basis in the S Corp. Please advise.
Project Questions
Using the template in the module, related party loans are frequently used to avoid income and/or increase basis. Noting this consistent abuse of these transactions, the Courts have taken closer looks with increased due diligence of these cash movements.
With this in mind, cite code sections, regulations, court cases, IRS rulings all dealing with the issues of S Corporation related party loans.
A) What factors constitute a bona fide loan as opposed to one that is not?
B) To be accepted as a loan for increasing basis, how must the loan be structured?
In conducting your research, especially with legal decisions, use recent decisions as much as possible. Be comprehensive and use the template. Make sure you properly cite the sources used.
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