I:9-69 In preparing the tax return for one of your clients, Jack Johnson, you notice that he has listed a deduction for a large business bad debt. Jack explains that the loan was made to his corporate employer when the corporation was experiencing extreme cash flow difficulties. In fact, Jack was very concerned at the time he made the loan that the corporation would go bankrupt.

This would have been extremely bad, because not only would he have lost his job, but he also would have lost the $80,000 he had invested in the common stock of the corporation.

You know that if the loan is a business loan Jack will receive an ordinary deduction.

However, if the loan is a nonbusiness debt, it becomes a short-term capital loss (and Jack can only currently deduct $3,000).

After thoroughly reviewing all of the facts, you do a complete search of the relevant judicial and administrative authority. There you find that the courts are split as to whether under these circumstances the loan should be treated as a business or nonbusiness bad debt.

What position should you take on Jack’s federal income tax return? (See the Statements on Standards for Tax Services section in Chapter I:15 and Appendix E for a discussion of this issue.)