LO.1 Several years ago, John Johnson, who is not in the lending business, loaned Sara

$30,000 to purchase an automobile to be used for personal purposes. In August of the current year, Sara filed for bankruptcy, and John was notified that he could not expect to receive more than $4,000. As of the end of the current year, John has received

$1,000. John has contacted you about the possibility of taking a bad debt deduction for the current year.

Write a letter to John that contains your advice as to whether he can claim a bad debt deduction for the current year. Also prepare a memo for the tax files. John’s address is 100 Tyler Lane, Erie, PA 16563.