Denise and Mark Velo, a married couple, are your clients and have come to you for advice on the tax treatment of two loans they renegotiated with First Federal Bank. Based on the “Our Understanding of the Facts” below, write a professional tax memo to document your advice you will provide via Zoom on October 12, 2020. Remember: A professional tax memo contains only proper legal citations to primary authorities.

Our Understanding of the Facts

Our clients, Denise and Mark Velo, a married couple, have come to us for advice on the tax treatment of two loans they renegotiated with First Federal Bank

In 2020, after Mark lost his job and the couple experienced financial difficulty, they renegotiated an automobile and a home mortgage loan they had with First Federal Bank. They were personally liable for both loans, are financially solvent, and have not filed for bankruptcy.

The Velo’s acquired their principal residence in March of 2017 for $1,100,000 and obtained an $810,000 mortgage from First Federal Bank. In 2020, after Mark lost his job, the couple renegotiated the $750,000 outstanding mortgage balance with the bank. Denise and Mark explained to the bank that they were unable to make their monthly mortgage payments. On July 14, 2020, Mark and Denise signed an agreement with the bank, whereby the bank forgave $150,000 of the outstanding mortgage balance and thereby reduced his monthly payments to a manageable amount.

Also, Denise and Mark had a remaining balance of $60,000 on an automobile loan for a car they purchased in 2019 for $90,000. With the loss of Mark’s income, they were no longer able to meet the monthly car payments. With the bank's agreement, the couple sold the car for $52,500 on June 1, 2020. The bank accepted the sales proceeds as payment against the loan balance. First Federal Bank released Denise and Mark from responsibility for the remaining balance of $7,500.

Required: Prepare a professional tax memorandum in proper form to document your tax advice to Denise and Mark regarding the renegotiations of the two loans. A proper memo contains only legal citations to primary authorities.