Many years ago your client Lucy Hapless (currently single and age 48) started working with Sham credit Swamp (SCS) Inc., where the participated in the company's 401k plan. Five years agon, she took out a home loan from her 401(k). The loan was repayable with interest through semi- montly payroll deductions over a 10 year loan term. Lucy made the scheduled payments until she was laid off early this year. The oustanding balance of the loan became due and payable at the time of Lucy's termination, but she did have the money to pay off the loan, nor was she able to refinance it. No payments were made on the loan after her layoff, and the loan went into default. The 401(k) plan sentLucy a letter, notifying her that she had a deemed distribution from the plan equal to the the unpaid loan balance of $72,000. The 401(k) plan sent Lucy a check for $98,000 which represented the balance of her plan account minus federal tax withholding of $24,500. Six months ago, after Lucy received the check, she deposited the entire $98,000 into her checking account and has been using the money for living expenses, because she has been unable find another job. After appropriate research, determine Lucy's tax consequences from this 401 )k) plan loan payoff and prepare (in good form) a research memorandum to the file. Write a client letter to Lucy with your findings. Please cite where you get the support for this case.

Thank you.