Our Understanding of the Facts: Mary Ryan is a well-known businesswoman in Harrisburg, Pennsylvania. Mary is the president and sole owner of an architectural firm, Ryan Architects, LLC (Ryan Architects). Ryan Architects is a single member Limited Liability Company which correctly reports its taxable income on Schedule C as if it were a sole proprietor. Mary has become known throughout the community for excellent work and honesty in her business dealings. Mary believes her reputation is an integral part of the success of Ryan Architects. Oil was found recently in the area around Harrisburg, and some geologists believe the reserves were large. A few well-respected business people organized Harrisburg Oil Company (HOC) to develop a few wells. Although some oil was extracted, HOC lacked the capital to develop the oil fields to their expected potential. After reading the geologist report, Mary felt that HOC was a good investment; therefore, she acquired 25% of HOC. A short time after Mary's acquisition, the price of oil decreased sharply. The decline in oil prices caused HOC to be unprofitable due to its high production cost. Three months later HOC filed for bankruptcy. The bankruptcy proceedings were reported in the local media. Many of HOCs creditors were real estate developers that engage Marys architectural firm to provide designs. After HOC declared bankruptcy, Ryan Architects revenue noticeably decreased. Mary was convinced that her reputation had been damaged by her association with HOC and was the direct cause of the decline in her architectural firms business. Mary decided to use her architectural firms accumulated earnings to repay all of HOCs creditors. The firm spent $1.5 million repaying HOCs creditors. Assignment You are having a meeting with Mary. The meetings agenda includes advising Mary on the tax treatment of the $1.5 million payment to HOCs creditors. In a properly structured tax research memorandum, document the advice you will be giving Mary regarding the tax treatment of the $1.5 million payment by Ryan Architects to HOCs creditors. In your memo, you should cite only primary sources such as the Internal Revenue Code, Regulations, Court Cases, etc. A partial list of research sources includes: IRC 162 Welch v Helvering 12 AFTR 1456 (54 S. Ct. 8), (S Ct, 11/06/1933) William A Thompson, Jr, TC Memo 1983-487, PH TCM P 83487, 46 CCH TCM 1109