Steve Carter lives in Pittsburgh, Pennsylvania. Steve is an architect and president of Modern Designs, an architectural firm. Steve has become known throughout the community for excellent work and honesty in his business dealings. Steve believes his reputation is an integral part of the success of the firm. Oil was discovered recently in the area around Pittsburgh and some geologists believed the reserves were large. A few well-respected businesspeople in town organized Sacco Oil Company to develop a few test wells. Although some oil was being extracted, the oil corporation lacked sufficient capital to develop the oil fields to their expected potential. After reading the geologists report, Steve felt that Sacco Oil Co. was a good investment and soon after, he acquired 25% of the company. A short time after Steves acquisition, the price of foreign oil decreased sharply, causing Sacco Oil Company to be unprofitable due to its high production costs. This led to a bankruptcy filing three months later. The bankruptcy proceedings were reported in the local newspaper. Many of Sacco Oil Companys creditors were real estate developers that engaged Steves architectural firm to provide designs. After Sacco Oil Company declared bankruptcy the architectural firms business noticeably decreased. Steve felt the decline in business was related to the bankruptcy of Sacco Oil Company. Steve convinced his partner to use the accumulated earnings of the firm to repay all the creditors of Sacco Oil Company. Steve hopes to deduct the payment to the creditors of Sacco Oil Co. as a business expense. He stated in a phone conversation that the payments helped the company re-establish goodwill with the local banking community. Required. Determine whether Steves firm can deduct the expenses of repaying Sacco Oil Companys creditors.

Identify the tax issues and the principle questions to be researched?