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. Prepare a research memorandum (1-2 pages), documenting your research, analysis, and conclusion. The research assignment may be completed in groups of two or three if desired. Each group will turn in one research memorandum. Use a cover page with you name or group member names. In preparing your research memorandum, use the following format. Client Name Indicate the full name of the client (individual or company, or both) Facts Briefly restate important facts. Tax Issue(s) Identify the principal questions (and any sub-questions) to be researched. Research Authority Locate relevant authority from the Internal Revenue Code, IRS regulations, and any court decisions that you deem important. The following partial list of research aids is a good start. I.R.C. Sec. 162 Thomas H. Welch v. Helvering, 12 AFTR 1456, 3 USTC 1164 (USSC, 1933) William A. Thompson, Jr., 1983 PH T.C. Memo 83,487, 46 TCM 1109 Analysis Analyze your clients facts with the research authority. Conclusion From your analysis, determine the answer to your tax issue(s).