WRITING ASSIGNMENT 2

Terry Boren is a very successful attorney specializing in intellectual property issues. Terry heads a 4-person firm based in Addison, Texas and earns approximately $800,000 per year.Terry has one child, a son named Zack, who was a high school baseball star who played at an NAIA school in Missouri. Zack was a catcher who was a 4-year starter in college. He never graduated from college and after playing for several lower-level minor league baseball teams moved back home. Terry has always been proud of Zack's baseball skills and encouraged him to pursue a professional baseball career, which required Terry to subsidize Zack's living expenses.

Zack decided to start a baseball academy in north Dallas and Terry loaned him $145,000 to start the business. Zack needed to lease some space and Terry encouraged a client of his to sign a lease for some space that the client owned.

Zack's business has never been successful. He is now 8 months behind on lease payments. Terry's client, the one who owns the leased space, has started to ask Terry about the late payments. Only Zack signed the lease so Terry bears no legal obligation to make the payments. Terry's client would not have leased the space to someone like Zack, an inexperienced business person with no history of business operations, without Terry's encouragement and even pleadings.

Terry is becoming increasingly concerned that Zack's business failure will reflect negatively on Terry. The individual who leased the space to Zack owns several businesses with significant IP and has been an excellent source of revenue for Terry's firm. Terry now fears that Zack's issues will spoil a business relationship that Terry spent years developing. Terry could gift money to Zack so that Zack can pay the expenses.However Zack's losses mean that he has no tax liability to offset so the deduction of these costs by Zack will create no tax benefit. Terry, however, pays tax at the highest individual rate and would get a healthy tax benefit if he could deduct the costs.

Terry is not a tax attorney. However, he has dug around a bit and has developed a theory that would allow him to pay Zack's delinquent business expenses (which include items in addition to the lease) and claim a deduction on Terry's law firm's tax return.

This strikes you as a stretch. What you know about Section 162 is that expenses must relate to the business that claims the deduction. Zack's business is not part of Terry's law business. However Terry asks that you read Jenkins, T.C. Memo 1983-667, because he believes it may present an argument for Terry to deduct the business expenses of Zack on Terry's return.

Write a memo that addresses whether Terry's firm may claim a deduction if it pays Zack's business expenses.