11. LO.1 Several years ago Amy Westbrook, who is in the lending business, loaned Sara Stuart $30,000 to purchase an automobile to be used for personal purposes.

In August of the current year, Sara filed for bankruptcy, after paying back $1,000 of the loan to Amy. Amy was notified by the bankruptcy court that she could not expect to receive more than an additional $4,000. Amy has contacted you about the possibility of taking a bad debt deduction for the current year.

Write a letter to Amy that contains your advice as to whether she can claim a bad debt deduction for the current year. Also prepare a memo for the tax files. Amy’s address is 100 Tyler Lane, Erie, PA 16563.