Have you ever loaned a friend or family member money for a business venture … did you ever get the money back…can you take a loss on your tax return?
Well, the Tax Court reminded us in D.D. Hultquist, TC Memo. 2011-17, that documentation is really important. In this case, a taxpayer had a friend who invented and patented fishing tools. The friend needed funding to develop, produce and market the tools. Their agreement, needless to say, was very loosely defined (no loan documents, no shares of stock, no partnership agreement). Even worse, the taxpayer didn’t know if his friend even used the funds in the business. The friend never paid any of the money back. Not surprisingly, the IRS did not allow the taxpayer to deduct the amount loaned and the court agreed.
Didn’t you learn anything from the movie Ruthless People (1986)?
I trusted a sleazeball like Sam Stone
with our life savings on a handshake deal,
and then watched him take it all away from us.
But that’s over. We know better now.
No? A handshake may work in my native land of Texas, but don’t take your chances with the IRS. If they can’t figure out the terms of the deal from more than word of mouth, then it’s likely that they won’t allow your loss. Let the Hultquist case serve as a reminder that you have to document the deal.