Several years ago, Carol Mutter, a cash-basis taxpayer, obtained a mortgage from Weak National Bank to purchase a personal residence. In December 2019, $8,500 of interest was due on the mortgage, but Carol had only $75 in her checking account. On December 31, 2019, she borrowed $8,500 from her sister, Pearl, evidenced by a note, and the proceeds were deposited in her checking account. On the same day, Carol issued a check in the identical amount of $8,500 to Weak Bank for the interest due. Is the interest expense deductible for the 2019 tax year?Prepare (in good form) a research memorandum to the file. (See Chapter 2 for an illustration of the structure of a tax memo.)

Answer and Explanation:

The tax memo is as follows

Tax memo

From: Tax Advisory

Specific issue: the case here addresses Taxpayer A deduction of interest expenses for the period 2009 in which taxpayer A filed taxes

Facts : taxpayer A realized interest in mortgage amounting to $8500 which is owed to Weak National Bank. Taxpayer A applied for a loan with same Weak national bank for settlement of mortgage loan interest of $8500

Conclusion: Taxpayer A can not get deduction of interest expense on loan in weak bank for 2009 tax returns. This is because taxpayer A applied for loan with Weak bank and paid with cheque from same bank in which mortagage interest was owed in settlement of debt interest, and as such cannot qualify for deduction

Cash basis tax payers can report tax deductions in year in which they payment is made in cash

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