Lending money to family relatively risky
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Dear Mr. Berko:
In March 2003 I loaned $8,000 to my very close first cousin of 43 years. I have his personal note stipulating that the loan is to be paid back in three years by March 2006 at an interest rate of 8 percent. I’m holding as collateral 85,000 shares of Sanchez Laboratories, which he bought at 50 cents a share in July 2001, and which he said is worth at least $1.25 a share. I’ve asked him for my money many times but he just ignores me and changes the subject, and I’m embarrassed to push harder. So I sent him nice letters that he doesn’t answer and even asked his wife (she also signed the note), who gets angry at me for “talking business.” He’s been bragging about this investment since he bought it and said he doesn’t want to sell it, saying, “any day I expect to wake up and discover Sanchez is worth $50 a share.” He’s certain that this stock will make him a multimillionaire. I have two questions: Is Sanchez worth $1.25 a share? and Can I deduct this personal loan as an expense on my 2008 tax return? Two of my work friends tell me I can’t, and two tell me I can. So we thought to write you, because you seem to have answers to so many questions.
H.E., Lady Lake, Fla.
Dear H.E.:
Relatives are the worst family members to whom one can lend money. I know that blood is thicker than water, but you should know that relatives are thicker than wood. So unless the dentist pulled all your wisdom teeth, you’ve got to know that this “very close first cousin” (VCFC) was probably turned down by Bank of America, Beneficial Finance, Moe’s Pawn, Johnny Ding Dong the loan shark, Hell’s Angels Bank and the Salvation Army. And you should know that if those 85,000 shares of Sanchez Laboratories had legitimate value, your VCFC would have sold 6,500 shares at $1.25 quick as a bunny to raise the $8,000 he needed.
I’ve never heard of, nor can I locate previous existence of, Sanchez Laboratories and the only source for that $1.25 price per share is in your cousin’s delusional imagination. I think you may have bought 85,000 Sanchez Labs for less than a dime a share; at least, that’s what your VCFC is probably thinking right now. I think you got taken to the cleaners, the car wash and for a ride.
There are two ways to handle this dilemma. For about 25 percent of the debt, you can employ what we call a “customized debt collector” (CDC) to obtain the $8,000 from your cousin. Most CDCs are skilled batsmen and with the proper Louisville Slugger can pop a patella without destroying the fibula, the tibia or the femur. CDCs are very effective and often produce good results.
A less satisfying alternative is to write off the loan; because “forgiveness of debt” is considered income, send your VCFC an Internal Revenue Service Form 1099 for that $8,000 plus three years of interest. This is a nonbusiness bad debt. Attach a statement to Schedule D that lists your VCFC’s name, why you loaned him $8,000, when the loan became due, all the actions you took to collect the $8,000 plus interest, why you consider the debt to be worthless and why you are taking the deduction. This should offset your short-term capital gains dollar for dollar. It’s not as much fun as hiring a CDC, but your VCFC will go bonkers when he discovers he owes taxes on over $10,000 in unexpected income.
If you want to play dirty pool with your VCFC, send the filing to the Internal Revenue Service but intentionally neglect to send him a copy; when the IRS sends him a “come to Jesus” letter, he’ll have a catatonic seizure.
If you prefer the latter solution, please verify the process with your accountant. If you prefer the former, well, check in with your attorney, who may suggest that you leave town the day before contact.
Or … get a “to whom this may concern” note from the stockbroker stating that the 85,000 shares of Sanchez Laboratories has no market value, that he/she can not locate a willing buyer and that the shares are not listed on any local or national stock exchange. Then make a certified copy of the shares (front and back) and return the original shares to your VCFC with a demand note for payment of his debt to you.
Good luck and have fun.
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@comcast.net. © Copley News Service
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