Tim, Manu, and Tony formed Spurs, Inc. (a C Corp) to market and sell basketball apparel. Tony and Manu contributed $10,000 each in exchange for common stock while Tim contributes $80,000. Tim contributed $10,000 in exchange of common stock. After a terrible first year, Tim advanced a loan of $20,000 to Spurs, Inc. to help the company stay afloat. No promissory note was signed by the company. After another 3 years of net operating losses, Tim agreed to advance another $30,000 but with the Spurs signing a promissory note with payment terms and interests. However, the Spurs never paid back interest.
Shortly before advancing the funds, Spurs’ Inc. CFO told Tim that the company’s financial prospects are dim with projected revenue expected to come in 60% below forecast. The CFO also warned Tim that without the cash advance that the company will likely go under. The company is also expected to experience severe cash flow due to uncollectible receivables exceeding their net terms.
Spurs Inc. eventually goes out of business. Tim comes to you and wishes to report business bad debt write off of $50,000 from the two advances that he made to Spurs. What would you advise him regarding these loans and why? Can he write them off?