Question :

You are sitting in an office in Fargo, North Dakota with Joanne Dwood, Human Resources Director of Black Hill Gas Company. Because of the Natural Gas boom in the Dakotas, Black Hill requires to hire a substantial number of employees for their North Dakota operations, the vast majority of who can be recruited from outside the Dakotas.

Joanne speaks:

"At very least it is an inconvenience to move to North Dakota, and in most cases it is a financial hardship. As a result we can be providing $25,000 to anyone who starts a job with us through the last quarter of 2013, and at the time of the job offer resides more than 100 miles away from Fargo. The money will be used by the employee in whatever way they please. The only string attached is that the employee must work with us for at least a year. If they leave employment before their one year anniversary, they can owe us the $25,000 principal plus interest computed using an APR of 5 percent which we believe is a market rate of interest for an unsecured loan of this type.

The employees can be needed to sign a promissory note showing that they owe us the $25,000 in principal plus interest evaluated at an APR of 5 percent due on the one year anniversary of their employment or the last day of employment with Black Hill whichever is the earlier date. Their employment offer letter will contain a provision that this $25,000 loan plus interest may be forgiven if they stay employed with Black Hill for a year, or if their employment is terminated before the one year anniversary due to a layoff. In effect, loan repayment will only be needed if the employee resigns or is terminated for cause.

I need to understand the loan's tax implications to our employees. As my tax advisor, please give a detailed memo that explain the US Federal income tax implications of this $25,000 loan considering that the employee receives the cash in 2013, and then in 2014 either (i) celebrates their one year anniversary of employment with us and the loan is forgiven, or (ii) resigns their position with us prior to the one year anniversary and is needed to repay the $25,000 plus interest. I will review your memo with Anna Oakley, our company's Tax Director and Bill Bison, our company's legal counsel."

Assignment:

Purpose a Tax Research Memo in good form regarding the $25,000 relocation loan that Joanne Black described.