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

Joanne speaks:

"At very least it is an inconvenience to relocate to North Dakota, and in most cases it is a financial hardship. As a result we will be providing $25,000 to anyone who starts a job with us during the last quarter of 2013, and at the time of the job offer resides more than 100 miles away from Fargo. The money can 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 will owe us the $25,000 principal plus interest computed using an APR of 5%, which we believe is a market rate of interest for an unsecured loan of this type.

The employees will be required to sign a promissory note indicating that they owe us the $25,000 in principal plus interest computed at an APR of 5% 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 will be forgiven if they remain 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 required 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 provide me with a detailed memo that describes the US Federal income tax implications of this $25,000 loan assuming 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 required 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:

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