Over the last thirty years, I have reviewed the income tax returns of many closely held corporations and partnerships. Quite often, on Schedule L (the balance sheet), I will see an entry for “other assets” or “other liabilities,” which are described on the attached explanatory statement as loans to or from affiliates, as the case may be. I then ask a series of questions: did the board of directors or managers of the entities approve the loan; how was the loan documented; is there a note with repayment terms; is the debt secured; does the loan provide for interest; has interest or principal been paid; has there ever been a default and, if so, has the lender taken action to collect on the loan?
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