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Let's suppose that in a moment of weakness, Lorenzo Sr. decides to loan $15,000 to his fine-looking son, Lorenzo Jr. This is NOT a gift, it's a loan. Terms are agreed to - say 4% for three years - a payment schedule is worked out, and everyone signs papers to that effect. And since this is "let's pretend," suppose further that, wonder of wonders, Lorenzo Jr. actually repays the loan.

A couple of questions:

1. Interest received by Lorenzo Sr. is taxable income, of course. Is it sufficient to put something like "Lorenzo Jr., interest on private loan - $349.57" on Lorenzo Sr's 2004 Schedule B, or is it necessary to generate some kind of official paperwork?

2. Lorenzo Jr. plans to use the money in a small business venture, currently a sole proprietorship, perhaps at some point an LLC. It seems to me that the interest paid by Lorenzo Jr. is a business expense on his 2004 Schedule C. Is it sufficient for Lorenzo Sr. to provide Lorenzo Jr. with a year-end accounting, saying something like "2004 interest paid to Lorenzo Sr., private loan - $349.57?" Or, again, is some sort of official reporting necessary?

In other words, if we actually go through with this exercise, what needs to be done to satisfy the tax people?

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