Problem $7-32($Algorithmic$)($LO$.1)$

Monty loaned his friend Ned $$14,000$ three years ago. Ned signed a note and made payments on the loan. Last year, when the remaining balance was $$11,200,$ Ned filed for bankruptcy and notified Monty that he would be unable to pay the balance on the loan. Monty treated the $$11,200$ as a nonbusiness bad debt. Last year, before considering the tax implications of the nonbusiness bad debt, Monty had capital gains of $$4,480$ and taxable income of $$35,000.$ During the current year, Ned paid Monty $$10,080$ in satisfaction of the debt.

Determine Monty's tax treatment for the $$10,080$ received in the current year.

The nonbusiness bad debt of $$11,200$ would have been reported as a short$-$term capital loss $,$ and $ $$ would be included in Monty's gross income this year.

Feedback

Check My Work

A nonbusiness bad debt is a debt unrelated to the taxpayer's trade or business either when it was created or when it became worthless.