Question

Monty loaned his friend Ned $12,000 three years ago. Ned signed a note and made payments on the loan. Last year, when the remaining balance was $9,000, Ned filed for bankruptcy and notified Monty that he would be unable to pay the balance on the loan. Monty treated the $9,000 as a nonbusiness bad debt. Last year, before considering the tax implications of the nonbusiness bad debt, Monty had capital gains of $3,600 and taxable income of $33,250. During the current year, Ned paid Monty $8,100 in satisfaction of the debt.

Determine Monty's tax treatment for the $8,100 received in the current year.

The nonbusiness bad debt of $9,000 would have been reported as a short-term capital loss , and $_________ would be included in Monty's gross income.

Answer 1

$ 6,600

Step-by-step explanation:

Monty should
`$\text{includ}$`e up to
`$\$ 8,100$` in the gross account but to an extent of the tax benefit in the previous year. Since the debt is a non-business debt, the amount of
`$\$ 9,000$` would be reported as the short term business capital loss.

In the previous year, Monty had a capital gain of
`$\$ 3,600$` and
`$\$33,250$` as taxable income.

Therefore, $ 3,600 + $ 3,000 = $ 6,600

So $ 6,600 out of $ 9,000 loss produced the tax benefit. Therefore, only
`$\$6,000$` can be included in the gross income of Monty for this year.