Question

Monty loaned his friend Ned $19,000 three years ago. Ned signed a note and made payments on the loan. Last year, when the remaining balance was $14,250, Ned filed for bankruptcy and notified Monty that he would be unable to pay the balance on the loan. Monty treated the $14,250 as a nonbusiness bad debt. Last year before considering the tax implications of the nonbusiness bad debt, Monty had capital gains of $5,700 and taxable income of $33,250. During the current year, Ned paid Monty $12,825 in satisfaction of the debt.

Determine Monty's tax treatment for the $12,825 received in the current year.

The nonbusiness bad debt of $14,250 would have been reported as a short-term capital loss , and ($____) would be included in Monty's gross income.

Answer 1

If the Non Business Bad Debt of $14,250 would have been reported as Short Term Capital Loss, then Capital Gain would have been NIL in previous year and Taxable Income would have been (33250-5700) = $27,550.

Loss of $7,125 (14250-5700) would have been carried forward to next year.

In the current year, when Ned paid $12,825, the same would be treated as Capital Gain and previous year brought forward loss of $7,125 would be adjusted against this Capital gain and Net Capital Gain taxable would be (12825-7125)=$5,700