Howard loaned $6,600 to Bud two years ago. The terms of the loan call for Bud to pay annual interest at 9%, with the principal amount due in three years. Until this year, Bud had been making the required interest payments. When Howard didn't receive this year's payment, he called Bud and found out that Bud had filed for bankruptcy. Bud's accountant estimated that only 40% of his debts would be paid after the bankruptcy proceeding. No payments were received. In the next year, Howard received $2,165 in full satisfaction of the debt under the bankruptcy proceeding.

a. If the debt is related to Howard's trade or business, he (WILL OR WILL NOT BE) allowed a deduction in the current year for an estimate of the worthlessness of the debt.

b. If the debt is unrelated to Howard's business, it (IS A OR IS NOT A) nonbusiness bad debt. Nonbusiness bad debts are deductible as (SHORT TERM CAPITAL LOSSES OR ITEMIZED DEDUCTION) in the year in which the actual amount of loss is known.

c. How would your answer change if instead Howard received $2,760 in satisfaction of the debt, related to his trade or business?

He (WILL OR WILL NOT) have to include the tax benefit he received from the overstatement of the deduction in the (CURRENT OR PREVIOUS) year. He have to include the tax benefit he received from the overstatement of the deduction in the year.