Question
Monty loaned his friend Ned $23,000 three years ago. Ned signed a note and made payments on the loan. Last year, when the remaining balance
Monty loaned his friend Ned $23,000 three years ago. Ned signed a note and made payments on the loan. Last year, when the remaining balance was $18,400, Ned filed for bankruptcy and notified Monty that he would be unable to pay the balance on the loan. Monty treated the $18,400 as a nonbusiness bad debt. Last year, before considering the tax implications of the nonbusiness bad debt, Monty had capital gains of $7,360 and taxable income of $49,000. During the current year, Ned paid Monty $16,560 in satisfaction of the debt.
Determine Monty's tax treatment for the $16,560 received in the current year.
The nonbusiness bad debt of $18,400 would have been reported as a (short-term capital loss, long-term capital loss, ordinary loss)
, and $(------------) would be included in Monty's gross income this year.
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