Problem 6-12 (Algorithmic) (LO. 1)

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 $17,250, Ned filed for bankruptcy and notified Monty that he would be unable to pay the balance on the loan. Monty treated the $17,250 as a nonbusiness bad debt. Last year before considering the tax implications of the nonbusiness bad debt, Monty had capital gains of $6,900 and taxable income of $38,500. During the current year, Ned paid Monty $15,525 in satisfaction of the debt.

Determine Monty's tax treatment for the $15,525 received in the current year.

The nonbusiness bad debt of $17,250 would have been reported as a short-term capital loss , and $ would be included in Monty's gross income.