Problem 7-29 (Algorithmic) (LO. 1)

Monty loaned his friend Ned $29,000 three years ago. Ned signed a note and made payments on the loan. Last year, when the remaining balance was $23,200, Ned filed for bankruptcy and notified Monty that he would be unable to pay the balance on the loan. Monty treated the $23,200 as a nonbusiness bad debt. Last year, before considering the tax implications of the nonbusiness bad debt, Monty had capital gains of $9,280 and taxable income of $54,250. During the current year, Ned paid Monty $20,880 in satisfaction of the debt.

Determine Monty's tax treatment for the $20,880 received in the current year.

The nonbusiness bad debt of $23,200 would have been reported as a short-term capital loss , and $ would be included in Monty's gross income this year.