Question 1

A business bad debt is a debt unrelated to the taxpayer's trade or business either when it was created or when it became worthless.

Accepted Answer

A business bad debt is a debt that is related to the taxpayer's trade or business either when it was created or when it became worthless.

Question 2

Other casualty means casualties similar to those associated with fires, storms, or shipwrecks.

Accepted Answer

Other casualty refers to casualties that are similar to those caused by fires, storms, or shipwrecks. This includes incidents such as accidents, natural disasters, and other unforeseen events that result in harm or loss to individuals or property.

Question 3

A corporation which makes a loan to a shareholder can have a nonbusiness bad debt deduction.

Accepted Answer

A corporation cannot take a nonbusiness bad debt deduction. Only individuals can deduct nonbusiness bad debts, and these are treated as short-term capital losses. Corporations can only deduct bad debts related to their business.

Question 4

A nonbusiness bad debt deduction can be taken any year after the debt becomes totally worthless.

Accepted Answer

The answer of A nonbusiness bad debt deduction can be...

Question 5

James is in the business of debt collection.He purchased a $20,000 account receivable from Green Corporation for $15,000.During the year, he collected $17,000 in final settlement of the account.James can take a $2,000 bad debt deduction in the current year.

Accepted Answer

James cannot take a bad debt deduction because he is in the business of purchasing debt and the $2,000 represents a realized loss from his investment, not a bad debt.

Question 6

Al, who is single, has a gain of $40,000 on the sale of § 1244 stock (small business stock) and a loss of $80,000 on the sale of § 1244 stock.As a result, Al has a $40,000 ordinary loss.

Accepted Answer

The answer of Al, who is single, has a gain...

Question 7

If a taxpayer sells her or his § 1244 stock at a loss, all of the loss will be ordinary loss.

Accepted Answer

The answer of If a taxpayer sells her or his...

Question 8

A loss is not allowed for a security that declines in value.

Accepted Answer

The answer of A loss is not allowed for a...

Question 9

An individual may deduct a loss on rental property even if it does not meet the definition of a casualty loss.

Accepted Answer

An individual can deduct a loss on rental property on their tax return even if it does not meet the definition of a casualty loss. This can include losses due to theft, vandalism, or other reasons. However, there are limitations on the amount of the deduction and certain rules that must be followed. It is always recommended to consult a tax professional for guidance.

Question 10

The amount of partial worthlessness on a nonbusiness bad debt is deducted in the year partial worthlessness is determined.

Accepted Answer

Nonbusiness bad debts are treated as short-term capital losses and can only be deducted as a loss in the year the debt becomes totally worthless, not partially.

Question 11

In determining whether a debt is a business or nonbusiness bad debt, the debtor's use of the borrowed funds is important.

Accepted Answer

The answer of In determining whether a debt is a...

Question 12

A cash basis taxpayer must include as income the proceeds from the sale of an account receivable to a collection agency.

Accepted Answer

Under the cash basis of accounting, income is typically recognized when it is received. When a cash basis taxpayer sells an account receivable to a collection agency, the taxpayer receives a lump sum of cash for the amount owed by the customer. This lump sum of cash is considered income and must be included in the year of receipt.

Question 13

A bond held by an investor that is uncollectible will be treated as a worthless security and, hence, produce a capital loss.

Accepted Answer

When a bond held by an investor becomes uncollectible, it is considered a worthless security and can be treated as a capital loss for tax purposes. This means the investor can deduct the loss from their capital gains or income. However, there are certain rules and limitations on how much can be deducted and when the loss can be claimed.

Question 14

A loss from a worthless security is always treated as a short-term capital loss.

Accepted Answer

A loss from a worthless security is generally treated as a long-term capital loss, assuming the security was held for more than one year. This is because the tax code treats the security as having been sold on the last day of the tax year in which it became worthless.

Question 15

A nonbusiness bad debt can offset an unlimited amount of long-term capital gain.

Accepted Answer

According to IRS rules, a nonbusiness bad debt can be treated as a short-term capital loss and can offset an unlimited amount of long-term capital gain.

Question 16

A bona fide debt cannot arise on a loan between father and son.

Accepted Answer

A loan between father and son can give rise to a bona fide debt if the transaction is carried out with a genuine intention to create legal relations and the loan agreement is supported by valuable consideration. However, such loans may be subject to closer scrutiny by the court as there is a presumption against the intention to create legal relations due to the familial relationship between the parties involved.

Question 17

Last year, taxpayer had a $10,000 nonbusiness bad debt.Taxpayer also had an $8,000 short-term capital gain and taxable income of $35,000.If taxpayer collects the entire $10,000 during the current year, $8,000 needs to be included in gross income.

Accepted Answer

The answer of Last year, taxpayer had a $10,000 nonbusiness...

Question 18

If an account receivable written off during a prior year is subsequently collected during the current year, the amount collected must be included in the gross income of the current year to the extent it created a tax benefit in the prior year.

Accepted Answer

This is known as the tax benefit rule and requires the amount collected to be included in gross income to the extent that it reduced taxable income in the prior year.

Question 19

If a business debt previously deducted as partially worthless becomes totally worthless this year, only the amount not previously deducted can be deducted this year.

Accepted Answer

The statement is correct. If a business debt that was previously deducted as partially worthless becomes totally worthless in a subsequent year, only the portion of the debt that was not previously deducted can be deducted in the current year. This is known as the "tax benefit rule."

Question 20

Several years ago, John purchased 2,000 shares of Red Corporation's § 1244 stock from Mark for $40,000.Last year, John sold one-half of his Red Corporation stock to Mike for $12,000.During the current year, John sold the remaining Red Corporation stock for $3,000.John has a $17,000 ($3,000 - $20,000) ordinary loss for the current year.

Accepted Answer

Since John sold his remaining 1,000 shares for $3,000, his basis for those shares would be $20 per share ($20,000/1,000 shares). Therefore, he would have a capital loss of $17,000 ($3,000 - $20,000), not an ordinary loss.

Quiz 6: Losses and Loss Limitations