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Loss transactions, stock & bad debts

33. Sue loaned her sister Janice $10,000 three years ago. Janice has never made any payments to Sue, and Sue has never tried to collect from Janice. This year, Janice filed for bankruptcy and told Sue that she would not be able to repay any of the $10,000 loan.
Determine Sue's tax treatment for the loan for the current year.

34. Ron is in the business of purchasing accounts receivable. Last year, Ron purchased an account receivable with a face value of $100,000 for $72,000. During the current year, Ron was notified that he could not expect to collect more than 80 cents on the dollar with respect to the receivable.
Determine the maximum amount of the bad debt deduction for Ron for the current year.

35. Mable and Jack file a joint return. For the current year, they had the following items:
Salaries $180,000
Loss on sale of § 1244 stock acquired two years ago 95,000
Gain on sale of § 1244 stock acquired six months ago 12,000
Nonbusiness bad debt 16,000
Determine their AGI for the current year.

Solution Preview

33. The loan will not be deductible, or at least would not stand up under audit for the following reasons:
1. It lacks proper documentation for a loan
2. Sue has never pursued collection
3. There are no terms or interest rate stated.
I have made assumptions based on having seen this happen more than once in my career. Family seems to think there is no need to have a 'business-like' transaction with a valid note, payments, interest, collateral, etc.; that is, until the loan goes bad. This transfer ...

Solution Summary

The 350 word solution give a comprehensive explanation of the tax treatment for non-business bad debts and Section 1244 stock.

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