CHAPTER 7 DEDUCTIONS AND LOSSES: CERTAIN BUSINESS EXPENSES AND LOSSES

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

2. 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.
a. True
b. False

3. 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.
a. True
b. False

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

5. 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.
a. True
b. False

6. A nonbusiness bad
debt deduction can be taken any year after the debt becomes totally worthless.
a. True
b. False

7. 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.
a. True
b. False

8. In determining
whether a debt is a business or nonbusiness bad debt, the debtor’s use of the
borrowed funds is important.
a. True
b. False

9. A corporation which
makes a loan to a shareholder can have a nonbusiness bad debt deduction.
a. True
b. False

10.A nonbusiness bad
debt can offset an unlimited amount of long-term capital gain.
a. True
b. False

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

12.A bona fide debt
cannot arise on a loan between father and son.
a. True
b. False

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

14.A loss from a
worthless security is always treated as a short-term capital loss.
a. True
b. False

15.A loss is not allowed
for a security that declines in value.
a. True
b. False

16.Several years ago,
John purchased 2,000 shares of Red Corporation § 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.
a. True
b. False

17.If a taxpayer sells
their § 1244 stock at a loss, all of the loss will be ordinary loss.
a. True
b. False

18.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.
a. True
b. False