...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 ANSWER: False RATIONALE: James has a basis of $15,000 in the account receivable and hence, he has income of $2,000. 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. c. True d. False ANSWER: True 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. e. True f. False ANSWER: False RATIONALE: The taxpayer must include the $10,000 in gross income to the extent of the tax benefit received last year. The entire $10,000 deduction provided a tax benefit; $8,000 offset by the short-term capital gain and $2,000 offset against ordinary income. 4. A cash basis taxpayer must include as income the proceeds from the sale of an account receivable to a collection agency. g. True h. False ANSWER: True 5. If an account...
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