True or False
___ 1. Dr. S has done extremely well financially. Several years ago, his good friend T started a small
amusement park with such attractions as a water slide and a miniature golf course. T persuaded S to
lend his new business $5,000, which he would repay to S in three years with 15 percent interest
annually. The note came due this year and T was unable to repay because his business had failed. In
light of the business nature of this debt, Dr. S may treat the bad debt as an ordinary loss.
___ 2. Q Corporation uses the cash method of accounting. The corporation manufactures microwave ovens.
Two years ago it loaned $50,000 to a supplier who was having difficulties due to an unexpected rise
in material prices. This year the debt became worthless. Q may not claim a deduction because it is a
cash basis taxpayer and has no basis in the debt.
___ 3. B made a $20,000 loan to his good friend C to help his struggling business venture. This year, C filed
for bankruptcy. B anticipates receiving $4,000 after the bankruptcy proceedings are complete,
probably next year. B may claim a deduction this year.
___ 4. N Airlines declared bankruptcy this year. As a result, it was unable to pay many of its employees
their salaries which they had earned. For example, S, one of its pilots, worked all of October and did
not receive his $5,000 salary for that month. S is not entitled to a bad debt deduction.
___ 5. An individual’s nonbusiness bad debt is treated as if it arose from the sale of a capital asset.
___ 6. Cash basis taxpayers are not allowed a bad debt deduction for worthless accounts receivable arising
from routine credit sales.
___ 7. C operates a glass business as a sole proprietorship. The business uses the cash method of accounting.
C replaced all of the windows for J Corporation when they were broken by high winds. J Corporation
went out of business before C could collect the $3,000 due for the work he performed. C may deduct
$3,000 as a bad debt.
___ 8. In accordance with generally accepted accounting principles, JKL Manufacturing Corporation uses
the reserve method of accounting for bad debts for financial accounting purposes. JKL also must use
this method for tax purposes.
___ 9. R backed into his neighbor’s mailbox, destroying it. R repaired the mailbox and may deduct this cost
(subject to limitations) as a casualty loss.
___ 10. Under § 165(c)(3) (deductions for losses related to personal property), X may deduct, subject to
limitations, the loss of value in his home when a vacant lot in the adjoining neighborhood is
discovered to be a toxic waste dump.
___ 11. H’s house was flooded this year due to abnormal rainfall. She was forced to stay in a motel while the
water subsided. Her motel stay, which cost $300, was not covered by her insurance policy. H may
deduct the $300 as part of her casualty loss from the flood.
___ 12. A fire in T’s garage destroyed several uninsured items. The items included a moped (cost $400, FMV