Melaney has had a bad year with her investments. She lent a friend $8,000; the f
ID: 2458519 • Letter: M
Question
Melaney has had a bad year with her investments. She lent a friend $8,000; the friend did not repay the loan whenit was due and then declared bankruptcy. The loan is totally uncollectable. Melaney also was notified by her broker that Oak corporate bonds she owned became worthless on October 13, 2015. She had purchased the bonds for $22,000 on November 10, 2014. Melaney also had a $60,000 loss on the disposition of Section 1244 corporate stock that she purchased several years ago. Melaney is single.
a. What are the nature and amount of Melaney's losses?
b. What is Melaney's AGI for 2015 assuming that she has $65,000 of ordinary gross income from sources other than those discussed?
c. What are the nature and amount of Melaney's loss carryforwards?
Explanation / Answer
A) Melaney has lent money to a friend and he was declared bankrupt so the loss to Melaney is $8000 from friend.
Three things need to be seen the loan is bonafide, there is the basis in the debt and it becomes totally worthless in the year the deduction is claimed.
Loss on disposition of $60000 under section 1244 from this an individual can claim upto $50000 in case he is single and $100000 if joint return filed. And the remaining can be carried forward in the next year but only $3000 per year can be used to offset ordinary income and remaining losses must be carried forward. He is single so maximum limit is $50000.
So total ordinary loss is $58000 ($50000+$8000). And $10000 (60000-$50000) loss is a capital loss which will be carried forward.
b) AGI= $65000- $58000 ordinary loss= $7000 for 2015
c) Capital loss of $10000 which will be carried forwardbut only $3000 per year can be used to offset ordinary income and remaining losses must be carried forward.