Instructions : Please provide 2-3 sentence brief explanation and choose the best
ID: 2564285 • Letter: I
Question
Instructions : Please provide 2-3 sentence brief explanation and choose the best multiple choice answer. All sources must be noted. SHOW ALL WORK.
PART A
On March 21, 2015, Rodney purchased stock in Colen Corporation (the stock is not small business stock) for $2,000. On June 8, 2016, the stock became worthless. During 2016, Rodney also had an $9,000 loss on § 1244 small business stock purchased two years ago, a $10,000 loss on a nonbusiness bad debt, and a $6,000 long-term capital gain. How should Rodney treat these items on his 2016 tax return?
a.
$4,000 long-term capital loss and $9,000 short-term capital loss.
b.
$4,000 long-term capital loss and $6,000 short-term capital loss.
c.
$9,000 ordinary loss and $6,000 short-term capital loss.
d.
$9,000 ordinary loss and $3,000 short-term capital loss.
e.
$9,000 long-term capital loss and $3,000 short-term capital loss.
PART B
John’s car, which he uses 100% for personal purposes, was completely destroyed in an accident in 2016. The car’s adjusted basis at the time of the accident was $13,000. Its fair market value was $10,000. The car was covered by a $2,000 deductible insurance policy. John did not file a claim against the insurance policy because of a fear that reporting the accident would result in a substantial increase in his insurance rates. His adjusted gross income was $14,000 (before considering the loss). What is John’s deductible loss?
a.
$0.
b.
$100.
c.
$500.
d.
$9,500.
e.
None of the above.
a.
$4,000 long-term capital loss and $9,000 short-term capital loss.
b.
$4,000 long-term capital loss and $6,000 short-term capital loss.
c.
$9,000 ordinary loss and $6,000 short-term capital loss.
d.
$9,000 ordinary loss and $3,000 short-term capital loss.
e.
$9,000 long-term capital loss and $3,000 short-term capital loss.
Explanation / Answer
Answer for question no.1:
$2,000 from the worthless stock is to be treated as ordinary loss if the abondonment is done as it is not mentioned that it is abondoned nothing is to be done for this. And also the loss from the sale of domestic small companies also to be treated as ordinary loss. Non business bad debt is to be treated as short term capital loss.
Long term capital gain=$6,000.
Set off aginst long term capital gain is the loss from non business debt=$10,000 -$6,000
=$4,000 short term capital loss.
But only $3,000 is allowed for the current year and the rest is to be carried forward.
Loss from sale of ordinary stock is $9,000 is to be treated as ordinary loss
Hence answer is option c.
Answer for PartB:
As the car is used for personal purposes, insurance is not deductible expense. The car adjuted basis of $13,000 and the $100 deduction rule applies so, the loss is $13,000 -$100 =$12,900 and from this allowable loss is calculated as below:
$12,900 -$10% of Adjusted gross income =$12,900 -$14000*10%=$12,900 -$1,400
=$11,500
Hence answer is none of the above.