[Anonymous]

NINJA Question –

With respect to the ABC Stock, the company declared bankruptcy and was declared insolvent on August 3, Year 4.

Asset Dates Amount Short-Term Gain or (Loss) Long-Term Gain or (Loss)

ABC Stock
Purchase 12/22/Year 3 26,000

Bankruptcy 8/3/Year 4 0 ($26,000) 0

What I have is wrong, see the correct answer below.

Remarks:

ABC Stock: This transaction results in a long-term capital loss of $26,000 ($0 − $26,000) because the asset is deemed to be worthless on the last day of the year, which means the holding period is more than 1 year.

Can someone please explain to me why this is deemed worthless on the last day of the year when the dates are 12/22/Y3 and 8/3/Y4, which is less than a year. I’m not getting it and I’m getting worried/frustrated.

[Holly]

What sim is this?

BEC - 79
REG - 85
AUD - 5/27/16

[Anonymous]

Number 13.

Kimberly Corporation had three property transactions during Year 4; the relevant details for each transaction are given in the table below. With respect to the ABC Stock, the company declared bankruptcy and was declared insolvent on August 3, Year 4. Record the gain or (loss) amount for each of the transactions in the shaded cells in the form below. If the value of a cell is zero, you must enter a zero (“0”) to receive credit for your answer. In addition, use dollar amounts only (i.e., no cents).

Property Transactions During Year 4
Asset…………Dates……….Amount
Unimproved Lot
Purchase…..6/30/Year 2…..50,000
Sale………12/19/Year 4….70,000

XYZ Stock
Purchase…..4/17/Year 3…..23,000
Sale………4/16/Year 4…..28,000

ABC Stock
Purchase…..12/22/Year 3….26,000
Bankruptcy…8/3/Year 4……0

This is the answer for ABC Stock. Why is it long term?

ABC Stock: This transaction results in a long-term capital loss of $26,000 ($0 − $26,000) because the asset is deemed to be worthless on the last day of the year, which means the holding period is more than 1 year.

Can someone please explain to me why this is deemed worthless on the last day of the year when the dates are 12/22/Y3 and 8/3/Y4, which is less than a year. I'm not getting it and I'm getting worried/frustrated.

[Yolonge]

-chrissy_turner

Short answer: because regulation said so.

26 CFR 1.165-5 – Worthless securities.

c)Capital loss. If any security which is a capital asset becomes wholly worthless at any time during the taxable year, the loss resulting therefrom may be deducted under section 165(a) but only as though it were a loss from a sale or exchange, on the last day of the taxable year, of a capital asset. See section 165(g)(1). The amount so allowed as a deduction shall be subject to the limitations upon capital losses described in paragraph (c)(3) of § 1.165-1.

Also I believe IRS prefers capital loss, because you can only offset capital loss with capital loss, unlike ordinary loss.

Been a while since I studied regulation, but hope it helps.

Materials: Wiley book + Ninja MCQ

FAR - 83 (Jan 2016)
Study time: 6 weeks
BEC - 87 (April 2016)
Study time: 2 weeks
AUD - 92 (July 2016), (74 Feb 2016), (72 May 2016)
Study time: 4 (Feb) + 2 (May) + 3 (July) = 9 weeks total
REG - (70 April 2016)
Study time: 3 weeks

[Anonymous]

Ahhh. Thank you @mhei8116

[Author]

Replies