REG 3 C Corporation Question – Worthless Stock – Section 1244
I don't understand the below question and answer. CPA-08215
I'm reading the text in the REG book page R3-47 and the way I understand it is that section 1244 worthless stock is deductible as an ordinary loss ($50,000/100,000 limit) and that the excess can offset capital gains ($3000/$1,500 limit.)
So the problem has two 1244 losses. I understand there is a net capital gain of $8,000. Why is it reduced by $5,000 of worthless stock? Wouldn't it either be reduced by both instances of worthless stock (title in book says Worthless Stock – Section 1244 Stock) so having trouble differentiating between 1st instance “worthless stock” in the problem and second instance “section 1244 stock” in the problem. OR if $3,000 is the limit than why is $5,000 allowed. Please help clarify where I am confused here. Thanks!!
Individual Lark's Year 2 brokerage account statement listed the following capital gains and losses from the sale of stock investments:
Short-term capital gain
$ 6,000
Long-term capital gain
14,000
Short-term capital loss
4,000
Long-term capital loss
8,000
In addition, two stock investments became worthless in Year 2. Public Company X stock was purchased in December, Year 1, for $5,000, and formal notification was received by Lark on July, Year 2, that it was worthless. Private company Section 1244 stock was issued to Lark for $10,000 in January, Year 1, and was determined to be worthless in December, Year 2. What is Lark's Year 2 net capital gain or loss before any capital loss limitation?
a.
$8,000 net capital gain.
b.
$7,000 net capital loss.
c.
$3,000 net capital gain.
d.
$2,000 net capital loss.
Explanation
Choice “c” is correct. First, the long-term capital gain of $14,000 is netted with the long-term capital loss of $8,000. This results in a net long-term capital gain of $6,000. Next, the short-term capital gain of $6,000 is netted with the short-term capital loss of $4,000. This results in a net short-term capital gain of $2,000. Now add the net long-term capital gain of $6,000 and the net short-term capital gain of $2,000 to arrive at a net capital gain of $8,000. This amount is reduced by the $5,000 worthless stock. So the final net capital gain is $3,000. Note that the Section 1244 loss of $10,000 does not affect this calculation because it is an ordinary loss and not a capital loss.
Choices “d”, “b”, and “a” are incorrect per the above explanation.
3 out of 4 passed and sitting for FAR on May 31. Will lose credit for Audit if I don't pass FAR by Aug 4. I love leases and bonds.
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