[jeff]

Welcome to the Q1 2017 CPA Exam Study Group for REG. 🙂

[RE2PECT]

Thanks financelady. I'll add that to my notes.

This is considered a wash sale so the loss on the first sale of stock on 5/12 ($1000) gets added to the basis of the shares purchased on 5/28 (250*25=$6250 + $1000 = new basis of $7250) That gives you a basis of $29 per share. When the 100 shares are sold there's a loss of $11 per share ($29 – $18) which gives you the $1100.

Sorry I'm not good at explaining and that's why I don't do it that often lol.

FAR: 75 Roger & Ninja (notes/flashcards/audio/MCQ)
AUD: 73, 81
BEC: 71, retake 8/29
REG:

[aatoural]

@Re2pect – Why do you add the entire loss to the new basis? Does your material say to add all the loss deferred or just the deferred loss? Mine is only deferred.

BEC - PASSED
AUD - 8/29/16
FAR - TBS
REG - TBS

[HoosierCPA]

I hate to add to the confusion but I'm getting the $1,400 loss. What am I missing?

5/12 sale — $1,000 loss ($500 allowable $500 disallowed)

5/28 purchase — Basis + Disallowed Loss, $25+2 = New Basis Price $27

10/15 sales — $27 new basis – 18 sales price X 100 shares = $900 allowable loss

$500 + $900 = $1,400 total allowable loss.

FAR - 78
REG - 72,74,71...please just go away REG nobody likes you!
BEC - 82
AUD - Aug 16

[RE2PECT]

@aatoural-I did a quick search and found this on investopedia.

BREAKING DOWN ‘Wash-Sale Rule'
Stocks or securities of one company are generally not considered substantially identical by the IRS to those of another. As well, bonds and preferred stock of a company are also ordinarily not considered substantially identical to the company’s common stock. However, there may be circumstances in which preferred stock, for example, may be considered substantially identical to the common stock. This would be the case if the preferred stock is convertible into common stock without any restriction, has the same voting rights as the common stock, and trades at a price close to the conversion ratio.

If the loss is disallowed by the IRS because of the wash sale rule, the taxpayer has to add the loss to the cost of the new stock, which becomes the cost basis for the new stock. For example, consider the case of an investor who purchased 100 shares of Microsoft for $33, sold the shares at $30, and within 30 days bought 100 shares at $32. In this case, while the loss of $300 would be disallowed by the IRS because of the wash sale rule, it can be added to the $3,200 cost of the new purchase. The new cost basis therefore becomes $3,500 for the 100 shares that were purchased the second time, or $35 per share.

FAR: 75 Roger & Ninja (notes/flashcards/audio/MCQ)
AUD: 73, 81
BEC: 71, retake 8/29
REG:

[aatoural]

@dtatham10 – You are right, the thing was and what I tried to explain was that it will be a total loss of 1,100 only if the new shares were purchased at 22 instead of 25. But if it is indeed 25 for the 250 shares purchased in May, then the total loss should be 1,400.

BEC - PASSED
AUD - 8/29/16
FAR - TBS
REG - TBS

[HoosierCPA]

@re2pect your example isn't quite an apples to apples comparison. Your example is purchased, sold, and repurchased 100 shares. The example above is purchased and sold 500 shares and repurchased 250 shares…so in that case I would think the $500 is an allowable loss with the disallowed loss of $500 being added back to the repurchased price and not the entire $1,000.

FAR - 78
REG - 72,74,71...please just go away REG nobody likes you!
BEC - 82
AUD - Aug 16

[aatoural]

Yeah the trick of this question is that they only disallowed 250 shares not the entire 500 shares.

It would be helpful if @financelady would confirm if the shares price was 25 or 22. I started looking through my study questions from AICPA and found the same problem where it says that shares purchased in May of 250 were at 22 per share in which case then 22 + 2 = 24 basis and the total loss will calculate as 1,100, if not the it is 1,400.

BEC - PASSED
AUD - 8/29/16
FAR - TBS
REG - TBS

[HoosierCPA]

@aatoural yeah we may have just got unlucky both answers were on the board or it might be more obvious if there was a typo lol!

FAR - 78
REG - 72,74,71...please just go away REG nobody likes you!
BEC - 82
AUD - Aug 16

[JMG]

I need clarification with this question:

Paul Pappas owns all of the stock of an S corporation which had previously been a C corporation. The S corporation had the following balances at the beginning of its tax year:

Accumulated adjustments account $ 8,000
Accumulated earnings and profits 10,000

Paul's stock basis was $20,000 at the beginning of the tax year. The S corporation made a distribution of $19,000 to Paul during the year. What amount of the distribution is taxable to Paul?

A.$0

B.$8,000

C.$10,000

D.$18,000

So the rule of thumb here is that the distribution is tax free to the extent of AAA and taxable to the extent of Acc E&P, making the answer C. Which works out good because the 19K distribution covers both. But how would you answer this question if the distribution was 16K?

[RE2PECT]

I was actually coming up with aatoural's and dtatham10's answer the first time I did it, but couldn't figure out why it was off lol. I had a feeling something wasn't right smh. After looking it up on investopedia I just used their example and plugged the numbers. Last time I try and explain something on here lol.

FAR: 75 Roger & Ninja (notes/flashcards/audio/MCQ)
AUD: 73, 81
BEC: 71, retake 8/29
REG:

[HoosierCPA]

If it was 16k it would be 8k is taxable distribution..it gets netted against the AAA accoutn first followed by the E&P.

It's also worth noting that if they ARE NOT a subchapter C corp then AAA is skipped altogether and go right to E&P. So if you had a 16K distribution and not a subchapter c corp then the taxable dividend would be the entire 10k with 6k being a return of capital.

FAR - 78
REG - 72,74,71...please just go away REG nobody likes you!
BEC - 82
AUD - Aug 16

[aatoural]

My attempt is this @JMG:

Beginning Basis – Dist to extent of AAA = 20 -8 = 12

Now the 8 are non taxable

I still have 8 more to distribute

The next is to distribute to extent of C corp E&P so:

You have 10 available but only need 8. So taxable will be 8

The ending basis remains at 12 because distributions to the extent ofC corp. E&P do not reduce basis.

BEC - PASSED
AUD - 8/29/16
FAR - TBS
REG - TBS

[aatoural]

@dtatham10 – that's a good point because I get confused when there is no AAA in the first place.

BEC - PASSED
AUD - 8/29/16
FAR - TBS
REG - TBS

[HoosierCPA]

Another trick regarding distributions is to make sure you look at if the AAA and E&P are as of the beginning of the year or end of the year. If it's beginning and there is a recognized gain then the gain gets added to AAA.

FAR - 78
REG - 72,74,71...please just go away REG nobody likes you!
BEC - 82
AUD - Aug 16

[RE2PECT]

@dtatham10- I just did a question that touched on what you just mentioned.

FAR: 75 Roger & Ninja (notes/flashcards/audio/MCQ)
AUD: 73, 81
BEC: 71, retake 8/29
REG:

[Author]

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