Chapter 14 HW 9. A worthless security is a stock or bond that has become worthless due to the insolvency of the issuer.

If such a security is a capital asset, the capital loss is deemed to have occurred as the result of a sale or exchange on the last day of the tax year. Section 1244 allows a limited ordinary deduction for the losses from disposition of certain small business stock (but not bonds). 14. A former owners holding period is tacked on to the present owners holding period if the transaction is nontaxable and the former owners basis carries over to the present owner. Here, the value of the property was less than Sivas (the donor) basis at the time of the gift. Mithras (the donee) holding period will not be known until Mithra sells the property. If Mithra sells the property for more than Sivas basis, Sivas holding period will tack on to Mithras. If Mithra sells the property for less than its fair market value at the date of gift ($12,000), Mithras holding period will start at the date of the gift. 23. If the taxpayer owns depreciable business equipment held for the short-term holding period, the equipment would have to be disposed of for less than its adjusted basis to generate a 1231 loss. 24. The dump truck would have to be sold for more than the amount that was paid for it. 26. Section 1245 depreciation recapture generally applies to 1231 assets; in this case depreciable equipment held more than one year. This asset was held one year or less; so it was an ordinary asset rather than a 1231 asset. Since the asset is ordinary, the gain from disposition is also ordinary and 1245 does not apply. 40. Section 1221 defines what not a capital asset is. Included on the list is depreciable property or real estate used in a business. Renting real estate is treated as a business. Therefore, even though he is holding the property for appreciation (an investment motive), it is not a capital asset. 45. a. When Kate made the loan to a friend, she had a nonbusiness receivable. When the loan is not repaid, she has a $5,700 nonbusiness bad debt assuming the debt is a bona-fide debt. The $5,700 is treated as a short-term capital loss, no matter how long Kate held the loan. Whether the receivable was a capital asset and whether its holding period was long-term or short-term are not

relevant because the Code defines the loss as a short-term capital loss. Kate also is the holder of a worthless bond. The bond is deemed to have become worthless on the last day of 2011the year in which it became worthless. Kates holding period for the bond is long-term because the time period from November 10, 2012, through December 31, 2013, is more than one year. The $22,000 loss on the bond is a long-term capital loss. The $30,000 loss on the disposition of the 1244 stock is an ordinary loss. The loss is a deduction for adjusted gross income. b. Kates adjusted gross income is $32,000 [$65,000 - $3,000 (capital loss deduction) - $30,000 (1244 ordinary loss deduction)]. c. Since short-term capital losses are used first to make up the capital loss deduction, Kate has a $2,700 ($5,700 minus $3,000) short-term capital loss carry-forward and a $22,000 long-term capital loss carry-forward. 58. AGI (exclusive of capital gains and losses) $240,000 Long-term capital gain 22,000 Long-term capital loss (8,000) Short-term capital gain 19,000 Short-term capital loss (23,000) Net capital gain $14,000 (4,000) $10,000 Dear Ms. Case: The purpose of this letter is to discuss the result of your stock transactions for 2011. You had $14,000 (net) of long-term capital gains and $4,000 (net) of short-term capital losses. Subtracting the $4,000 of losses from the $14,000 of gains resulted in a $10,000 net long-term capital gain. The $10,000 net long-term capital gain and the details of your stock transactions will be reported on the Schedule D attached to your Form 1040. The $10,000 net capital gain qualifies for the alternative tax and will be taxed at a 15% rate rather than at your marginal tax rate of 35%. 73. a. Siena has $47,000 ($40,000 + $7,000) of ordinary income due to 1245 recapture and $7,000 of 1231 loss.

b. Since Siena does not have a net 1231 gain, none of the gains are treated as capital gains. 74. a. Copper has $5,000 of ordinary income due to 1245 recapture and $12,000 of 1231 loss. b. Rack: Asset Sold For $55,000 Less Adjusted Basis Gain or Loss $50,000 ($110,000 - $60,000) $24,000 ($45,000 $21,000) $66,000 ($97,000 -$31,000) = $5,000 ($9,000) ($6,000) $15,000 $60,000 Forklift: Bin:

Since Copper has a $12,000 ($9,000 + $3,000) net 1231 loss, there is no gain to be treated as capital gain. The $5,000 1245 depreciation recapture gain is treated as ordinary income and the $12,000 net 1231 loss is treated as an ordinary loss deduction for AGI.