MODULE 34 TAXES: TRANSACTIONS IN PROPERTY 497

f. Rollover of capital gain from publicly traded securities

(1) An individual or C corporation may elect to roll over an otherwise currently taxable capital
gain from the sale of publicly traded securities if the sale proceeds are used to purchase
common stock or a partnership interest in a specialized small business investment
company
(SSBIC) within sixty days of the sale of the securities.

(2) An SSBIC is a partnership or corporation licensed by the Small Business Administration un-
der the Small Business Investment Act-of 1958 as in effect on May 13, 1993.
(3) The amount of gain eligible for rollover is limited to $50,000 per year for individuals (life-
time cap of $500,000) and $250,000 per year for corporations (lifetime cap of $1 million).
(4) The taxpayer's basis in the SSBIC stock or partnership interest must be reduced by the gain
that is rolled over.

g. Market discount bonds

(1) Gain on the disposition of a bond (including a tax-exempt bond) that was acquired for a price
that was less than the principal amount of the bond is treated as taxable interest income to
the
extent of the accrued market discount for bonds purchased after April 30, 1993.

(2) Accrued market discount is the difference between the bond's cost basis and its redemption
value at maturity amortized over the remaining life of the bond.
h. Wash sales
(1) Wash sale occurs when stock or securities (or options to acquire stock or securities) are sold
at a loss and within thirty days before or after the sale, substantially identical stock or
se-
curities (or options to acquire them) in the same corporation are purchased.

(2) Wash sale loss is not deductible, but is added to the basis of the new stock:
(3), Wash sale rules do not apply to gains.
EXAMPLE: C purchased 100 shares 'ofXYZ Corporation stockfor $1,000. C later sold the stockfor $700,
and within thirty days acquired 100 shares ofXYZ Corporation stockfor $800. The loss of$300 on the sale
of stock is not recognized. However, the unrecognized loss of $300 is added to the $800 cost of the new stock
to arrive at the basis for the new stock of $1,100. The holding period of the new stock includes the period of
time the old stock was held.

(4) Does not apply to dealers in stock and securities where loss is sustained in ordinary course of

business. "
1. Worthless stock and securities
(1) Treated as a capital loss as if sold on the last day of the taxable year they become worthless.
(2) Treated as an ordinary loss if stock and securities are those of an 80% or more owned cor-
porate subsidiary that derived more than 90% of its gross receipts from active-type sources.

6. Losses on deposits in insolvent financial institutions

a. Loss resulting from a nonbusiness deposit in an insolvent financial institution is generally
treated
as a nonbusiness bad debt deductible as a short-term capital loss (STCL) in the year in which a fi-
nal determination of the amount of loss can be made.

a. As an alternative, if a reasonable estimate of the amount of loss can be made, an individual

may
elect to
(1) Treat the loss as a personal casualty loss subject to the $100 floor and 10% of AGI limitation.
Then no bad debt deduction can be claimed.
(2) In lieu of (1) above, treat up to $20,000 as a miscellaneous itemized deduction subject to the
2% of AGI floor if the deposit was not federally insured. Then remainder of loss is
treated as
a STCL.
EXAMPLE: An individual with no capital gains and an AGI of $70,000, incurred a loss on a federally insured

. deposit in afinancial institution of $30,000. The individual may treat the loss as a $30,000 STCL subject to
the $3,000 net capital loss deduction limitation, with the remaining $27,000 carried forward
as a STCL; or,
may treat the loss as a personal casualty loss and an itemized deduction of {($30, 000 - $100) -
(10% x
$70,000)] = $22,900. If the deposit had not been federally insured, the individual could also
have taken a
miscellaneous itemized deduction of[$20, 000 - (2% x $70,000)] = $18,600, with the
remaining $10,000
treated as a STCL (i.e., $3,000 net capital loss deduction and a $7,000 STCL carryover).