(Test 2) chapter 6: losses and Limitations

Question 1

Worthless Securities

Answer 1

A loss is allowed if a stock becomes completely worthless during the year and is treated as a capital loss deemed to have occurred the last day of the tax year (so it can be considered long term)

Question 2

Small business stock (max of capitalization of 1 million)

Answer 2

Possible to avoid capital loss limitations if the loss is sustained on a small business stock. (loss from both sale and becoming worthless)

Only individuals who acquired it from the issuing corporation are eligible to receive ordinary loss treatment

limited to $50,000 (100,00 for married who file jointly) stock in excess of this are treated as capital losses.

Only applies to gains

Question 3

casualty

Answer 3

loss from fire, storm , shipwreck, and theft, etc.

Question 4

What three things are required to deduct a loss by considering it a casualty or theft loss?

Answer 4

1. identifiable
2. damaging to the property
3. sudden unexpected and unusual in nature

Must meet all three tests

Question 5

Sudden (Casualty and theft)

Answer 5

an event that is swift and precipitous and not gradual or progressive

Question 6

unexpected event (casualty and theft)

Answer 6

Ordinarily unanticipated and occurs without the intent of the taxpayer who suffers the loss.

Question 7

Unusual event (casualty and theft)

Answer 7

extraordinary and nonrecurring and does not commonly occur during the activity in which the taxpayer was engaged when the destruction occurred.

Question 8

Deduction of casualty losses

Answer 8

Usually in year that the loss occurs.

Not permitted if a reimbursement claim with a reasonable prospect of full recovery exists.

Question 9

Partial claim (Deduction of casualty losses)

Answer 9

Only Part of the loss can be claimed in the year of the casualty and the remainder is deducted in the year that the claim is setttled

Question 10

Reimbursement for a casulty loss sustained and deducted in a previous year (Deduction of casualty losses)

Answer 10

An amended return is not filed for that year. Taxpayer must include the reimbursement in gross income on the return for the year in which it is received to the extent the previous deduction resulted in a tax benefit.

Question 11

Disaster area losses (Deduction of casualty losses)

Answer 11

casualties or disaster related business losses sustained in an area designated as a disaster area bu the president.

Can treat the loss as having occurred in the taxable year immediately preceding the taxable year in which the disaster occurred. ( amended return or refund claim)

Immediate relief through accelerated tax benefits

Question 12

Theft (Deduction of casualty losses)

Answer 12

Includes but is not necessarily limited to larceny, embezzlement, and robbery. Not misplaced items.

Question 13

Theft losses(Deduction of casualty losses)

Answer 13

Treated like other casualty losses, but the timing of recognition of the loss differs. Deducted in the year of discovery, because year of theft could be unknown.

If there is reasonable expectation of recovering the adjusted basis of the asset from the insurance company, no deduction is permitted.

If recovery is less than the adjusted basis a deduction may be available.

If recovery greater than the asset’s adjusted basis, casualty gain may be recognized.

Question 14

Loss measurement depends on what two factors? (Deduction of casualty losses)

Answer 14

1. Business, investment, or personal-use?

2. Partially or completely destroyed?

Question 15

Completely destroyed (loss measurement)

Answer 15

The loss is equal to the adjusted basis of the property at the time of destruction

Question 16

Partial destruction of business and investment property and partial and complete for personal use (loss measurement)

Answer 16

The loss is the lesser of;

1. The adjusted basis of the property
   or
2. The difference between the fair market value of the property before the event and the fair market value immediately after the event.

Question 17

Insurance recovery (loss measurement)

Answer 17

reduces the loss for business, investment, and personal-use losses.

may realize gain if recovery from insurance is greater than the adjusted basis.

Question 18

Personal use property and insurance recovery (loss measurement)

Answer 18

not permitted to deduct a casualty loss for damage to insured personal-use property unless and insurance claim is filed.

Generally an appraisal before and after the casualty is needed to measure the amount of loss, but cost of repairs can be acceptable for establishing the loss in value.

Question 19

Multiple losses

Answer 19

amount of each loss is computed seperately

Question 20

casualty and theft losses of individuals

Answer 20

in connection with business or with rental and royalty activity: deductible for agi and are limited only by the rules previously discussed.

Most other investment activities and personal use: deducted from agi.

Question 21

Personal-use property (Loss of individuals)

Answer 21

Deductions from personal-property must be reduced by a $100 per event floors and a 10% of agi aggregate floor. Total is reduced by 10% of the taxpayers agi.

Question 22

Both casualty left gains and losses from personal use property (loss of individual)

Answer 22

gains>loss= capital gains and losses

loss>gains= ordinary gains and losses

any excess losses are deductible as personal casualty and theft losses