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Exam 6: Losses and Loss Limitations

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Question 81

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Taxpayer's home was destroyed by a storm in the current year and the area was declared a disaster area.If the taxpayer elects to treat the loss as having occurred in the prior year, it will be subject to the 10%-of-AGI reduction based on the AGI of the current year.

A) True
B) False

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Question 82

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Which of the following events would produce a deductible loss?

A) Erosion of personal use land due to rain or wind.
B) Termite infestation of a personal residence over a several year period.
C) Damages to personal automobile resulting from a taxpayer's willful negligence.
D) A misplaced diamond ring.
E) None of the above.

F) B) and E)
G) A) and B)

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Question 83

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Discuss the treatment, including the carryback and carryforward periods, of casualty losses incurred with personal use property.

The amount of partial worthlessness on a nonbusiness bad debt is deducted in the year partial worthlessness is determined.

Alma is in the business of dairy farming.During the year, one of her barns was completely destroyed by fire.The adjusted basis of the barn was $90,000.The fair market value of the barn before the fire was $75,000.The barn was insured for 95% of its fair market value, and Alma recovered this amount under the insurance policy.Alma has adjusted gross income for the year of $40,000 (before considering the casualty) .Determine the amount of loss she can deduct on her tax return for the current year.

Three years ago, Sharon loaned her sister $30,000 to buy a car.A note was issued for the loan with the provision for monthly payments of principal and interest.Last year, Sharon purchased a car from the same dealer, Hank's Auto.As partial payment for the car, the dealer accepted the note from Sharon's sister.At the time Sharon purchased the car, the note had a balance of $18,000.During the current year, Sharon's sister died.Hank's Auto was notified that no further payments on the note would be received.At the time of the notification, the note had a balance due of $15,500.What is the amount of loss, with respect to the note, that Hank's Auto may claim on the current year tax return?

In 2016, Robin Corporation incurred the following expenditures in connection with the development of a new product: $\begin{array}{lr}\text { Salaries } & \$ 100,000 \\\text { Supplies } & 40,000 \\\text { Market survey } & 10,000 \\\text { Depreciation } & 25,000\end{array}$ In 2017, Robin incurred the following additional expenditures in connection with the development of the product: $\begin{array} { l r } \text { Salaries } & \$ 125,000 \\ \text { Supplies } & 50,000 \\ \text { Depreciation } & 30,000 \\ \text { Advertising } & 10,000 \end{array}$ In October 2017, Robin began receiving benefits from the project. If Robin elects to expense research and experimental expenditures, determine the amount and year of the deduction.

Wolf Corporation has active income of $55,000 and a passive activity loss of $33,000 in the current year.Wolf cannot deduct the $33,000 loss if it is a closely held C corporation that is not a personal service corporation.

Tonya had the following items for last year: $\begin{array}{lr}\text { Salary } & \$ 40,000 \\\text { Short-term capital gain } & 12,000 \\\text { Nonbusiness bad debt } & (23,000) \\\text { Long-term capital gain } & 8,000\end{array}$ $\text { For the current year, Tonya had the following items: }$ $\begin{array}{lr}\text { Salary } & \$ 45,000 \\\text { Collection of last year's bad debt } & 23,000\end{array}$ $\text { Determine Tonya's adjusted gross income for the current year. }$

The current position of the IRS is that a personal casualty loss deduction is not allowed for losses resulting from termites.

Last year, taxpayer had a $10,000 nonbusiness bad debt.Taxpayer also had an $8,000 short-term capital gain and taxable income of $35,000.If taxpayer collects the entire $10,000 during the current year, $8,000 needs to be included in gross income.

In 2017, Wally had the following insured personal casualty losses (arising from one casualty) .Wally also had $42,000 AGI for the year before considering the casualty. $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\underline{\text { Fair Market Value }}$ $\begin{array}{ccccc}\text { Asset } & \text { Adjusted Basis }& \text { Before } &\text { After }& \text { Insurance Recovery }\\\hline\text { A } & \$ 9,200 & \$ 8,000 & \$ 1,000 & \$ 2,000 \\\text { B } & 3,000 & 4,000 & -0- & 4,000 \\\text { C } & 3,700 & 1,700 & -0- & 900\end{array}$ Wally's casualty loss deduction is:

"Other casualty" means casualties similar to those associated with fires, storms, or shipwrecks.

On September 3, 2016, Able, a single individual, purchased § 1244 stock in Red Corporation from his friend Al for $60,000.On December 31, 2016, the stock was worth $85,000.On August 15, 2017, Able was notified that the stock was worthless.How should Able report this item on his 2017 tax return?