Question

At the beginning of the current year, Sandy Brewer had a zero basis in her 38 shares of stock in Lindlee, an S corporation, a zero basis in a $5,000 note from Lindlee, and a $7,400 carryforward of a prior year ordinary loss from Lindlee that she was unable to deduct because of the basis limitation. Early in February of the current year, Sandy was notified by Lindlee’s attorney that the corporation was bankrupt. Consequently, Lindlee was defaulting on its $5,000 debt to Sandy, and Sandy’s 38 shares of stock were worthless.
Describe the consequences to Sandy of the worthlessness of her Lindlee investments (note, stock, and loss carryforward).

Answer 1

Answer:

As in her worthless note,Sandy has a zero adjusted basis. Her bad debt deduction is Nil according to Section 166 (b).

Section 166(g)(1) states that her capital loss realized on the deemed sale of this stoke is also nil because of zero adjusted basis in her worthless stock.

According to Reg. Sec.1.1366-2(a)(5) if all of her stock is disposed by an S corporation shareholder and loss carryforward attributable to the Section 1366 (d) basis. Limitaitons are permanently disaalowed.

Hence, her $7,400 ordinary loss carryforward can never be deducted by Sandy.

Sandy has no 2012 tax consequences from worthlessness of her Lindlee investments

Answer 2

Answer:

Explanation:

The Section 166 (5) gives the terrible obligation reasoning is zero because of the examination has a zero balanced premise in her useless note. Segment 166 (g)(1) gives that her misfortune acknowledged on request offer of this stock is zero because of she had zero balanced premise in her useless stock.

Reg. sec 1.1366-2(0)(5) gives that if a S organization investor discards every last bit of her stock, the impediment is for all time refused at any misfortune convey forward inferable from the area 1366(d) premise.

In this way, she can never deduct her $7400 standard misfortune convey forward. In any case, she has no present year charge results from useless of her interest in Lindlee Inc.