Question

Melaney has had a bad year with her investments. She lent a friend $8,000; the friend did not repay the loan whenit was due and then declared bankruptcy. The loan is totally uncollectable. Melaney also was notified by her broker that Oak corporate bonds she owned became worthless on October 13, 2015. She had purchased the bonds for $22,000 on November 10, 2014. Melaney also had a $60,000 loss on the disposition of Section 1244 corporate stock that she purchased several years ago. Melaney is single.

a. What are the nature and amount of Melaney's losses?

b. What is Melaney's AGI for 2015 assuming that she has $65,000 of ordinary gross income from sources other than those discussed?

c. What are the nature and amount of Melaney's loss carryforwards?

Answer 1

a. The nature and amount of Melaney's losses is shown below

Type of loss Nature of loss Amount of loss

1 Bad debts of $8,000 Short-term capital loss $8,000

2. Bond of Oak Co. Long-term capital loss $22,000

3. Section 1244 Ordinary loss $50,000

Corporate stock

4. Section 1244 Long-term capital loss $10,000

Corporate stock (60,000- 50,000)

Note: Non business debt of $8,000 is treated as Short-term capital loss, The loss of $50,000 is treated as ordinary loss for single tax payers. Ordinary loss is fully deductible in the current years.

b. The ordinary loss and net capital loss would be deducted from the ordinary income to get the AGI.

AGI = $65,000 - ($50,000 + $3,000)

AGI = $65,000 - $53,000

AGI = $12,000

So the AGI of Malaney is $12,000

c. Malenay can claim the deduction for net capital losses of $3,000 in the current year. The short term capital loss of $5,000 ($8,000-$3,000) and the Long term capital loss of $32,000($22,000+$10,000) would be carried forward to future years.