Question

Chapter 06: Deductions and Losses:

You may use any format for the answer, however, the Conclusion, Rule, Application, Conclusion format is preferable for clarity and better understanding.

-The stock of Eagle, Inc. is owned as follows:

Tom 23%
Tom’s uncle 22%
Tom’s daughter 7%
Tom’s sister 15%
Tom’s spouse 15%
Tom’s nephew 8%
Tom’s CPA, unrelated 10%
Tom sells land and a building to Eagle, Inc. for $212,000. His adjusted basis for these assets is $225,000. Calculate Tom’s realized and recognized loss associated with the sale.

-Tracy invested in the following stocks and bonds during 2018.

Blue, Inc. $25,000 City of Falcon bonds 75,000

To finance the investments, she borrowed $100,000 from Swan Bank. Interest expense paid on the loan during 2018 was $5,000. During 2018, Tracy received $1,250 of dividend income from Blue, Inc. and $3,000 of interest income on the municipal bonds. Determine the amount of Tracy’s gross income. Determine the maximum amount of Tracy’s deductible interest expense.

-Are all personal expenses disallowed as deductions in 2018?

Answer 1

Tom's Realised and Recognised Loss

Tom's Realised and Recognised loss will be the difference between the amount at which at he sold the Land and Building to Eagle, Inc i.e $212,000 and his adjusted basis for the assets i.e $225,000.

Since Tom has sold the assets at less than the adjsuted basis for the assets, this will result in a loss. Therefore Tom's Realised and Recognised loss works out to be:

$212,000-$225,000= $13,000 Loss.

Tracy's Gross Income

Tracy's Gross Income will the amount received by Tracy before deducting any expense incurred for earning the same.

Therefore Tracy's gross Income works out to be as follows:

Dividend from Blue Inc.	$ 1,250
Interests Income from Municipal Bonds	$ 3,000
Gross Income	$ 4,250

Tracy's Deductible Expense:

Only those expense are deductible that have been incurred for earning the income. Accordingly deductible expense for Tracy will be worked out as:

Interest paid on Loan- Loan taken for Financing the investment	$ 5,000
Total Deductible Expense	$ 5,000

No Personal Expenses are allowed as deduction.