Question

Mr. Hippo owns 50,000 shares of East West Corporation common​stock, which it purchased on March​ 8, 2011​, for $1,000,000. On October​ 3, 2019​, Hippo purchases an additional 30,000 shares for $540,000. On October​ 12, 2019​, he sells the original 50,000 shares for $925,000. On November​ 1, 2019​, he purchases an additional 5,000 shares for $80,000. a. What is Mr. Hippo's recognized gain or loss as a result of the sale on October​ 12, 2019​? b. What are the basis and the holding period of the stock he continues to​ hold? c. How would your answers to Parts a and b change if the stock Hippo purchases during 2019 is East West ​nonvoting, nonconvertible, preferred stock instead of East West common​stock?

Answer 1

PART A: What is Mr. Hippo's recognized gain or loss as a result of the sale on October​12, 2019​?

• Realized loss of Mr. Hippo is : Sales price (925,000) - Purchase price ((1,000,000) = $ 75,000
• Since Mr. Hippo purchased 70% of the shares within 61 days of the sales and 30 days prior to sales, Recognized loss will be 70% of $ 75,000 = $ 52,500.

PART B: What are the basis and the holding period of the stock he continues to​ hold?

• The basis in the 30000 shares purchased October 3, 2019 is $559285. [$540000 purchase price + $19285 (30/35 x $22500)]
• The basis in the 5000 shares purchased November 1, 2019 is $82315. [($80,000 purchase price + $3215 (5/35 x $22500 disallowed loss))].
• The holding period for both of these blocks of stock starts on March 8, 201. As per Wash Sales, Holding period would start from the date of purchase

PART C: How would your answers to Parts a and b change if the stock Hippo purchases during 2019 is East West​nonvoting, nonconvertible, preferred stock instead of East West common​stock?

• Preference share are not substantially identical to common stock. Thus holding period would start from date of purchase of new shares and basis would be the purchase price.