AC256_Finley_Joey_Losses_and_Bad_Debts_Unit 8

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Running head: LOSSES AND BAD DEBTS 1 Losses and Bad Debts Joey Finley Kaplan University Federal Tax AC256 Emil Koren July 09, 2011
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Losses and Bad Debts 1) I:8-40 Amount and Character of Loss Transactions- On September 30 of the current year, Silver Fox Corporation files for bankruptcy. At the time, it estimates that the total FMV of its assets is $725,000, whereas the total amount of its outstanding debt amounts to $950,000. Silver Fox Corporation has been engaged in the resale of tax preparation and tax research-related books and software for several years. a) At the time of the bankruptcy, Silver Fox is owned by Randall, who purchased the stock from an investor for $250,000 several years ago. Randall is single. What are the amount and character of the loss sustained by Randall upon Silver Fox’s bankruptcy? i) Essentially, Silver Fox Corporation is insolvent which means that all of the assets will be liquidated to go toward paying off the outstanding debt. This will basically leave nothing remaining of any financial value for Randall. Randall will not be able ever recover any of his basis in the Silver Fox Corporation stock. Being that the stock was not purchased or begotten from the corporation upon original issuance; his stock will not qualify as Sec. 1244 stock. Overall Randall will unfortunately have a $250,000 long-term capital loss. b) How would your answer to part a change if Randall originally organized Silver Fox Corporation, capitalizing it with $250,000 of cash and assuming Silver Fox qualifies as a small business corporation?
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