Question

4. Explain when a basis adjustment for loss property is taken. include in your answer the default application and election available to Corporation/Shareholder. Discuss when it would make sense to use the election. Use an example if necessary to illustrate your analysis. (3 points)

Answer 1

• Adjustment basis for loss on/ off property is used to determine capital gains/ losses on a sale, exchange or other disposition of property, which is subsequently used to compute capital gains tax. IRS rules/regulations provide for certain adjustments of basis in order to arrive at gains/ losses occurred. Basis adjustment for losses on property are taken in

a) casualty and b) theft

• How are they adjusted?

Stock basis is adjusted in the following order:

1. Basis is adjusted for the required increases to basis.
2. Reduce stock basis by distributions prior to any reduction for losses or nondeductible expenses
3. Reduce basis by nondeductible expenses
4. Finally, reduce basis for items of loss and deduction

Basis for property is decreased by

1. Any insurance or other reimbursement
2. Any deductible loss not covered by insurance

• It makes sense to use the election if making election under Sec. 1377 (a) (2) makes a difference in income allocation to different shareholders