QUESTION 3 Helen Pitt has been an investor ever since she be

QUESTION 3

Helen Pitt has been an investor ever since she began having her own money from part-time jobs. Her grandpa, Joe Pitt, was so excited when Helen was born, that he bought 200 shares of Disney stock the day she was born, intending to give her one share per year of age every year on her birthday until she was 15 (one share at age one, two shares at age two, etc.). Helen was born August 1, 1990. (For purposes of the Disney stock only, we will ignore the impact of any stock splits). Joe was also an avid investor and liked to buy things that lasted for decades. He bought 1,000 shares of Ford Motor Company stock on August 1, 1977 for $1.80 per share. On August 8, 2000, Joe gave Helen a gift of some of his Ford shares. This gift was of 5,734 shares. On August 14, 2015, Grandpa Joe passed away. His will left all of his remaining shares in Ford to Helen. Helen decided to go back to college in the fall of 2016 and needed money for tuition so she sold all of her Ford and Disney stocks on June 15, 2016. She paid a broker a 1% commission based upon the gross sales price of the trades. Joe’s will also left Helen a large investment account at Charles Schwab. The details of the various trades made AFTER Joe’s death are below (assume the broker has the classification correct). Finally, Helen made an investment of her own in Sports Authority (SA) in September 2015 for $90,000. In February 2016, SA announced it was going into Chapter 11 bankruptcy to reorganize its debts. However, that did not work out so well and in May 2016, SA announced it was going into Chapter 7 liquidation and by the end of August 2016 sold all of its assets and ceased all business activities.

Details of the Charles Schwab account:

Required: Calculate Helen’s net capital gain or loss from all of the above transactions and determine whether the results are short-term or long-term, including how much, if any, and the character of any carryover to the following year. To receive credit, you must show all of your work and explain your reasoning for each conclusion you make. Simply showing numbers on a page will not result in credit.

SALES PRICE BROKER FEES BASIS RT TERM SUMMARY: GAINS 577,770 5,778 343,500 LOSSES 95,549 955 577,430 LONG TERM SUMMARY GAINS 978,870 9,789 365,800 LOSSES 355,489 3,555 694,375

Solution

Summary of Short Term Capital Gain:- Sale Price - Broker Fees - Basis(Purchase Value)

= 577770-5778-343500

= 228492

Summary of Short-Term Capital Loss:- Sale Price - Broker Fees - Basis(Purchase Value)

= 95549-955-577430

= (482836)

Summary of Long-Term Capital Gain:- Sale Price - Broker Fees - Basis(Purchase Value)

= 978870-9789-365800

= 603281

Summary of Long-Term Capital Loss:- Sale Price - Broker Fees - Basis(Purchase Value)

= 355489-3555-694375

= (342441)

In the Capital Gain Chapter First of all Incomes and losses are adjusted within the same head i.e.Short term capital loss is adjusted from Short-term capital gain and long-term capital loss is adjusted from the long-term capital gain.

In the above question:-

Net short Term capital loss/Gain:- 228492-482836

= (254344)

Net Long-Term capital loss/Gain:- 603281-342441

= 260840

Further, the Short-term capital loss can be set off from long-term capital gain but the long-term capital loss cannot be set off against short-term capital gain.

In the above question, there is short-term capital loss and long-term capital gain, so that short-term capital loss can be set off against long-term capital gain.

Conclusion:- Net capital gain:- 254344(STCL)-260840(LTCG)

:- 6496 ( Net Long-Term Capital Gain)

No balance is left for carryover in following year.