ch 6 prob # 46 Wash Sales. Cougar Corporation owns 1,000 shares of Western Corpo
ID: 2423039 • Letter: C
Question
ch 6 prob # 46
Wash Sales. Cougar Corporation owns 1,000 shares of Western Corporation common stock, which it purchased on March 8, 2009, for $12,000. On October 3, 2015, Cougar purchases an additional 300 shares for $3,000. On October 12, 2015, it sells the original 1,000 shares for $8,500. On November 1, 2015, it purchases an additional 500 shares for $4,000. a. What is Cougar’s recognized gain or loss as a result of the sale on October 12, 2015? b. What are the basis and the holding period of the stock Cougar continues to hold? c. How would your answers to Parts a and b change if the stock Cougar purchases dur-ing 2015 is Western nonvoting, nonconvertible, preferred stock instead of Western common stock?
Explanation / Answer
Wash Sales Transactions in Western Common Stock Purchases
Date
March 8, 2007 1,000 shares @ $12,000
October 3, 2013 Purchases 300 shares @ $3,000
October 12, 2013 Sells original 1,000 shares @ 8,500
November 1, 2013 Purchases 500 shares @ 4,000
(a) • Cougar Corporation realizes a total loss of $3,500 ($8,500 - $12,000). However, Cougar Corporation can only recognize $700 ($3,500 x .2) of the total loss. Under the wash sale rules, the remaining $2,800 of the realized loss is disallowed because Cougar repurchased 80% of the common stock sold [(300 + 500)/1,000) = 80%] within the 61 day period beginning 30 days before the date of sale and ending 30 days after the date sale. Because the $700 recognized loss is a capital loss, Cougar Corporation can only deduct it against any capital gains it realizes during the year.
(b) • The basis in the 300 shares purchased October 3, 2013 is $4,050. [$3,000 purchase price + $1,050 (3/8 x $2,800 disallowed loss)]. The basis in the 500 shares purchased November 1, 2013 is $5,750. • [($4,000 purchase price + $1,750 (5/8 x $2,800 disallowed loss))]. The holding period for both of these blocks of stock starts on March 8, 2007.
(c)• The recognized loss would be $3,500. Nonvoting, nonconvertible preferred stock is not substantially identical to common stock in the same corporation. Thus, the wash sale rules do not apply to the purchase of the preferred stock. Cougar Corporation’s basis in the preferred stock would be the cost of the stock ($3,000 for the October 3rd purchase and $4,000 for the November 1st purchase) and the holding periods would begin on the respective dates of purchase.
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