PROBLEM 4 In 20X1, Van Lyle was the original purchasers of 12% of the stock in a new fracking device for gas production in 20X1. The stock cost…

PROBLEM 4

In 20X1, Van Lyle was the original purchasers of 12% of the stock in a new fracking device for gas production in 20X1. The stock cost $89,000. Unfortunately, 4 years later, it is discovered that the fracking destroys the ground infrastructure and created great sink holes. The company files for bankruptcy and the stock of the Lyles becomes worthless on July 15, 20X5. Assume a 33% tax bracket for the Lyles.

A.  Demonstrate whether the stock qualifies under §1244. How is the stock worthlessness this treated for tax purposes?

B.  In 20X5, what is the NPV of the worthless stock tax saving assuming a 4% discount rate?

C.  If Van had invested the $59,000 in a tax municipal bond paying 4%, how much would he have had in 20X5?

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