ACC 403 – Fall 2021 – Exam #3 Take Home Short Answer Essay Questions
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Note: A Student’s answer to these questions must be the student’s own work.
Collaboration among students is strictly prohibited. For more information, view
the Exam #3 guidance document section on cheating.
In Research Memo #2, students were required to address two questions for an
individual equity investor, TP:
• What are the Federal Income Tax treatment of SynLyth ceasing operations
and TP’s equity investment becoming worthless?
• What are the Federal Income Tax consequences of the transfer of 10
Bitcoin (fair market value of $357,500 and a basis of $2,500) to RLL in
settlement of a loan with a $500,000 balance due?
Checkpoint should be used to find the appropriate primary authorities to address
both questions. These authorities are directly on point and answer the questions
above.
A. TP’s Deduction for SynLyth’s equity becoming worthless in 2021. (8 Points)
The recognition of a loss of a worthless asset is problematic because there is no
sale or exchange. When a property becomes worthless, the taxpayer suffers loss
equal to the property’s adjusted basis, but the loss does not arise from a sale or
exchange within the meaning of IRC§1222.
Assignment:
1. Identify the IRC provision(s) that would allow TP to recognize a long-term
capital loss when SynLyth ceases operations and its equity (common stock)
becomes worthless.
2. Identify the highest level of authoritative interpretation of the IRC allowing
TP’s deduction for her basis ($1 million) in SynLyth’s equity (common stock)
as a long-term capital loss.
3. Explain how the IRC Section(s) and the highest level of authority (identified
in 1. And 2. above) apply to TP’s recognition of a long-term capital loss
equal to her basis ($1 million) in SynLyth’s equity (common stock) when
SynLyth ceases operations, and its equity becomes worthless.
ACC 403 – Fall 2021 – Exam #3 Take Home Short Answer Essay Questions
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B. Capital Gain and Debt Cancellation Income recognition when TP transfers the
10 Bitcoin to repay the $500,000 loan balance. (9 Points)
Notice 2014-21, 2014-16 IRB 938 states that Cryptocurrency like Bitcoin is
property. Thus, if Cryptocurrency is a capital asset in a taxpayer’s hands, the tax
treatment of cryptocurrency transactions is governed by IRC §1001. IRC §1001 is
titled “Determination of amount of and recognition of gain or loss.” An
authoritative interpretation of IRC §1001 at the highest level applies to
transactions where a property is transferred in settlement of a loan, and the
property’s fair market value is less than the balance due but more than the
taxpayer’s basis.
Assignment:
1. Identify this high-level authoritative interpretation of IRC §1001.
2. Does the authoritative guidance found in 1 above cross-reference other IRC
section(S) or authoritative interpretations. If it does, identify those crossreferences.
3. Explain how the IRC Section(s), high-level authoritative guidance, and crossreferences apply to TP’s settlement of the $500,000 loan with 10 Bitcoin (fair
market value of $357,500 and a basis of $2,500).