Jerry sprayed all of the landscaping around his home with a pesticide in June of

Question

Jerry sprayed all of the landscaping around his home with a pesticide in June of the current year. Shortly thereafter, all of the trees and shrubs unaccountably died. The FMV and the adjusted basis of the plants were $15,000. Later in the year, the pesticide manufacturer announced a recall of the particular batch of pesticide that Jerry used. It also announced a program whereby consumers would be repaid any damage caused by the improper mixture. Jerry is single and reports $38,000 AGI in the current year and $42,000 in the subsequent year. a. Assume that in the current year Jerry files a claim for his losses and receives notification that payment of $15,000 will be received in the subsequent year; however, Jerry receives full payment for the damage in the current year. How should the loss and the reimbursement be reported? b. How will your answer to Part a change if in the subsequent year the manufacturer files bankruptcy and Jerry receives $1,500 in total and final payment for his claim? c. How will your answer to Part a change if the announcement and the reimbursement do not occur until late in the subsequent year, after Jerry has already filed his tax return for the previous tax year?

Explanation / Answer

a)Loss and reimbursement should be reported as: loss =0 as he has received the amount in the same year as reimbursement by the pesticide company and reimbursement=$38000 in current year and $42000 in the subsequent year b)loss= $15000-$1500 =$13500 reimbursement reported in current year =$38000 as he will be receiving amount next year reimbursement reported in the subsequent year =$42000+$13500 =$55500 C)loss=$15000 reimbursement for current year =$38000+$15000=$53000 reimbursement for subsequent year=$42000

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