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Ethics of transaction

Sam invested $100,000 in TechCo, a startup high technology venture. Four years ago Techno declared bankruptcy. Sam wrote off his $100,000 in worthless securities as long-term capital loss.

This year, Sam receives a $40,000 from the bankruptcy trustee in final settlement of the TechCo's affairs. Sam now realizes he should not have claimed the loss four years ago because the deduction is allowed only if the stock is completely worthless. The $40,000 recovery indicates that the stock was not completely worthless.

Because the three-year statute of limitations has passed, he does not plan to amend his tax return from four years ago. He also decides that the $40,000 is not income in the current year because he is merely recouping some of his original investment. How do you react to Sam's assumptions from an ethical and legal standpoint?

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Regardless of the fact that the $40,000 is a recoupment of his original ...

Solution Summary

Brief answer about declaring income after investments have been written off.