Sam, a single taxpayer, acquired stock in a corporation that qualified as a smal

Question

Sam, a single taxpayer, acquired stock in a corporation that qualified as a small business corporation under § 1244, at a cost of $100,000, three years ago. He sells the stock for $10,000 in the current tax year.

Sam would have a capital loss of $_____ and an ordinary of loss of $___ for tax purposes.

b. Assume instead that Sam sold the stock to his sister, Kara, a few months after it was acquired for $100,000 (its fair market value).

If Kara sells the stock for $60,000 in the current year, she should treat the loss as a capital loss of $__________ for tax purposes.

Explanation / Answer

Any individual can claim $50,000 as the loss under sec 1244 , any excess over $50,000 will be treated as capital loss

Hence total loss $100,000 - $10,000 = $90,000

Sam would have a capital loss of $ 40,000 ($90,000 - $50,000) and an ordinary of loss of $ 50,000 for tax purposes.

b.

Kara is treated as his relative and there will be a related party connection. So if Kara sells the stock for $60,000, the capital loss will be $0 (loss<$50,000)

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