Question

Lucia owns 100 shares of Cronco Inc. which she purchased on December 1 of last year for $10,000. The stock is not Sec. 1244 stock. On July 1 of the current year, Lucia receives notice from the bankruptcy court that Conco Inc. has been liquidated, and there are no assets remaining for shareholders. As a result, Lucia will have

A) a short-term capital loss of $10,000
B) an ordinary loss of $10,000
C) a long-term capital loss of $10,000
D) no loss allowed

Answer 1

Lucia will have a long-term capital loss of $10,000 because she held the stock for more than a year and the stock is not Sec. 1244, precluding an ordinary loss deduction.

Step-by-step explanation:

The question pertains to the tax treatment of an investment loss incurred by Lucia when a company she invested in, Cronco Inc., goes bankrupt.

Since Lucia held the stock for more than a year (from December 1 of last year to July 1 of the current year, which is more than 6 months), the loss is considered a long-term capital loss.

Section 1244 stock refers to small business stock that allows for an ordinary loss deduction, but since the stock is not Sec. 1244, she cannot claim it as an ordinary loss.

Therefore, Lucia will have a long-term capital loss of $10,000, which she can use to offset other capital gains or potentially deduct from her ordinary income based on IRS limits.