Question

Several years ago, John purchased 2,000 shares of Red Corporation's § 1244 stock from Mark for $40,000. Last year, John sold one-half of his Red Corporation stock to Mike for $12,000. During the current year, John sold the remaining Red Corporation stock for $3,000. John has a $17,000 ($3,000 – $20,000) ordinary loss for the current year. What's amount of loss can John can deduct for the current year?

Answer 1

John can deduct the full $17,000 as an ordinary loss for the current year's tax return under § 1244, assuming he has no other § 1244 losses.

Step-by-step explanation:

John's transactions with § 1244 stock involve recognizing capital losses which, under certain circumstances, may be treated as ordinary losses. Given that John originally purchased the stock for $40,000, sold half for $12,000, and sold the remaining for $3,000, his total proceeds from the sale are $15,000 ($12,000 from the first sale and $3,000 from the second sale). The basis or cost of the entire stock is $40,000, so he has realized a total loss of $25,000 ($40,000 - $15,000).

For the current year, John is recognizing a loss on the second half of the stock, which cost $20,000 initially (half of the total $40,000 cost basis). The sale proceeds were $3,000, resulting in a loss of $17,000 for this transaction. However, under § 1244, individuals may deduct as an ordinary loss up to $50,000 ($100,000 if married filing jointly) of losses on the disposition of small business stock.

Therefore, assuming John has no other § 1244 losses to report, he may deduct the full $17,000 as an ordinary loss on his current year's tax return.

Answer 2

$17,000 amount of loss can John can deduct for the current year

Step-by-step explanation:

Given,

John paid 2,000 worth of Red Corporation's $1244 share

Mark for $40,000

Mike for $12,000

John sold the remaining assets of Red Company for $3,000.

John has a typical risk of $17,000 ($3,000 – $20,000) for the current year.

The given statement is False.

John did not purchase the stock from Red Corporation; thus, he will not have a balance of $1244.

He does have a long-term capital risk of $17,000.