Question

Lynn transfers property (basis of $225,000 and fair market value of $300,000) to Condor Corporation in exchange for §1244 stock. The transfer qualifies as a nontaxable exchange under § 351. In the current year, Lynn sells the Condor stock for $100,000. Assume Lynn files a joint return with her husband, Ricky. With respect to the sale, Lynn has:

a. A capital loss of $125,000.
b. An ordinary loss of $100,000 and a capital loss of $100,000.
c. An ordinary loss of $125,000.
d. An ordinary loss of $100,000 and a capital loss of $25,000.
e. None of these choices are correct.

Answer 1

d. An ordinary loss of $100,000 and a capital loss of $25,000

Step-by-step explanation:

Assume Lynn files a joint return with her husband, Ricky. With respect to the sale, Lynn has an ordinary loss of $100,000 and a capital loss of $25,000 because Lynns Condor stock basis is $225,000 following the 351 exchange. In which she later sold the stock for $100,000, the $125,000 loss partially qualifies for ordinary treatment under 1244.

Therefore $100,000 is ordinary (the maximum ordinary loss in any one year) and $25,000 is capital.