Question

Four years ago, Travis, a single taxpayer, acquired stock in a corporation that qualified as a small business corporation under § 1244, at a cost of $60,000. Travis wants to give his son, Jaden, $20,000 to help finance Jaden’s college education. The stock is currently worth $20,000. Travis is considering selling the stock in the current year for $20,000 and giving the cash to Jaden. As an alternative, Travis could give the stock to Jaden and let Jaden sell it for $20,000. Which alternative should Travis choose?

Answer 1

Alternative 1
Any individual can claim $ 50,000 as the loss under Sec 1244,  any excess over $ 50,000 will be treated as capital loss.
Total loss= $ 60,000- $ 20,000=	$40,000
For tax purposes, Travis would have  $40,000 ordinary loss and $0 long-term capital loss.
Alternative 2
For tax purposes, Jaden would not recognize any ordinary loss and  long term capital loss.
Total loss= $ 20,000- $ 20,000 =	$0
Travis should choose Alternative 1 .
Travis should sell the stock. He will have a $40,000 ordinary loss deduction in the current year. Only the original holder of the stock (Travis) qualifies under § 1244 for ordinary loss treatment. If Travis gives the stock to Jaden, Jaden will have a basis of $20,000 in the stock and, thus, will have no loss deduction. A carryover basis for gifts applies unless fair market value of the property is less on the date of the gift and the property is sold at a loss.