Question

In 2001, Pagan contributed $150,000 cash to her corporation, Tax corporation in exchange for stock. The business never attained success the way Pagan would hope for. In 2011, Pagan sold her stocks to another party for $40,000. Pagan tax loss on her sale of stock is $110,000 ($40,000 - $150,000). The stock qualifies as section 1244 stock. Pagan files a return with her wife and can claim $100,000 ordinary loss and $10,000 as capital loss instead of $110,000 capital loss at 20% rate.

Question: What if Pagan sold 90% of her stock in 2010 and the remaining 10% in 2011. What amount is loss qualifies as ordinary loss and capital loss?UNDER NEW TAX LAW IN USA

Answer 1

Pagan's investment in her corporation Tax Corporation towards section 1244 stock in 2001 is US $ 150000.00
for section 1244 stock i.e. small business stock
a) capital loss is limited to US $ 3000/- annually
b) Ordinary loss in case of joint returns is limited to US $ 100000/- in the year of loss
Purchase value of 100% stock is US $ 150000.00
Therefore Purchase value of 90% stock will be 90% of US $ 150000.00 i.e. US $ 135000.00
And Purchase value of 10% stock will be 10% of US $ 150000.00 i.e. US $ 15000.00
Sale Value of 100% stock is US $ 40000.00
Therefore sale value of 90% stock will be 90% of US $ 40000.00 i.e. US $ 36000.00
And sale value of 10% stock will be 10% of US $ 40000.00 i.e. US $ 4000.00
UNDER NEW TAX LAWS IN USA
If Pagan sells 90% of the stock in 2010
then his loss in 2010 will be US $ 135000.00 - US $ 36000.00 i.e. US $ 99000.00
If he files joint return with wife then he can claim the entire loss of US $ 99000.00 as ordinary loss in 2010
AND THERE WILL BE NO LOSS LEFT TO BE CLAIMED AS CAPITAL LOSS IN 2010
If Pagan sells balance 10% of the stock in 2011
then his loss in 2011 will be US $ 15000.00 - US $ 4000.00 i.e. US $ 11000.00
If he files joint return with wife then he can claim the entire loss of US $ 11000.00 as ordinary loss in 2011
AND THERE WILL BE NO LOSS LEFT TO BE CLAIMED AS CAPITAL LOSS IN 2011