Question

Mary, a single taxpayer, purchased 10,000 shares of § 1244 stock several years ago at a cost of $20 per share. In November of the current year, Mary received an offer to sell the stock for $12 per share. She has the option of either selling all of the stock now or selling half of the stock now and half of the stock in January of next year. Mary will receive a salary of $80,000 for the current year and $90,000 next year. Mary will have long-term capital gains of $8,000 for the current year and $10,000 next year.

If Mary's goal is to minimize her AGI for the two years, determine whether she should sell all of her stock this year or half of her stock this year and half next year.

a. The loss on the sale of Mary's § 1244 stock is treated as an ordinary loss. This treatment for taxpayers filing as single is limited to $ per year.

b. Determine Mary's total AGI under both options for the current year and next year.

If an amount is zero, enter "0".

Sell all of the stock this year: Current year's AGI Salary $80,000 Ordinary income $ Long-term capital gain $8,000 Less: $ Equals: $ $ Adjusted gross income $ $ Next year's AGI Salary $90,000 Long-term capital gain $10,000 Less: $ Equals: $ $ Adjusted gross income $ Total AGI Current year $ Next year Total $ Sell half of the stock this year and half next year: Current year's AGI Salary $80,000 $ Long-term capital gain $8,000 Less: $ Equals: $ $ Adjusted gross income $ Next year's AGI Salary $90,000 $ Long-term capital gain $10,000 Less: $ $ Adjusted gross income $ Total AGI Current year $ Next year Total $

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The corporation must meet certain requirements for § 1244 stock. The major requirement is that the total amount of money and other property received by the corporation for stock as a contribution to capital (or paid-in surplus) does not exceed $1 million. The $1 million test is made at the time the stock is issued. Section 1244 stock can be common or preferred stock. Section 1244 applies only to losses.

Which option will result in the best overall tax consequence for Mary?

Answer 1

If Mary will sell all 10,000 shares of 1244 stock - here capital loss will be

$12*10,000 shares - $20*10,000 shares = ($80,000)

Once all of the requirements of §1244 stock are met, ordinary loss treatment for losses on a sale or exchange of §1244 stock is permitted if the loss would otherwise be treated as a capital loss.

If all shares are sold this year - Mary's AGI will be $80,000(salary) + $8000(long-term capital gains) - $80,000(section 1244 loss) = $8000 in this case she will have zero tax liability this year, and

next year - $17,850

Tax calculation is based on 2009 tax tables and assumptions that Mary i s single, standard deduction and no other deduction s or credits.

If she sells half of the stock now and half of the stock in January of the next year - her AGI will be

this year $80,000(salary) + $8000(long-term capital gains) - $40,000(section 1244 loss) = $48000

next year $90,000(salary) + $10000(long-term capital gains) - $40,000(section 1244 loss) = $60000

Her tax liability will be:

this year - 5,850

next year - 8,850

Total - $14,700

So assuming the selling price would not changed - she should sell half of her stock this year and half next year.