Sergio who is married and sole shareholder of El Centro Corporation, sold all of his stock...

Sergio who is married and sole shareholder of El Centro Corporation, sold all of his stock in the corporation for $250,000. Sergio had organized the corporation in 2010 by contributing $400,000 and receiving all of the capital stock of the corporation. El Centro Corporation is a domestic corporation engaged in the manufacturing of mountain bikes. The stock in El Centro Corporation qualified as Sec. 1244 stock. The sale results in a(n)

A) ordinary loss of $150,000.

B) long-term capital loss of $150,000.

C) long-term capital loss of $100,000 and ordinary loss of $50,000.

D) ordinary loss of $100,000 and long-term capital loss of $50,000.

LABEL AND SHOW ALL WORK.

Expert Solution

Difference between capital and ordinary loss:

Capital loss occurs when a capital asset is disposed at a loss and these losses are subject to an annual deduction limit of $3,000. Any excess amount of loss are carried over to the next year. On the other hand ordinally losses are normally 100% deductible.

Section 1244 allows shareholders of domestic small business corporations to deduct a loss on the disposal of stock as an ordinary loss (upto $50,000 on single return and upto $100,000 on joint return) rather than whole losses as capital loss.

In the stated case:

Contribution made by sergio is $400,000

Sold all of his stock in the corporation and received $250,000

Total loss incurred by him will be $150,000

Amount contributed by him is more than the amount received/ realised by him therefore he has incurred total loss of $150,000. The stock in El Centro Corporation qualified as Sec. 1244 stock and he is married and filing joint return so, he can claim upto $100,000 as the ordinary loss and above this amount all losses will be capital loss.

Therefore, the sale results in an

D) ordinary loss of $100,000 and long-term capital loss of $50,000.

ekkarill92 answered 1 year ago

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