Question

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.

Answer 1

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.