Kristine owns all of the stock of a C corporation which owns the following assets: Her adjusted basis for her stock is $270,000. Calculate Kristine's recognized gain or loss and classify it as capital or ordinary if she sells her stock for $500,000.
A) $230,000 ordinary income.
B) $230,000 capital gain.
C) $115,000 ordinary income and $115,000 capital gain.
D) $110,000 ordinary income and $120,000 capital gain.
E) None of the above.

Question

Kristine owns all of the stock of a C corporation which owns the following assets:  Her adjusted basis for her stock is $270,000. Calculate Kristine's recognized gain or loss and classify it as capital or ordinary if she sells her stock for $500,000.
A) $230,000 ordinary income. 
B) $230,000 capital gain. 
C) $115,000 ordinary income and $115,000 capital gain. 
D) $110,000 ordinary income and $120,000 capital gain. 
E) None of the above.

Quizplus · Accepted Answer

When a shareholder sells his/her stock in a corporation, the gain or loss is classified as either capital or ordinary. If stock is held for more than one year, the gain or loss is a long-term capital gain or loss, whereas if stock is held for one year or less, the gain or loss is a short-term capital gain or loss. In this case, Kristine's ownership constitutes a sale of stock. Since her adjusted basis in the stock is $270,000 and she sells it for $500,000, her recognized gain is $230,000 ($500,000 - $270,000). Since Kristine has held the stock for more than one year, this gain is a long-term capital gain. Therefore, the correct answer is B.

Kristine Owns All of the Stock of a C Corporation