Several years ago, John purchased 2,000 shares of Red Corporation's § 1244 stock from Mark for $40,000.Last year, John sold one-half of his Red Corporation stock to Mike for $12,000.During the current year, John sold the remaining Red Corporation stock for $3,000.John has a $17,000 ($3,000 - $20,000) ordinary loss for the current year.

Question

Quizplus · Accepted Answer

The calculation for the loss is incorrect.

John purchased the 2,000 shares of Red Corporation's § 1244 stock for $40,000, which means his basis in each share is $20.

When he sold half of his shares to Mike for $12,000, he effectively sold 1,000 shares. His realized gain on this sale is $12,000 - ($20 x 1,000) = $12,000 - $20,000 = ($8,000). This is an ordinary loss as it is a loss on the sale of § 1244 small business stock.

When John sold the remaining 1,000 shares for $3,000, his realized loss is $3,000 - ($20 x 1,000) = $3,000 - $20,000 = ($17,000). This is also an ordinary loss.

Therefore, John has a total ordinary loss of ($8,000 + $17,000) = ($25,000) for the current year.

Several Years Ago, John Purchased 2,000 Shares of Red Corporation's