In 1996, Mr. Exton, a single taxpayer, contributed $30,000 in exchange for 100 shares of Morton stock. In 2005, he paid $43,000 to another shareholder to purchase 100 more shares of Morton stock. Morton stock qualified as Section 1244 stock when it was issued. This year, Mr. Exton sold his 200 Morton shares for $250 per share. What is the amount and character of Mr. Exton's recognized loss?

Question

Quizplus · Accepted Answer

To determine the amount and character of Mr. Exton's recognized loss, we need to calculate his basis in the Morton stock and compare it to the sales price.

First, let's calculate his basis in the original 100 shares of Morton stock:

$30,000 (original cost)

Since the stock was Section 1244 stock, any loss on the sale of those shares is treated as an ordinary loss. If Mr. Exton had sold these shares for less than $30,000, he would have recognized an ordinary loss equal to the difference between the sale price and his basis.

Next, let's calculate his basis in the additional 100 shares of Morton stock:

$43,000 (cost) + $30,000 (original basis) = $73,000

Since Mr. Exton acquired these shares in 2005 and sold them this year, they would be considered long-term capital assets. If he had sold these shares for less than $73,000, he would have recognized a long-term capital loss equal to the difference between the sale price and his basis.

Adding the two bases together, we get:

$30,000 (original basis) + $73,000 (additional basis) = $103,000

Since Mr. Exton sold his 200 Morton shares for $250 per share, his total sales price was:

200 shares x $250 per share = $50,000

To determine his recognized loss, we need to compare his basis to the sales price:

$50,000 (sales price) - $103,000 (basis) = -$53,000

Since the result is negative, Mr. Exton recognized a loss on the sale of his Morton stock. However, since he held the shares for more than one year, the loss is considered a long-term capital loss. The maximum amount of capital loss that can be deducted in a single year is $3,000, so Mr. Exton can recognize a $5,000 ordinary loss and an $18,000 long-term capital loss ($53,000 capital loss - $30,000 Section 1244 ordinary loss).