Shawn transfers property (basis of $40,000 and fair market value of $35,000) to Condor Corporation in exchange for § 1244 stock. The transfer qualifies as a nontaxable exchange under § 351; therefore, Shawn's basis in the Condor stock is $40,000. Five years later, Shawn sells the Condor stock for $25,000. With respect to the sale, Shawn has:

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Shawn's basis in the stock is $40,000. When he sells it for $25,000, he realizes a loss of $15,000. Under § 1244, up to $50,000 of loss on small business stock can be treated as an ordinary loss. Therefore, $10,000 of the loss is ordinary, and the remaining $5,000 is a capital loss.

Shawn Transfers Property (Basis of $40,000 and Fair Market Value