Lynn transfers property (basis of $225,000 and fair market value of $300,000)to Falcon Corporation in exchange for § 1244 stock.The transfer qualifies as a nontaxable exchange under § 351.In the current year,Lynn sells the Falcon stock for $100,000.Assume Lynn files a joint return with her husband,Ricky.With respect to the sale,Lynn has:

Question

Quizplus · Accepted Answer

When Lynn transfers property with a basis of $225,000 and fair market value of $300,000 to Falcon Corporation in exchange for § 1244 stock, the transfer qualifies as a nontaxable exchange under § 351. Therefore, Lynn's basis in the Falcon stock is equal to her basis in the property transferred, which is $225,000.

When Lynn sells the Falcon stock for $100,000 in the current year, she has a loss of $125,000 ($225,000 - $100,000). Since the Falcon stock is § 1244 stock, the loss of $100,000 ($125,000 - $25,000) is treated as an ordinary loss, and the remaining $25,000 is treated as a capital loss.

Lynn's filing status as joint or individual does not affect the characterization of the loss as ordinary or capital.

Lynn Transfers Property (Basis of $225,000 and Fair Market Value