Amount and Character of Loss Transactions. On September 30 of the current year,

Question

Amount and Character of Loss Transactions. On September 30 of the current year, Silver
Fox Corporation files for bankruptcy. At the time, it estimates that the total FMV of its
assets is $725,000, whereas the total amount of its outstanding debt amounts to
$950,000. Silver Fox Corporation has been engaged in the resale of tax preparation and
tax research-related books and software for several years.
a. At the time of the bankruptcy, Silver Fox is owned by Randall, who purchased the
stock from an investor for $250,000 several years ago. Randall is single. What are the
amount and character of the loss sustained by Randall upon Silver Fox’s bankruptcy?
b. How would your answer to part a change if Randall originally organized Silver Fox
Corporation, capitalizing it with $250,000 of cash and assuming Silver Fox qualifies as
a small business corporation?
c. How would your answer to Part a change if Randall were a corporation instead of an
individual?
d. How would your answer to Part b change if Randall were a corporation instead of an
individual?
8-47
Passive Losses. In 2010, Julie, a single individual, reported the following items of income
and deduction:
Salary $166,000
Interest income 14,000
Long-term capital gain from sales of stock 22,000
Short-term capital losses from sales of stock (17,000)
Loss from a passive rental real estate activity (20,000)
Interest expense on loan to purchase stock (21,000)
Qualified residence interest on residence (12,000)
Charitable contributions ( 8,000)
Property taxes on residence ( 5,000)
Tax return preparation fees ( 2,500)
Unreimbursed employee business expenses ( 2,000)
Julie owns 100% and is an active participant in the rental real estate activity. What is
Julie’s taxable income in 2010?

Explanation / Answer

a. Since Silver Fox is insolvent, all of its assets will go toward its debts, leaving nothing for Randall. Randall will not recover any of his basis in the stock. Since the stock was not acquired from the corporation on original issuance, the stock does not qualify as Sec. 1244 stock. Thus, Randall suffers a $250,000 long-term capital loss. b. The stock is qualified Sec. 1244 stock since it is original issue stock. Since Randall is single, the loss will consist of $50,000 ordinary loss and $200,000 long-term capital loss. c. Since at least 80% of the voting power of Silver Fox’s stock is owned by Randall Corporation, and more than 90% of Silver Fox’s gross receipts are from its business operation, the $250,000 loss is all ordinary. d. Same as part (c).

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