On September 30 of the current year, Silver Fox Corporation files for bankruptcy
ID: 2442830 • Letter: O
Question
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?
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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