This year, Jack O. Lantern incurred a $75,000 loss on the worthlessness of his s

Question

This year, Jack O. Lantern incurred a $75,000 loss on the worthlessness of his stock in the Creepy Corporation (CC). The stock, which Jack purchased in 2005, met all of the §1244 stock requirements at the time of issue. In December of this year, Jack’s wife, Jill, also incurred a $80,900 loss on the sale of Eerie Corporation (EC) stock that she purchased in July 2005 and which also satisfied all of the §1244 stock requirements at the time of issue. Both corporations are operating companies.

How much of the losses incurred on the two stock sales can Jack and Jill deduct this year, assuming they do not have capital gains in the current or prior years?

Assuming they did not engage in any other property transactions this year, how much of a net capital loss will carry over to next year for Jack and Jill?

What would be the tax treatment for the losses if Jack and Jill reported only $66,250 of taxable income this year, excluding the securities transactions?

This year, Jack O. Lantern incurred a $75,000 loss on the worthlessness of his stock in the Creepy Corporation (CC). The stock, which Jack purchased in 2005, met all of the §1244 stock requirements at the time of issue. In December of this year, Jack’s wife, Jill, also incurred a $80,900 loss on the sale of Eerie Corporation (EC) stock that she purchased in July 2005 and which also satisfied all of the §1244 stock requirements at the time of issue. Both corporations are operating companies.

Explanation / Answer

Loss Deduction for the qualified §1244 stock-

Under section 1244 losses that would otherwise be treated as capital loss are treated as ordinary loss.

_ The amount of deduction of ordinary loss arise from sale of §1244 stock is limited to $ 50,000. In case of spouses filing a joint return the maximum deduction available in the year of loss is $ 100,000.

If the amount of loss is exceeds these specified amount, the remainder will be considered as capital loss.

Ordinary loss offset the other income which is taxable at ordinary rate of tax.

(‘a) – The total loss incurred by Jack and Jill is $ 155,900. So the maximum amount of loss is treated as ordinary loss is $ 100,000. So in the current year deduction available is $ 100,000. This can be set off any other source of income.

(‘b)- Out of the total loss of $ 155,900, $ 100,000 is treated as ordinary loss. Balance of $ 55,900 will be treated as capital loss and will be carried over next year to set off.

(‘c) – Out of total loss $100,000 will be treated as ordinary loos and deductible from ordinary income. Balance $55,900 will be treated as capital loss and will be deductible against net capital gains maximum upto $ 3000 per year.

In this case ordinary loss of $ 100,000 will be deducted against income of $66250. Balance ordinary loss of $ 33,750 will be carried forward to next year and deductible any other source of income taxable at ordinary rates. Capital loss of $55,900 will be carried forward to next year and deductible maximum $3000 per year against net capital gains.

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