Question

I would like to know how you get the answer.

6. When Pheasant Corporation was formed under s 351, Kristen transferred property (basis of $26,000 and fair market value of $22,500) for § 1244 stock. Kristen's basis in the Pheasant stockis S26 000. Three y ears later, Pheasant Corporation goes bankrupt and its stock becomes worthless. Kristen, who is single, owned the stock as an investment. Kristen's loss is: a. $26,000 capital. b. $22,500 ordinary and $3,500 capital. c. $3,500 ordinary and $22,500 capital. d. $26,000 ordinary e. None of the above

Answer 1

Correct answer is: b. $22,500 ordinary and $3,500 capital

Total loss incurred to Kristen = $26,000

Ordinary loss = up to the fair market value = $22,500 Ordinary loss

Amount of basis over and above the fair market value is to be treated as Capital loss = $26,000 - $22,500 = $3,500 Capital loss