When Pheasant Corporation was formed under § 351, Kristen transferred property (basis of $26,000 and fair market value of $22,500) for § 1244 stock. Kristen's basis in the Pheasant stock is $26,000. Three years 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.

Question

Quizplus · Accepted Answer

Since Kristen transferred the property for § 1244 stock, she is entitled to treat up to $50,000 ($100,000 if married filing jointly) of the loss as an ordinary loss. Therefore, Kristen's loss on the Pheasant stock is $22,500 ordinary loss (the fair market value of the property transferred) and $3,500 capital loss ($26,000 basis in the stock minus the fair market value at the time of transfer).

When Pheasant Corporation Was Formed Under § 351, Kristen Transferred