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Problem 18-41 (LO. 6)

Sam, a single taxpayer, acquired stock in a corporation that qualified as a small business corporation under 1244, at a cost of $100,000, three years ago. He sells the stock for $10,000 in the current tax year.

a. How will the loss be treated for tax purposes? Sam would have a capital loss of $ and an ordinary of loss of $ for tax purposes.

In an exception to the capital treatment that generally results, 1244 permits ordinary loss treatment for losses on the sale or worthlessness of stock of so-called small business corporations. By placing shareholders on a more nearly equal basis with proprietors and partners in terms of the tax treatment of losses, the provision encourages investment of capital in small corporations. Gain on the sale of 1244 stock remains capital.

b. Assume instead that Sam sold the stock to his sister, Kara, a few months after it was acquired for $100,000 (its fair market value). If Kara sells the Hummer stock for $60,000 in the current year, how should she treat the loss for tax purposes?

She will treat the loss as a capital loss of $ for tax purposes.

c. Enter the results of this transaction for Kara on Form 1040, Schedule D (p. 1) for the tax year 2018. Assume that relevant facts from the transaction initially had been shown on Form 8949 with Box F checked.

• If required, use the minus to indicate a loss.
• If an amount is zero, enter "0".

SCHEDULE D (Form 1040) Department of the Treasury Internal Revenue Service (99) Capital Gains and Losses Attach to Form 1040 or Form 1040NR. Go to www.irs.gov/ScheduleD for instructions and the latest information. Use Form 8949 to list your transactions for lines 1b, 2, 3, 8b, 9, and 10. OMB No. 1545-0074 2018 Attachment Sequence No. 12 Name(s) shown on return Karen Upchurch Your social security number 123-45-6789 Part I Short-Term Capital Gains and LossesGenerally Assets Held One Year or Less (see instructions) See instructions for how to figure the amounts to enter on the lines below. (d) Proceeds (sales price) (e) Cost (or other basis) (g) Adjustments to gain or loss from Form(s) 8949, Part I, line 2, column (g) (h) Gain or (loss) Subtract column (e) from column (d) and combine the result with column (g) This form may be easier to complete if you round off cents to whole dollars. 1a Totals for all short-term transactions reported on Form 1099-B for which basis was reported to the IRS and for which you have no adjustments (see instructions). However, if you choose to report all these transactions on Form 8949, leave this line blank and go to line 1b 1b Totals for all transactions reported on Form(s) 8949 with Box A checked . . . . . . . . . . . . . . . . . . 2 Totals for all transactions reported on Form(s) 8949 with Box B checked . . . . . . . . . . . . . . . . . . 3 Totals for all transactions reported on Form(s) 8949 with Box C checked . . . . . . . . . . . . . . . . . . 4 Short-term gain from Form 6252 and short-term gain or (loss) from Forms 4684, 6781, and 8824 . . . . . . . . 4 5 Net short-term gain or (loss) from partnerships, S corporations, estates, and trusts from Schedule(s) K-1 . . . 5 6 Short-term capital loss carryover. Enter the amount, if any, from line 8 of your Capital Loss Carryover Worksheet in the instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 () 7 Net short-term capital gain or (loss). Combine lines 1a through 6 in column (h). If you have any long-term capital gains or losses, go to Part II below. Otherwise, go to Part III on the back . . . . . . . . . . . . . . . . . 7 Part II Long-Term Capital Gains and LossesGenerally Assets Held More Than One Year (see instructions) See instructions for how to figure the amounts to enter on the lines below. (d) Proceeds (sales price) (e) Cost (or other basis) (g) Adjustments to gain or loss from Form(s) 8949, Part II, line 2, column (g) (h) Gain or (loss) Subtract column (e) from column (d) and combine the result with column (g) This form may be easier to complete if you round off cents to whole dollars. 8a Totals for all long-term transactions reported on Form 1099-B for which basis was reported to the IRS and for which you have no adjustments (see instructions). However, if you choose to report all these transactions on Form 8949, leave this line blank and go to line 8b 8b Totals for all transactions reported on Form(s) 8949 with Box D checked . . . . . . . . . . . . . . . . . . 9 Totals for all transactions reported on Form(s) 8949 with Box E checked . . . . . . . . . . . . . . . . . . 10 Totals for all transactions reported on Form(s) 8949 with Box F checked . . . . . . . . . . . . . . . . . . 11 Gain from Form 4797, Part I; long-term gain from Forms 2439 and 6252; and long-term gain or (loss) from Forms 4684, 6781, and 8824 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 12 Net long-term gain or (loss) from partnerships, S corporations, estates, and trusts from Schedule(s) K-1 . . 12 13 Capital gain distributions. See the instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 14 Long-term capital loss carryover. Enter the amount, if any, from line 13 of your Capital Loss Carryover Worksheet in the instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 () 15 Net long-term capital gain or (loss). Combine lines 8a through 14 in column (h). Then go to Part III on the back . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 For Paperwork Reduction Act Notice, see your tax return instructions. Cat. No. 11338H Schedule D (Form 1040) 2018

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