Morgan and Sarah formed the Hi Kite Corporation (a calendar year C-corporation) in 2017 each investing $250,000 in cash in exchange for 100% of the corporation’s stock. The attorney that helped them setup the corporation made an election to designate the stock as section 1244 stock although neither Morgan or Sarah can remember why he told them he was doing that. Things went great for the first two years and the corporation was able to make substantial dividends to both Morgan and Sarah. However, in the middle of 2020 the Alabama legislature made an ingredient in the product that the corporation was manufacturing an illegal substance. They immediately stopped all manufacturing and all of the work in progress was destroyed. The company literally became worthless overnight and it has now been dissolved. Both Morgan and Sarah lost all of their initial investment in 2020. How do they calculate, classify and report their losses (if any) on their 2020 tax returns? Neither are married. Explain.

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