Problem 4-48 (LO. 6, 7)

Three years ago at a cost of $40,000, Paul Sanchez acquired stock in a corporation that qualified as a small business corporation under 1244. A few months after he acquired the stock, when it was still worth $40,000, he gave it to his brother, Mike Sanchez. Mike, who is married and files a joint return, sells the stock for $25,000 in the current tax year. Mike asks you, his tax adviser, how the sale will be treated for tax purposes.

Question Content Area

a. Complete the letter.

SWFT, LLP 5191 Natorp Boulevard Mason, OH 45040

July 24, 2021

Mr. Mike Sanchez 10 Hunt Wood Drive Hadley, PA 16130

Dear Mr. Sanchez:

This letter is in response to your question about stock you held in a corporation that qualified as a small business corporation under 1244. Our conclusion is based on the facts you provided us. Any change in facts may cause our conclusion to be

accurate or inaccurate

.

Your brother, Paul, gave you the stock a few months after he purchased it for $40,000 three years ago. You sold the stock this year for $25,000.

You may deduct the difference between your basis and the

fair market value or selling price

of the stock. When property is given to another, there

is a or is no

carryover of basis from the donor to the donee. Consequently, a

long-term capital loss or short-term capital loss or long-term ordinary loss or short-term ordinary loss

of $fill in the blank d19540fe5fab052_5 results from the sale of the stock. Because you

were the original holder or were not the original holder

of the stock, the special rules of 1244

apply or do not apply

. These rules would allow you to take

a capital or an ordinary

loss deduction on the sale.

Should you need more information or need clarification on our conclusion, do not hesitate to contact me.

Sincerely yours,

Suzy Smith, CPA Partner

Question Content Area

b. Complete a memo for the file.

TAX FILE MEMORANDUM

July 24, 2021

FROM: Suzy Smith

SUBJECT: Mike Sanchez

Today I talked to Mike Sanchez regarding his sale of stock that was issued to his brother, Paul, pursuant to 1244. Paul paid $40,000 for the stock three years ago and gave the stock to his brother, Mike, a few months after acquiring it. Mike sold the stock in the current tax year for $25,000.

At issue: May a donee of stock in a corporation that

qualifies or does not qualify

as a small business corporation under 1244 take

a capital or an ordinary

loss deduction pursuant to 1244?

Conclusion:

Any owner or Only the original holder

of 1244 stock qualifies for

a capital or an ordinary

loss.