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income tax: small business stock

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Problem 7-35
Bad Debt and § 1244 Stock and Capital Loss Limit (LO. 1, 2)

Mabel and Jack file a joint return. For the current year, they had the following items:

Salaries $120,000
Loss on sale of § 1244 stock acquired two years ago 105,000
Gain on sale of § 1244 stock acquired six months ago 20,000
Nonbusiness bad debt 19,000

Determine their AGI for the current year.

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Solution Preview

IRC Section 1244(a) states that "In the case of an individual, a loss on section 1244 stock issued to such individual or to a partnership which would (but for this section) be treated as a loss from the sale or exchange of a capital asset shall, to the extent provided in this section, be treated as an ordinary loss." IRC section 1244(b) states that "For any taxable year the aggregate amount treated by the taxpayer by reason of this section as an ordinary loss shall not exceed ... $50,000, or ... $100,000, in the case of a husband and wife filing a joint return for such year under section 6013." IRC section 1202(a)(1) states that "In the case of a taxpayer other than a corporation, gross income shall not include 50 percent of any ...

Solution Summary

This solution illustrates how to compute adjusted gross income if a taxpayer has Section 1244 transactions and capital losses.