Capital Gains and Losses

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Capital Gains and Losses

Scenario: Sole proprietor gifted 20% of the business assets

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to daughter on 9/30/1993. On...
Scenario: Sole proprietor gifted 20% of the business assets to daughter on 9/30/1993. On October 1, 1993 the sole proprietorship became a C-Corporation with the same business assets and the daughter became a 20% shareholder. When assets were established in the corporation, the paid in capital account was set at, say, $400,000. I therefore assume the daughter has basis of $80,000 in her shares ($400K X 20%). In 2016 the father (or possibly the C-Corporation) is buying the daughters shares for, say, $70,000.
My assumption is that the daughter has a non-deductible loss of $10,000 on the sale on her 2016 tax return. Can you please confirm my assumption is correct?
Submitted: 1 year ago.Category: Capital Gains and Losses
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9/9/2016
Tax Expert: Mark Taylor, Certified Public Accountant replied 1 year ago
Mark Taylor
Mark Taylor, Certified Public Accountant
Category: Capital Gains and Losses
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Hi, my name is Mark. I will be happy to help you with your question. Please give me a few moments to prepare your response.

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Tax Expert: Mark Taylor, Certified Public Accountant replied 1 year ago

The basis in the stock would have been the Fair Market Value of the property at the time that it was contributed to the C-Corporation. The journal entry to record the contribution of the property would have credited the Capital Stock and Additional Paid in Capital Account. Your assumption of taking 20% of the additional paid in capital is correct. You would also take 20% of the Capital Stock account as well. It sounds like you would have a loss on the sale. The loss would be deductible. Please give me a few more moments.

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Tax Expert: Mark Taylor, Certified Public Accountant replied 1 year ago

I believe that you would have a section 1244 stock loss. Section 1244 of the tax code allows for losses from the sale of small domestic corporation to be deducted as a ordinary loss instead of a capital loss up to $50,000 ($100,000 if married). I see why you are saying that this would be a non-deductible loss due to a related party transaction.

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Tax Expert: Mark Taylor, Certified Public Accountant replied 1 year ago

I hope you found this information to be beneficial. If this answered your question please take a few moments to rate my response. A rating is needed in order for me to receive credit for helping you today. The rating bar is located at the top of the page – ranging from 1 to 5 stars. If you need me to clarify aspect of my response or if there are additional areas of the question that you would like me to consider please let me know. I would be happy to continue the discussion. It has been my pleasure helping you today.

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Customer reply replied 1 year ago
Okay thank you Mark. I believe you have confirmed what I thought was the case and thank you for alerting me to the ability to deduct the loss in spite of the related party issue.
Tax Expert: Mark Taylor, Certified Public Accountant replied 1 year ago

No, you are correct that the loss is non-deductible because of the related party issue. I am sorry I did not consider that aspect before I mentioned the 1244 loss.

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Customer reply replied 1 year ago
It's all good, thank you Mark.
Tax Expert: Mark Taylor, Certified Public Accountant replied 1 year ago

I was happy to help . Please let me know if you have any other questions.

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Tax Expert: Mark Taylor, Certified Public Accountant replied 1 year ago

I hope you found this information to be beneficial. If this answered your question please take a few moments to rate my response. A rating is needed in order for me to receive credit for helping you today. The rating bar is located at the top of the page – ranging from 1 to 5 stars. If you need me to clarify aspect of my response or if there are additional areas of the question that you would like me to consider please let me know. I would be happy to continue the discussion. It has been my pleasure helping you today.

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