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Bob transfers property with a basis of $245,760 and a fair market value of $414,640 to Star Corporation in exchange for § 1244 stock. The transfer qualifies as a nontaxable exchange under § 351. In the current year, Bob sells the Star stock for $138,820. Assume Bob files a joint return with his wife, Sue. With respect to the sale, Bob has:

A) An ordinary loss of $100,000 and a capital loss of $6,940.

B) None of these.

C) A capital loss of $106,940.

D) An ordinary loss of $106,940.

E) An ordinary loss of $100,000 and a capital loss of $175,820.

Answer :

The correct answer is: D) An ordinary loss of $106,940.

When Bob transferred the property to Star Corporation in exchange for § 1244 stock under § 351, it was a nontaxable exchange. The basis of the stock received would be the same as the basis of the property transferred, which is $245,760. Since the transfer qualifies under § 351, Bob does not recognize any gain or loss on the transfer.

When Bob sells the stock for $138,820, the selling price is less than the basis of $245,760, resulting in a loss. However, since the stock received in the exchange was § 1244 stock, the loss is treated as an ordinary loss rather than a capital loss.

The amount of the ordinary loss would be the selling price ($138,820) minus the basis ($245,760), which equals $-106,940. Since the loss is treated as an ordinary loss, it can offset other ordinary income on Bob's tax return.

Therefore, Bob has an ordinary loss of $106,940 with respect to the sale of the Star Corporation stock.

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