Question

Julio is in the 32% tax bracket. He acquired 2,000 shares of stock in Gray Corporation seven years ago at a cost of $50 per share. In the current year, Julio received a payment of $150,000 from Gray Corporation in exchange for 1,000 of his shares in Gray. Gray has E & P of $1,000,000. Julio has a capital loss carryover of $50,000 in the current tax year. Julio has no other capital gain transactions during the year. Assume that Julio has no capital losses and taxpayers in the 32% tax bracket are subject to the long-term capital gains and qualified dividends tax rate of 15%.

What amount of the capital loss may Julio deduct in the current year in the following situations? What is his income tax liability?

a. The $150,000 payment from Gray Corporation is a qualifying stock redemption for tax purposes.
Julio may use $ of the capital loss carryover to offset the gain on the redemption. His income tax liability is $.

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b. The $150,000 payment from Gray Corporation is a nonqualified stock redemption for tax purposes.
Julio could deduct $ of the $50,000 capital loss carryover. His income tax liability is $.

Answer 1

Part A

Julio may use $50,000 of the capital loss carryover to offset the gain on the redemption. His income tax liability is $7500

Entire $50,000 capital loss carryover is deducible to offset $50,000 of the $100,000 (150000-(1000*50) long-term capital gain. Thus, taxable gain $50,000 (100000-50000). Income tax liability on the $50,000 long-term capital gain = $7,500 ($50,000 × 15%).

Part B

Julio could deduct $3000 of the $50,000 capital loss carryover. His income tax liability is $22500

Only $3,000 of the $50,000 capital loss carryover could be deducted. Julio’s income tax liability on the $150,000 dividend received = $22,500 ($150,000 × 15%).