Question

Justin Justice owns 55% of the outstanding stock of Rego Corporation. During the current year, Rego sold a trailer to Justin for $10,000. The trailer had an adjusted tax basis of $12,000 and had been owned by Rego for 3 years. In its current-year income tax return, what is the allowable loss that Rego can claim on the sale of this trailer?

A. $0.

B. $2,000 ordinary loss.

C. $2,000 Sec. 1231 loss.

D. $2,000 Sec. 1245 loss.

Answer 1

Answer:

A. $0.

Explanation:

Tax Basis means that the acquisition cost plus any other cost incurred to make use of that asset. In this case tax basis of trailer is $12,000 but had been owned by Rego for 3 years which means it must have been depreciated over these 3 years. So, if the trailer is sold for $10,000 it must have profit and not any loss, so the allowable loss for Rego would be $0.