Fox corp., an s corporation, had an ordinary loss of $36,500 for the year ended december 31, year 2. at january 1, year 2, duffy owned 50% of fox's stock. duffy held the stock for 40 days in year 2 before selling the entire 50% interest to an unrelated third party. duffy's basis for the stock was $10,000. duffy was a full-time employee of fox until the stock was sold. duffy’s share of fox’s loss was
a) $0b) $2,000c) $10,000d) $18,250

b. $2000

Explanation:

The rule for charging loss and/or recognizing profit during a change in ownership interest within the taxable year is that 'the loss and/or gain is allocated on a daily basis'.

Assuming a 365 day year, the daily loss would be as follows;

Loss per day: $36500÷365 = $100 per day

Now in this question Duffy only held the stock for 40 days so the allocation of ordinary loss would be on a daily basis. The loss bore by both Fox Corp. and Duffy during 40 days would be as follows;

Loss of 40 days: $100×40=$4000

Duffy owned only 50% of Fox's stock therefore the loss will also be allocated based on his ownership.

Duffy's share of fox's loss = $4000×50%

Duffy's share of fox's loss = $2000