LO.6 Three years ago and at a cost of $40,000, Paul Sanders acquired stock in a corporation that qualified as a small business corporation under § 1244. A few months after he acquired the stock, when it was still worth $40,000, he gave it to his brother, Mike Sanders. Mike, who is married and files a joint return, sells the stock for $25,000 in the current tax year. Mike asks you, his tax adviser, how the sale will be treated for tax purposes.

Prepare a letter to your client and a memo for the file. Mike’s address is 10 Hunt Wood Drive, Hadley, PA 16130.