Choice "D" is correct. Losses resulting from the sale, exchange or worthlessness of Section 1244 qualifying stock (also called small business stock) are treated as ordinary losses up to $50,000 in any tax year. However, this loss is available only to original owners of the stock. Because Jackson inherited the stock, he is not the original owner. Therefore, in this case, no ordinary loss may be deducted. (Note that Jackson would be allowed a capital loss in the year the stock was deemed entirely worthless. The capital loss would be deducted under the personal capital loss rules and calculated using the likely transfer basis of $25,000.)
Choice "b" is incorrect. An ordinary loss is allowed on the worthlessness of Sec. 1244 stock if taken by an original owner. It appears as if this answer was attempting to "trick" the candidate into choosing this option (a $3,000 deduction as would be the case if the loss were a capital loss, rather than an ordinary loss) and not considering that the question referenced the deductibility of an ordinary loss.
Choices "c" and "a" are incorrect. Both these answers utilize either the basis of Jackson's parents or the fair market value to determine the ordinary loss. In this instance, no ordinary loss is available to Jackson because he is not the original owner of the stock.