[hardin63]

This is regarding question CPA-01726:

In Year 3, Fay sold 100 shares of Gym Co. stock to her son, Martin, for $11,000. Fay had paid $15,000 for the stock in Year 1. Subsequently in Year 3, Martin sold the stock to an unrelated third party for $16,000.

What amount of gain from the sale of the stock to the third party should Martin report on his Year 3 income tax return?

A: $0 (what I believe is the correct answer)

B: $1,000 (Becker correct answer)

C: $4,000

D: $5,000

The question indicates that Martin should report a $1,000 gain on his Year 3 income tax return. However, Section 267(d) of the Tax Code states that a gain should only be recognized to the extent that it exceeds a previously disallowed loss resulting from a related-party transaction. Therefore, Martin should obtain a right to offset a maximum of $4,000 (the amount of disallowed loss when Fay sold the stock to Martin) of the gain on his subsequent sale to an unrelated third party. Due to the fact that his realized gain was only $1,000 when he sold the stock to the unrelated party, he should be able to use a portion of the $4,000 right of offset to bring his recognized gain to $0.

Summary:

Fay sells to Martin –> ($4,000) loss realized but disallowed; Martin acquires a $4,000 right of offset to be applied to a subsequent sale –> Martin sells the stock to an unrelated third party –> $1,000 realized gain reduced by his previously required right of offset –> final result: $0 recognized gain.

Can anyone clarify?

BEC - 90
REG - 88
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[HoosierCPA]

Martin assumes the Fays basis because of the related party transaction. Therefore Martin's basis is $15k when he goes to sell the stock for $16k bringing the difference to $1k gain. I agree with Becker.

Granted a did a terrible job at explaining it so sorry if I did not help at all. Seems fairly straight forward though.

AUD - 80
BEC - 82
FAR - 78
REG - 89

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FAR - 78
REG - 72,74,71...please just go away REG nobody likes you!
BEC - 82
AUD - Aug 16

[hardin63]

That makes sense, but I wasn't necessarily arguing Becker's logic. I was saying that Becker's logic seems to disregard the rules in Section 267(d).

BEC - 90
REG - 88
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[HoosierCPA]

Yeah I was quick to post. I stopped at the question and didn't read the tax code you posted…hmmm I cannot elaborate on that. I am reading it the same way you are.

AUD - 80
BEC - 82
FAR - 78
REG - 89

...

FAR - 78
REG - 72,74,71...please just go away REG nobody likes you!
BEC - 82
AUD - Aug 16

[Author]

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