[Rhunter]

NINJA Question –

Here is the question:

Gibson purchased stock with a fair market value of $14,000 from Gibson’s adult child for $12,000. The child’s cost basis in the stock at the date of sale was $16,000. Gibson sold the same stock to an unrelated party for $18,000. What is Gibson’s recognized gain from the sale?

A. $0

Correct B. $2,000

Incorrect C. $4,000

D. $6,000

How is one supposed to know when to use Gift rules vs. Related Parties rules in a transaction such as this?

[reallytired]

Sorry for creeping on your posts lol, currently studying REG as well.

This is a related party transaction, so all losses are disallowed. However, related party gains are allowed and will be calculated using the same rules as gift rules.

So for this one, I believe that the reason we do not care about the related party loss rules is because there is not a loss in the original sale of the stock, there is a $2k gain from Gibson's view (which are allowed under related party transactions unless the related parties are husband & wife or an individual & 50%+ controlled corp).

The next thing you must figure out is what to use as Gibson's basis.
FMV= 14,000
Basis= 16,000
Selling price= $18,000

Because the selling price is above the old basis, you would then use the old basis as the new basis. So,

18,000 asset received
-16,000 adjusted basis given up
= 2,000 gain

Hopefully that makes sense, I didn't understand the question at first until I looked up the related party transaction stuff in my book. Also, if this didn't answer your question, I apologize!

B 10/29/16
A 10/1/16
R 9/2/16
F 7/26/16

[Rhunter]

Haha, you're fine. I'm glad you're providing valuable feedback for which I'm grateful.

The thing that I can't wrap my head around is that Gibson's child received 4,000 less than basis in the transaction.

16,000 Basis less 12,000 sale price = 4,000 loss.

Are we supposed to just ignore this loss?

[reallytired]

I feel like we have learned something about how a related party loss can be absorbed by the purchaser when he subsequently sells the item for a gain, but for the life of me I cannot remember what it was.

Did this question not explain the right answer? I am perplexed by it to be honest!

B 10/29/16
A 10/1/16
R 9/2/16
F 7/26/16

[Rhunter]

Any disallowed losses can be used by the purchaser on a subsequent sale to an unrelated party.

Here is the excerpt from Ninja Notes:

SALES BETWEEN RELATED PARTIES
Ø Ancestors
Ø Brother/Sister
Ø Spouse
Ø Descendants
Ø Corporation or partnership where you're a 50% shareholder

Ø Seller cannot take a loss on a sale, but the gain is always recognized

Ø Related party gets to use the disallowed loss when sold
o Never below zero – i.e. a net loss is not allowed
o Related party's holding period begins when they acquire property

Ø In-Laws are not related parties

And here is the explanation from the MCQ, which doesn't make any mention of the initial loss other than it's a gift. No explanation as to why this is a gift and not a related party loss.

When Gibson's adult child sold stock valued at $14,000 to a parent for $12,000, the child made a $2,000 gift to the parent as well. Where a transfer of property is in part a sale and in part a gift, the basis to the purchaser is the sum of:

the greater of:
the amount paid for the property or
the seller's adjusted basis for the property at the time of the transfer, and
the amount of basis increase allowed for gift tax paid.
In this case, the seller's $16,000 adjusted basis in the property at the time of the transfer was greater than the $12,000 paid for the property, so this is Gibson's basis in the stock. His gain is recognized as follows:

Sale price $18,000
Basis (16,000)
——–
Recognized gain $ 2,000

Note: For determining loss, the basis of the property to the purchaser cannot be greater than the fair market value of the property at the time of the transfer.

Regulation Sections 1.1001-1(e) and 1.1015-4

I even searched the regulation sections listed in the explanation, and it is also lacking an explanation as to why this isn't a related party transaction.

[reallytired]

Here is the Becker example for a disallowed loss:

Ned bought stock for $20,000 that he sold to his brother Ray for $16,000. The $4,000 loss is disallowed. Ray then sells the stock to Bobby, an unrelated party, for $21,000. Ray's recognized gain from the sale is $1,000, calculated as follows:
Rays selling price- $21,000
Less Rays cost- 16,000
Disallowed loss- 4,000
Rays basis =(20,000)
Rays gain =$1,000

So now I am really confused because if you set up your problem with how the Becker problem is set up, there should be a $4,000 gain. I am missing something. I think that maybe we have looked too far into the question because if you look at it quickly as simply a related party transaction and plug in numbers to the little Becker formula thing, you do get the $2,000 gain. Here is their “formula:”

The purchasing relative's basis rules are the same as the gift tax rules:

———————Sell higher——-> Use “relative's basis” to determine gain
Relatives basis
———————Sell between——> No gain or loss
Lower FMV
———————Sell lower——–> Use “purchase price” to determine loss

So the selling price in this question is $18,000, which is higher than the relative's basis (the son) so then you would use their basis to determine the gain of $2,000.

I might be rambling at this point, but I just cannot figure it out.

B 10/29/16
A 10/1/16
R 9/2/16
F 7/26/16

[Rhunter]

It has me stumped as well. Gotta love the ambiguity. Hopefully someone else will chime in with some clarification.

[Author]

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