[Miso_Soup]

NINJA Question –

Hi Everyone!

So I guess I am a little confused by the approaches in Ninja MCQ and Wiley Notes. I am sure there is a difference and I am just failing to see it…. thanks in advance for the help!

From Ninja Reg:

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

B. $2000

C. $4000

D. $6000

The correct answer is B. And per Ninja here is the rationale:

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:

1.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

2.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

Now from Wiley:

Example: TP sold stock to S, his brother, for $1000. TP had an adjusted basis in the stock of $2,500, but cannot deduct the realized loss of $1,500 because S is a related party. S takes a basis in the stock of $1,000. If S eventually sells the stock to an unrelated third party for $1,800, S can offset the $800 gain with $800 of the deferred loss. The remainder of the deferred loss ($700) is not recognized.

Per Wiley deferred losses from related party transactions create a “right to offset” which can be used to reduce a gain upon the ultimate sale of the property to an unrelated taxpayer. The right of offset cannot create a loss, nor make a loss greater.

For the ninja problem I applied the right of offset and reduced the realized gain by the deferred loss which was incorrect. Why does the “right of offset” not apply in this situation?

FAR - 8/17/15 - 82
AUD - 10/26/15 - 87
REG - 11/30/15
BEC - 1/2/16