[Anonymous]

Dunn received 100 shares of stock as a gift from Dunn’s grandparent. The stock cost Dunn’s grandparent $32,000 and it was worth $27,000 at the time of the transfer to Dunn. Dunn sold the stock for $29,000. What amount of gain or loss should Dunn report from the sale of the stock?

a.

$0

b.

$2,000 gain.

c.

$3,000 gain.

d.

$3,000 loss.

Explanation

Choice “a” is correct. To determine the amount of gain or loss that should be reported on the sale of gifted property, a determination must be made as to whether the property is sold at a gain or a loss. The stock in this question has a $27,000 value which is less than its $32,000 cost. The basis for gain is the adjusted basis of the donor on the date of gift, or $32,000. However, the stock is sold for $29,000, which is not at a gain. The basis for loss is the lower of the adjusted basis or the fair market value on the date of gift, or $27,000. However, the stock is not sold at a loss. In this situation, neither gain nor loss is recognized, and the “middle” basis of the subsequent sales price is used.

______________________________________________________________________________________________

Farr made a gift of stock to her child, Pat. At the date of gift, Farr’s stock basis was $10,000 and the stock’s fair market value was $15,000. No gift taxes were paid. What is Pat’s basis in the stock for computing gain?

a.

$5,000

b.

$15,000

c.

$0

d.

$10,000

Explanation

Choice “d” is correct. Property acquired as a gift generally retains the rollover cost basis that it had in the hands of the donor at the time of the gift. Basis is increased by any gift tax paid that is attributable to the net appreciation in the value of the gift. Since there were no gift taxes paid, Pat’s basis for computing a gain is the rollover cost (basis), $10,000.

[Anonymous]

I'm not sure this is going to satisfy you, but here is what I remembered (going off memory so might be wrong):

Step 1: Is there a built in gain or loss?

FMV of the gift > NBV = NORMAL situation. No tax and basis carries over (unlike inheritence which steps up)

FMV of the gift < NBV = WEIRD situation. Basis determined upon the date of subsequent sale.

So built in gains are totally normal. The stock grandma bought a long time ago probably should have gone up in value. Grandma's stock she bought 70 years ago being lower than the basis is WEIRD.

—-

Step 2 (WEIRD situation):

Draw two lines

Ceiling = Original cost (NBV/Basis)

Floor = FMV at time of gift

Write in the price where it belongs:

If the subsequent sale price is above the ceiling, then the basis is the ceiling (i.e. gain is small)

If the subsequent sale price is below the floor, then the basis is the floor (i.e. loss is small)

If the subsequent sale price is in the middle then the basis equals the subsequent sales price (i.e. no gain or loss)

WHY is this? I don't know. Why is the sky blue? Because. It probably has to do with not wanting to be able to transfer losses to other people, but who cares. Just draw the lines and write in the price.

—-

Step 2 (NORMAL situation):

Basis = Carryover basis

Compute gain or loss normally. No weird stuff.

[Anonymous]

I feel my first fail coming up.

[leglock]

[CPA soon]

I think it's safest for us to use the chart on page R4-12

Purchase=Cost

Gift=Rollover cost

Inherited=Lesser of FMV or Valuation if elected

that should cover the majority of situation probably

FAR - 71, 68, 74, (8/31/14) 78 ✔
REG - 67, 71, 71, (10/18/14) 78 ✔
BEC - (11/29/14) 86 ✔
AUD - 73, (4/4/15) 86 ✔

I can't believe this is over! 2 years and 3 months..

[leglock]

With gift's, you keep the donor's basis, USUALLY. So if you give your son, your stock that you bought for 5, and it's now worth 10, his basis is still gonna be 5. That's why alot of estate planners suggest waiting til death to give a loved one stock, because then your son would get your stepped up basis of 10 upon death, instead of your basis of 5 as a gift.

The exception though is if you give the gift when the fmv is LESS than your basis. Then, basis can only be determined at such time as when the recipient of the gifts sells the gift. So if your stock basis is 5 and it is now worth 1, then the basis to your son can only be determined based upon the price he ultimately sells it for.

In the examples you gave above, in the first example, the basis is more than the fmv (need later sale price to determine basis), whereas in the second example, basis is less than fmv (keep rollover basis), hence the different treatment

[Anonymous]

Just draw the lines and everything will be fine.

[Evwy_Mom]

^What leglock said.

AUD = 85
FAR = 79
BEC = 79
REG = 65, 72, 75!

I AM DONE!!

[Anonymous]

Aha! I think I can actually understand what Leglock just said.Thanks to all.

[CPA soon]

@Leglock based on what you said here:

The exception though is if you give the gift when the fmv is LESS than your basis. Then, basis can only be determined at such time as when the recipient of the gifts sells the gift. So if your stock basis is 5 and it is now worth 1, then the basis to your son can only be determined based upon the price he ultimately sells it for.

What would the gain/loss recognized be if after receiving the gift it is:

Sold for .5 , is it .5 loss?

Sold for 3, no gain/loss?

Sold for 8, gain of 3?

FAR - 71, 68, 74, (8/31/14) 78 ✔
REG - 67, 71, 71, (10/18/14) 78 ✔
BEC - (11/29/14) 86 ✔
AUD - 73, (4/4/15) 86 ✔

I can't believe this is over! 2 years and 3 months..

[Anonymous]

Draw the lines

Step 1: FMV < Basis. Built in loss exists. It's a weird case.

Step 2: Draw the lines

Top line = Gifter's basis = 5

Bottom line = FMV at time of gift = 1

Case A: Sold for 0.5, it's below the line so use the bottom line as the basis.

0.5 – 1 = 0.5 loss

Case B: Sold for 3, it's in between the lines so basis = price, i.e. no gain or loss

3-3=0

Case C: Sold for 8, so it's above the line. Use the top line as basis.

8-5 = 2 gain

Draw the lines, draw the lines, draw the lines.

[CPA soon]

So it's the same rule just taking the lower of NBV or FMV as a floor. Applying the same concept to the example discussed earlier.

Farr made a gift of stock to her child, Pat. At the date of gift, Farr's stock basis was $10,000 and the stock's fair market value was $15,000. No gift taxes were paid. What is Pat's basis in the stock for computing gain?

a.

$5,000

b.

$15,000

c.

$0

d.

$10,000

I would imaging the basis to compute the gain is 15K and the basis to computer the loss is 10K, anything in between is no gain/loss. where is the disconnect? why is 10K the basis for gain? or am I overreading the words?

FAR - 71, 68, 74, (8/31/14) 78 ✔
REG - 67, 71, 71, (10/18/14) 78 ✔
BEC - (11/29/14) 86 ✔
AUD - 73, (4/4/15) 86 ✔

I can't believe this is over! 2 years and 3 months..

[Anonymous]

Gifter's basis = 10K

FMV at time of gift = 15K

FMV > Basis, built in gain, NORMAL case.

Normally, basis of gifted assets CARRY OVER.

10K.

There's no “determine basis at time of sale”, it's just 10K. Period.

That's what NORMALLY happens.

If grandma buys a stock for 7 cents during the 1930s, NORMALLY the stock should be worth like $700 (I don't know if that's normal or not, lol). So in a normal situation, you'll get the basis rolled over, which SUCKS. If you sell the stock for $700 you need to use the basis of 7 cents, which is a ton of gain.

That's a normal world (side note, in a normal world, if your grandma dies, you get a step up basis from 7 cents to $700. Which is awesome, but that's irrelevant).

In an ABNORMAL world, grandma gifts you her stock she bought a century ago for 7 cents, which is now worth 3 cents or something. That's WEIRD (could be because the company went bankrupt or something).

And when it's weird, you're gonna have to draw those lines.

Top line = 7 cents

Bottom line = 3 cents

If the company gets out of bankruptcy and the stock rebounds to $10 or something, use the top line (write $10 and put it above the top line. Circle the top line).

If the company's still going through bankruptcy proceedings and hovering at 4 cents or something, if you sell it, just have the basis equal the subsequent sales price (write 4 cents and put it in between the lines and circle it)

If the company conclusively goes bankrupt and the price drops to like 1 cent, then write 1 cent below the bottom line and circle the bottom line. Use 3 cents as the basis to determine your loss.

[CPA soon]

I understand everything you're saying but when they say ” Pat's basis for computing a gain is the rollover cost (basis), $10,000″ do they mean for computing gain or loss? because in my mind no gain if sold under $15,000

FAR - 71, 68, 74, (8/31/14) 78 ✔
REG - 67, 71, 71, (10/18/14) 78 ✔
BEC - (11/29/14) 86 ✔
AUD - 73, (4/4/15) 86 ✔

I can't believe this is over! 2 years and 3 months..

[Anonymous]

In a normal world, gain or loss. There's no weird stuff. It's just carryover basis, period.

In an abnormal world, the basis is determined afterwards when you sell it. It morphs and shifts and stuff.

Maybe I should be more conceptual.

If you've noticed, if you had a built in loss (abnormal world), and you sell the asset for a gain, you basically just end up using carryover basis.

However, if you sell it for a loss but it's between the FMV at the time of the gift and the original basis, here's the government's logic.

Listen, you're basically being GIFTED A LOSS. Imagine a rich person, who has a high tax rate. He could theoretically be gifted a stock that just crashed in the market, sell it IMMEDIETLY and get a loss. He could get someone in a lower tax bracket to gift him that stock and pay him some money on the side.

Point is, the government doesn't like people transferring loss. That's why they have all those rules about acquiring companies with NOLs and stuff.

NO TRANSFERRING LOSSES.

So if you draw the lines, think of the middle portion as like the volatile portion of the stock market. That represents somebody just flipping a stock that has a built in loss to get the loss for themselves. The government's gonna slap your wrist and say “No loss for you (or gain”).

The bottom part of the line can be seen as the stock continuing to dip even more. It's a loss that you REALLY incurred and wasn't really transferred to you. The government will let you have that loss, but it's only going to start from the FMV of the time of the gift.

So I gifted you Enron stocks that I bought for a $100 when it's like $10, and you flip it for $8, the government says you deserve that loss of $2.

But if you flip the stock when it's $12, you're not going to be able to claim a loss of $88. The government's just going to say “nope” to you, and you get nada.

If Enron gets cleared of any wrongdoing and the stock rebounds to $200, the government says “OK, guess you weren't trying to screw us over, just do what you would have normally done” and you would use the $100 as the basis.

In comparison, if I gifted you the Enron stock when it was at $120, then the basis you use would be my original basis of $100, period. So if Enron crashes the next day to 0, you can claim a $100 loss. If it goes to $200, you need to recognize a gain of $100.

Point is, NO WEIRD STUFF. Just carryover basis.

[CPA soon]

All I was concerned about was the wording stated in the question. I understand the calculations.

FAR - 71, 68, 74, (8/31/14) 78 ✔
REG - 67, 71, 71, (10/18/14) 78 ✔
BEC - (11/29/14) 86 ✔
AUD - 73, (4/4/15) 86 ✔

I can't believe this is over! 2 years and 3 months..

[Author]

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