[Tasia]

I have a question on the answer Becker gives for this multiple choice question. I understand that a loss on a related party transaction is disallowed, but if the related party later sells the property at a gain, shouldn’t their gain be reduced by the previous disallowed loss? Can anyone explain Becker’s response to me? I had answered with B and got it wrong.

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. $6,000

b. $0

c. $4,000

d. $2,000

Explanation

Choice “d” is correct. Losses are disallowed on most related party sales transactions even if they were made at an arm’s length (FMV) price. The basis (and related gain or loss) of the (second) buying relative depends on whether the second relative’s resale price is higher, lower, or between the first relative’s basis and the lower selling price to the second relative. In this case, the $4,000 capital loss on the sale by Gibson’s adult child to Gibson [$12,000 SP – $16,000 Basis] is disallowed. Gibson’s basis is determined by his selling price to a third party. In this case, the selling price is $18,000, which is HIGHER than the original basis of Gibson’s adult child. Gibson’s basis in the stock is, therefore, his adult child’s basis of $16,000. Gibson’s recognized basis is calculated as follows:

Selling price $ 18,000

Basis (16,000)

Gain $ 2,000

Choice “b” is incorrect. There would be a zero gain or loss if the selling price were between the adult child’s basis and Gibson’s purchase price, but this is not the case in the facts.

Choice “c” is incorrect. This answer option uses the fair market value of the stock at the date of purchase as the basis. As is discussed above, the rules do not provide for this treatment. [$18,000 SP – $14,000 FMV = $4,000]

Choice “a” is incorrect. This would be the answer if the basis were Gibson’s purchase price of $12,000; however, because the stock sold for more than Gibson’s child’s basis and the child had a disallowed loss on the sale to Gibson, Gibson is allowed to use his child’s original basis of $16,000 as his basis for the stock on the date of the second sale. [$18,000 SP – $12,000 PP = $6,000]

BEC - 78 (8/30/13)
REG - 73 (1/31/14) - 76 (4/7/14)
***GETTING MARRIED 7/19/14***
FAR - after the wedding
AUD - also after the wedding

"For I know the plans I have for you,” declares the LORD, “plans to prosper you and not to harm you, plans to give you hope and a future." - Jeremiah 29:11

[Anonymous]

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. $6,000

b. $0

c. $4,000

d. $2,000

Someone please correct me if I'm wrong since I'm retaking this and need to know as well:

Gibson's realized gain would be $18,000 – $12,000 = $6,000 , which is then reduced by the $4,000 disallowed loss leaving the $2,000 recognized gain.

The $4,000 disallowed loss is derived from $16,000 child's cost basis – $12,000 price sold to related party.

The answer explanation confuses me because I thought the explanation was used for determining gift basis gains. So, although I have the right answer I don't know if I determined the answer correctly.

[Anonymous]

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. $6,000

b. $0

c. $4,000

d. $2,000

Someone please correct me if I'm wrong since I'm retaking this and need to know as well:

Gibson's realized gain would be $18,000 – $12,000 = $6,000 , which is then reduced by the $4,000 disallowed loss leaving the $2,000 recognized gain.

The $4,000 disallowed loss is derived from $16,000 child's cost basis – $12,000 price sold to related party.

The answer explanation confuses me because I thought the explanation was used for determining gift basis gains. So, although I have the right answer I don't know if I determined the answer correctly.

[Gatorbates]

Slang, that's correct.

An easier way to look at this scenario is to just ignore the rules, and assume that he just carried the child's original basis over.

Licensed Florida CPA:
B: 71, 73, 79
A: 83
R: 78 (expired), 77
F: 74, 74, 80

It's finally freaking over.

[Gatorbates]

Slang, that's correct.

An easier way to look at this scenario is to just ignore the rules, and assume that he just carried the child's original basis over.

Licensed Florida CPA:
B: 71, 73, 79
A: 83
R: 78 (expired), 77
F: 74, 74, 80

It's finally freaking over.

[Tasia]

I guess what I'm confused about is @gatorbates, if you say to assume the parent carried the child's original basis over, then their basis in the stock would be $16,000, and selling the stock at $18,000 would only create a realized gain of $2,000. This is where I'm confused because if the realized gain is only $2,000 then the entire amount would be reduced by the child's disallowed loss.

So is the parent's actual basis only $12,000?

BEC - 78 (8/30/13)
REG - 73 (1/31/14) - 76 (4/7/14)
***GETTING MARRIED 7/19/14***
FAR - after the wedding
AUD - also after the wedding

"For I know the plans I have for you,” declares the LORD, “plans to prosper you and not to harm you, plans to give you hope and a future." - Jeremiah 29:11

[Tasia]

I guess what I'm confused about is @gatorbates, if you say to assume the parent carried the child's original basis over, then their basis in the stock would be $16,000, and selling the stock at $18,000 would only create a realized gain of $2,000. This is where I'm confused because if the realized gain is only $2,000 then the entire amount would be reduced by the child's disallowed loss.

So is the parent's actual basis only $12,000?

BEC - 78 (8/30/13)
REG - 73 (1/31/14) - 76 (4/7/14)
***GETTING MARRIED 7/19/14***
FAR - after the wedding
AUD - also after the wedding

"For I know the plans I have for you,” declares the LORD, “plans to prosper you and not to harm you, plans to give you hope and a future." - Jeremiah 29:11

[Gatorbates]

Two ways you can look at it (I prefer A … it's much easier):

A.) Exactly what you said. Assume the parent carried the child's original basis over … 16k, and sold it for 18k. 2k Gain. Answer D. End of story, move on to the next question. (Ignore the “disallowed” rules).

B.) Use his purchase price as his new basis. 12,000. He sold it later to an unrelated party for 18,000. Potential 6,000 gain. This is where the disallowed loss comes in. The kid's disallowed loss was 4,000 (sold for 12,000, basis was 16,000). So now you have to reduce the “potential gain” of 6,000 by this disallowed 4,000 loss, and you come up with the same answer, D. 2,000 gain.

Does this help more?

Licensed Florida CPA:
B: 71, 73, 79
A: 83
R: 78 (expired), 77
F: 74, 74, 80

It's finally freaking over.

[Gatorbates]

Two ways you can look at it (I prefer A … it's much easier):

A.) Exactly what you said. Assume the parent carried the child's original basis over … 16k, and sold it for 18k. 2k Gain. Answer D. End of story, move on to the next question. (Ignore the “disallowed” rules).

B.) Use his purchase price as his new basis. 12,000. He sold it later to an unrelated party for 18,000. Potential 6,000 gain. This is where the disallowed loss comes in. The kid's disallowed loss was 4,000 (sold for 12,000, basis was 16,000). So now you have to reduce the “potential gain” of 6,000 by this disallowed 4,000 loss, and you come up with the same answer, D. 2,000 gain.

Does this help more?

Licensed Florida CPA:
B: 71, 73, 79
A: 83
R: 78 (expired), 77
F: 74, 74, 80

It's finally freaking over.

[Tasia]

Yes, thank you very much! I guess I was confused as to which basis the related party actually takes. I was under the assumption that there was a rollover basis, but that's not the case. Just to clarify, the parent's actual basis then is what they bought the stock for, correct?

BEC - 78 (8/30/13)
REG - 73 (1/31/14) - 76 (4/7/14)
***GETTING MARRIED 7/19/14***
FAR - after the wedding
AUD - also after the wedding

"For I know the plans I have for you,” declares the LORD, “plans to prosper you and not to harm you, plans to give you hope and a future." - Jeremiah 29:11

[Tasia]

Yes, thank you very much! I guess I was confused as to which basis the related party actually takes. I was under the assumption that there was a rollover basis, but that's not the case. Just to clarify, the parent's actual basis then is what they bought the stock for, correct?

BEC - 78 (8/30/13)
REG - 73 (1/31/14) - 76 (4/7/14)
***GETTING MARRIED 7/19/14***
FAR - after the wedding
AUD - also after the wedding

"For I know the plans I have for you,” declares the LORD, “plans to prosper you and not to harm you, plans to give you hope and a future." - Jeremiah 29:11

[Author]

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