Here is another one for you
On March 1 of the previous year, a parent sold stock with a cost of $8,000 to their child for $6,000, its fair market value. On September 30 of the current year, the child sold the same stock for $7,000 to Hancock, who is unrelated to the parent and child. What is the proper treatment for these transactions?
A. Parent has a $2,000 recognized loss and child has $1,000 recognized gain.
B. Parent has $2,000 recognized loss and child has $0 recognized gain.
C. Parent has $0 recognized loss and child has $0 recognized gain.
Answer (C) is correct.
With a related party stock sale, the original related seller is not permitted to recognize any realized loss on the disposition. However, if the recipient of that stock subsequently disposes of it at a gain, they are permitted to reduce any gain realized by the amount of the disallowed loss. In this case, $2,000 ($6,000 amount realized, less $8,000 adjusted basis) of loss is realized to the parent on the initial disposition. The child takes a $6,000 fair market value basis. Upon subsequent disposition, the child realizes a $1,000 gain on the sale of the shares ($7,000 amount realized, less $6,000 adjusted basis). However, this is reduced to $0 by the disallowed loss to the parent. The remaining $1,000 loss ($2,000 disallowed loss, less $1,000 used to offset the child’s gain) is permanently lost.
D. Parent has $0 recognized loss and child has $1,000 recognized gain.
.