@HR I'll find it when I go back and review in a few weeks. Thanks for taking the time.
I'm having a hard time distinguishing between these two questions.
In Year 3, Fay sold 100 shares of Gym Co. stock to her son, Martin, for $11,000. Fay had paid $15,000 for the stock in Year 1. Subsequently in Year 3, Martin sold the stock to an unrelated third party for $16,000.
What amount of gain from the sale of the stock to the third party should Martin report on his Year 3 income tax return?
a. $5,000
b. $1,000
c. $4,000
d. $0
Explanation
Choice “b” is correct. Losses between related parties are disallowed. Therefore, Fay's $4,000 capital loss ($15,000 basis less $11,000 received) is disallowed because she sold the stock to her son, a related party. When her son sells the stock to an unrelated party, however, he can use the $4,000 disallowed loss to reduce any gain he realized from the sale (but not to create or increase a loss). His realized gain is $5,000 ($16,000 received less $11,000 basis), but he can reduce it by $4,000 to $1,000 using his mother's disallowed loss. Employing the “Pass Key” in the text, Martin sold the stock for higher than Fay purchased it. The donor's basis (i.e., $15,000) is, therefore, used to determine gain on the sale by Martin.
VS.
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. $2,000
b. $0
c. $4,000
d. $6,000
Explanation
Choice “a” 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
These are both related party questions, are they not? Why in the first was Martin allowed to use that 4,000 unrecognized loss to subtract out from his $5,000 gain to ultimately end up with a $1,000 loss, but in the second, you can't do the same? I made this mistake and got the first one right and the second one wrong. I put for the second question that the gain was 0, because I calculated 12,000-16,000=$4000 loss that is disallowed from the “adult child” because they sold it to their parent (related party), and then I calculated the $2,000 gain at sale to Gibson (18,000-16,000)=2,000 and subtracted out $2,000 from the $4,000 loss of the child (making sure that I did not subtract it below 0).
What am I doing wrong here? What is the difference between the two questions?
AUD (2/3/2015) Pass
REG (4/24/2015) Pass
FAR (8/3/2015) Pass
BEC (10/25/2015) Pass
.