Can someone please explain this question to me. I understand the answer. But I do not understand how it is considered a long term capital gain with related party. Becker clearly states that the holding period with the buyer starts brand new with the buyer, as opposed to taking on the holding period of the previous owner with related party transactions.
Question CPA-01668
Conner purchased 300 shares of Zinco stock for $30,000, 20 years ago. On May 23 of the current year, Conner sold all the stock to his daughter Alice for $20,000, its then fair market value. Conner realized no other gain or loss during the year. On July 26 of the current year, Alice sold the 300 shares of Zinco for $25,000.
What was Alice's recognized gain or loss on her sale?
A. $0
B. $5,000 long-term gain.
C. $5,000 short-term loss.
D. $5,000 long-term loss.
Explanation
Choice “A” is correct. Alice has a realized gain of $5,000 on the transaction: $25,000 sales price less $20,000 purchase price. However, she can reduce the gain, but not below zero, by the amount of loss her father could not deduct on the sale to her. Thus, Alice can reduce her gain by up to $10,000, but not below zero. Here, the gain is $5,000, so it is reduced to zero. Conner should have sold the stock in the open market so that he could deduct the entire loss. Alice could then have purchased the stock in the open market.
Choice “B” is incorrect. $5,000 is Alice's realized long-term gain on the sale. However, she can reduce the gain, but not below zero, by the amount of loss her father could not deduct on the sale to her.
Choice “C” is incorrect. Alice has a realized gain of $5,000 on the sale. However, since she is related to Conner, her holding period includes his holding period. Therefore, her realized gain is long-term. In addition, she can reduce the gain, but not below zero, by the amount of loss her father could not deduct on the sale to her.
Choice “D” is incorrect. Alice can reduce the gain by the amount of loss her father could not deduct on the sale to her. However, she cannot reduce the gain below zero.
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