[Anonymous]

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.

So if Pat would have paid her mother one dollar, would this then be governed by related party rules thus allowing her to use a basis of 15,000 to figure her gain?

[PurpleK]

Nope, Pat's cost basis would be $1 because that is the amount she paid for the stock. However, due to the transaction being related party, her mother would not be allowed to take the loss of $9,999.

If Pat were to sell the stock at a gain, she could reduce that gain by the disallowed loss, but not below zero. Disallowed losses cannot be used to create or increase a loss on a sale to a non-related party.

[Anonymous]

I thought basis on a related party transaction was either the original seller's basis or FMV on date of related party transaction depending whether it was sold at a loss or at a gain when sold to an unrelated party?

[PurpleK]

I think you are confusing realized gain/loss vs. recognized gain/loss.

Going back to the example:

Cost basis: 10k

FMV on date of related party transaction: 15k

Sale to daughter: $1

If the daughter were to sell at any amount that is $1 or greater but less than 10k to a non-related party, her realized gain would be that amount less $1. However, she would not recognize any gain or loss because her mother's disallowed loss would reduce her gain to zero.

If the daughter were to sell for greater than 10k, her realized gain would be that amount less $1 and her recognized gain would be the proceeds less $9,999.

I cannot think of a situation where you would use FMV as cost basis. Perhaps you are thinking about like-kind exchanges?

[Anonymous]

I think REG is rotting my brain. I feel like some of the Becker questions are conflicting, and I'm getting horribly frustrated. I have two Becker questions that clearly conflict unless I am totally crazy. I will post them in a new thread.

[CPA soon]

Purple K, look at the below. This is confusing me too.

(TPRO-0027)

Need a hint?Losses are disallowed on sales between related taxpayers.

See Reference…Loss is disallowed on the sale or exchange of property to a related taxpayer.

(1) Transferee’s basis is cost; holding period begins when transferee acquires property.

(2) On a later resale, any gain recognized by the transferee is reduced by the disallowed loss (unless the transferor’s loss was from a wash sale, in which case no reduction is allowed).

On July 1, 2013, Daniel Wright owned stock (held for investment) purchased 2 years earlier at a cost of $10,000 and having a fair market value of $7,000. On this date he sold the stock to his son, William, for $7,000. William sold the stock for $6,000 to an unrelated person on November 1, 2013. How should William report the stock sale on his 2013 tax return?

As a short-term capital loss of $1,000.

As a long-term capital loss of $1,000.

As a short-term capital loss of $4,000.

As a long-term capital loss of $4,000.

This answer is correct because losses are disallowed on sales between related taxpayers, including family members. Thus, Daniel’s loss of $3,000 is disallowed on the sale of stock to his son, William. William’s basis for the stock is his $7,000 cost. Since William’s stock basis is determined by his cost (not by reference to Daniel’s cost), there is no “tack-on” of Daniel’s holding period. Thus, a later sale of the stock for $6,000 on November 1 generates a $1,000 short-term capital loss for William. Note that if William had sold the stock at a gain, Daniel’s disallowed loss would have been used to reduce the recognized gain.

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..

[PurpleK]

@CPA soon

Questions like this require a step-by-step analysis:

1. What is the cost basis to the person selling? Section 1012 states that cost basis is always equal to what someone pays for the property (unless otherwise provided in other parts of the Code). William paid $7,000 so that is his cost basis.

2. How much did the person selling the property receive in proceeds? $6,000

3. What is the realized gain? None. The amount is a realized loss, therefore you can ignore any disallowed losses to his father (and ignore his father's original cost basis).

4. What is the realized loss? 7k – 6k = 1k. This is also the recognized loss since we are ignoring the disallowed amount.

5. What is the holding period? Section 267 and related regs state that holding period does not tack on to related party sales. Therefore holding period is less than a year and loss is short term.

[Author]

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