A taxpayer sells stock to their brother for $5,000. The basis was $8,000. The brother sells the stock to an unrelated party for $4,000. What is the brother's recognized gain or loss?

Answer options:

$4,000 loss

$1,000 loss

$3,000 loss

How to approach this question

Related Party Loss Rule: 1. Original loss disallowed. 2. Transferee takes cost basis ($5k). 3. If Transferee sells at a LOSS, they recognize their own loss ($5k - $4k = $1k). The original disallowed loss disappears.

Full Answer

B.$1,000 loss✓ Correct

$1,000 loss

IRC §267(d). The transferee can only use the transferor's disallowed loss to offset GAIN. If the transferee sells at a loss, they calculate loss using their own cost basis ($5,000). The transferor's loss is permanently extinguished.

Common mistakes

Adding the disallowed loss to the brother's loss.

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