ExpertHard1 markMultiple Choice
CPA · Question 43 · Area IV: Property Transactions
A taxpayer sells stock to their brother for $5,000. The taxpayer's basis was $8,000. The brother subsequently sells the stock to an unrelated party for $4,000. What is the brother's recognized gain or loss?
A taxpayer sells stock to their brother for $5,000. The taxpayer's basis was $8,000. The brother subsequently sells the stock to an unrelated party for $4,000. What is the brother's recognized gain or loss?
Answer options:
A.
$1,000 Loss
B.
$4,000 Loss
C.
$1,000 Loss
D.
$0
How to approach this question
1. Original loss ($3k) disallowed. 2. Brother's Basis = $5k. 3. Brother sells for $4k. Realized Loss $1k. 4. Disallowed loss from related party can ONLY reduce gain, never increase loss. Result: $1,000 Loss.
Full Answer
C.$1,000 Loss✓ Correct
C
IRC §267(d). The transferee can use the transferor's disallowed loss only to offset recognized gain. Since the brother sold at a loss ($4,000 - $5,000 = $1,000 loss), the original $3,000 disallowed loss provides no benefit.
Common mistakes
Adding the disallowed loss to the current loss.
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