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:

$1,000 Loss

$4,000 Loss

$1,000 Loss

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

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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