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Subject Topic: basis of stock sold to related parties Post ReplyPost New Topic
  
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cpameplz
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Posted: 14 Apr 2011 at 18:30 | IP Logged Quote cpameplz

hello all, been working on the becker questions and am
confused with this one:

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

Okay, what confuses me is the explanation of the answer.
The answer is A. $0 but because she realized a $5,000
gain, and was able to deduct a portion of her father's
loss (up to $5,000 since she can't go below 0), thus
recognized no gain/loss.

I understand that, but what I don't understand is that
means her basis is the price she paid for it, $20,000.
According to the book, it says that the basis rules for
related parties is the same as the basis rules for gifts
given, which from what I understand, states that if FMV
is lower than original basis (which it was), you would
recognize no gain/loss if it was sold at a price between
the basis and the FMV (again, which it was).

Either way I would have arrived at answer A, but I got
there for a complete different reason, so I'm guessing
I'm missing something. I understood it as her basis would
be $25,000 and she'd recognize no gain/loss. The
explanation states her basis is $20,000 and she's able to
deduct her father's portion of losses realized, so long
as she doesn't go below zero.
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cpameplz
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Posted: 14 Apr 2011 at 18:51 | IP Logged Quote cpameplz

Just had another similar question, and again ended up with
the same answer. This time, the explanation went through
the same process of deducting realized losses, but it
mentioned about the pass key that I was referring to.

I'm thinking that the whole explanation in the first post
is the technically correct way of calculating it, but by
comparing the sale price to the FMV or basis that I was
doing is simply a shortcut?

Can anyone confirm?
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jl0329
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Posted: 15 Apr 2011 at 10:57 | IP Logged Quote jl0329

FMV < Carry over basis ====》 Apply the special rule like
you did. Since the sale price is in between of the FMV and
basis, no gain/loss.

Or when He sold the stock to his daughter, a $10,000 loss
was not recognized. When Alice sold the stock, her gain is
$25000 - 20000 = 5000, BUT she is able to use the un-
recognized loss from her dad ($10000). And this will
eliminate her gain. Loss is recognized only to the extent
that the future sale price is lower than the acquiring
relative's purchase price (FMV $20000).
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jl0329
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Posted: 15 Apr 2011 at 10:58 | IP Logged Quote jl0329

Ok, I just read my explanation above and it's pretty
confusing.

In short, use the gift FMV rule and ignore the explanation
from becker.
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