M4 Related Party Transactions Flashcards
MCQ-14907
Hull and Black are partners in a partnership. Hull has a 60 percent interest in the partnership’s capital and profits. In Year 1, Hull purchased stock for $20,000 and decided to sell the stock to the partnership at the fair market value of $8,000 in Year 5. What is Hull’s recognized long-term capital loss in Year 5?
$0
Hull owns more than 50 percent of the partnership, so Hull and the partnership are related parties. Hull has a $12,000 realized loss on the sale of the stock to the partnership
($8,000 sales price − $20,000 cost). Because it is a related party loss, the deduction of the loss is disallowed.
MCQ-06604
Bank Corp.’s voting stock is owned by the following individuals: Farber, 25%; Farber’s mother, 15%; Farber’s father, 40%; and Grosset, an unrelated person, 20%. Farber’s sister sold equipment to Bank at a loss. For the purposes of determining whether the sister’s loss is deductible under the related party rules, what percentage of Bank’s stock, if any, does the sister constructively own?
80%
Under the related party rules, stock owned by a taxpayer’s family members (including brothers, sisters, spouses, ancestors, and lineal descendants) is treated as if it is
constructively owned by the taxpayer. Therefore, the sister is treated as if she owns the 25 percent of Bank stock owned by her brother, the 15 percent owned by her mother, and the 40 percent owned by her father. In total, then, the sister is treated as if she owns 80 percent of the Bank stock (25 percent + 15 percent + 40 percent = 80 percent)
MCQ-14661
Terry, a taxpayer, purchased stock for $12,000. Later, Terry sold the stock to a relative for $8,000. What amount is the relative’s gain or loss?
$0
The loss realized on the transaction by Terry is $4,000 ($8,000 - $12,000). Terry is not allowed to deduct the loss because it is on a sale to a related party. However, the question asks about the relative’s gain or loss, not Terry’s gain or loss. Because all the relative did to this point was to buy the stock, the relative has no gain or loss.
MCQ-01667
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 amount of the loss from the sale of Zinco stock can Conner deduct in the current year?
$0
Even though Conner has a realized loss of $10,000 on this transaction he cannot deduct the loss since it was incurred in a transaction with his daughter, a related party.
MCQ-01668
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?
$0
Alice has a realized gain of $5,000 on the transaction: $25,000 sales price less $20,000 purchase price. However, she can reduce the gain, but not below zero, by the amount of loss her father could not deduct on the sale to her. Thus, Alice can reduce her gain by up to $10,000, but not below zero. Here, the gain is $5,000, so it is reduced to zero. Conner should have sold the stock in the open market so that he could deduct the entire loss. Alice could then have purchased the stock in the open market.
MCQ-05523
Gibson purchased stock with a fair market value of $14,000 from Gibson’s adult child for $12,000.The child’s cost basis in the stock at the date of sale was $16,000. Gibson sold the same stock to an unrelated party for $18,000. What is Gibson’s recognized gain from the sale?
$2,000
Losses are disallowed on most related party sales transactions even if they were made at an arm’s length (FMV) price. The basis (and related gain or loss) of the (second) buying relative depends on whether the second relative’s resale price is higher, lower, or between the first relative’s basis and the lower selling price to the second relative. In this case, the $4,000 capital loss on the sale by Gibson’s adult child to Gibson [$12,000 SP - $16,000 Basis] is disallowed. Gibson’s basis is determined by his selling price to a third party. In this case, the selling price is $18,000, which is HIGHER than the original basis of Gibson’s adult child. Gibson’s basis in the stock is, therefore, his adult child’s basis of $16,000. Gibson’s recognized basis is calculated as follows:
Selling price $18,000
Basis (16,000)
Total Gain $2,000
MCQ-15797
Lamb purchased real property for $20,000 and sold it the next year to Gray, Lamb’s child, for the fair market value of $12,000. Later, Gray sold the property to Hogan, who is not related to Gray or Lamb, for $15,000. What amount, if any, should be recognized by Gray?
$0
A loss on a sale to a related party is disallowed. When the second related party later sells the property to an unrelated party, no gain or loss is recognized if the sales price is
between the first related party’s original cost basis and the second related party’s purchase price. Lamb, the first related party, sold the property to Gray for an $8,000 loss ($12,000 sales price – $20,000 cost basis). The loss was disallowed because Gray was a related party. Gray, the second related party, later sold the property to Hogan, an unrelated party, for $15,000, which is between Lamb’s original cost basis of $20,000 and Gray’s purchase price of $12,000, so no gain or loss is recognized by Gray.
MCQ-01726
In Year 3, Fay sold 100 shares of Gym Co. stock to her son, Martin, for $11,000. Fay had paid $15,000 for the stock in Year 1. Subsequently in Year 3, Martin sold the stock to an unrelated third party for $16,000. What amount of gain from the sale of the stock to the third party should Martin report on his Year 3 income tax return?
$1,000
Losses between related parties are disallowed. Therefore, Fay’s $4,000 capital loss ($15,000 basis less $11,000 received) is disallowed because she sold the stock to her son, a related party. When her son sells the stock to an unrelated party, however, he can use the $4,000 disallowed loss to reduce any gain he realized from the sale (but not to create or increase a loss). His realized gain is $5,000 ($16,000 received less $11,000 basis), but he can reduce it by $4,000 to $1,000 using his mother’s disallowed loss. Martin sold the stock for higher than Fay purchased it. The donor’s basis ($15,000) is, therefore, used to determine gain on the sale by Martin.
MCQ-12517
An individual taxpayer sells stock with a basis of $11,000 to her brother for $7,600. The value of the stock 30 days prior to the sale is $9,600. The taxpayer has no other capital asset transactions during the year. What amount, if any, can the taxpayer deduct on her tax return for the loss sustained?
$0
The stock was sold at a loss of $3,400 ($7,600 sales price − $11,000 basis). Since the stock was sold to the taxpayer’s brother, it is a related party loss and the taxpayer is not
allowed to deduct any of the loss.
MCQ-04080
Good, a C corporation, sells an automobile to its sole shareholder for $4,500. Good’s adjusted basis in the automobile is $12,000, and the fair market value is $5,000. What is the amount of loss that is recognized by Good?
$0
Taxpayers may not deduct losses on sales of property to related parties. A corporation and a shareholder who owns more than 50% of that corporation are considered related
parties.
MCQ-08442
On March 1 of the previous year, a parent sold stock with a cost of $8,000 to their child, for $6,000, its fair market value. On September 30 of the current year, the child sold the same stock for $7,000 to Hancock, who is unrelated to the parent and child. What is the proper treatment for these transactions?
Parent has $0 recognized loss and child has $0 recognized gain.
The parent has a realized loss of $2,000 ($6,000 sale less $8,000 cost). However, none of this loss is recognized, because it is disallowed under the related party transaction rules. The child has a realized gain of $1,000 ($7,000 sale less $6,000 cost). This gain can be reduced (but not below zero) by the disallowed loss of the parent. Therefore, the recognized gain to the child is zero.
