On January 15 of the current taxable year, Merle sold stock with a cost of $40,000 to his brother Ned for $25,000, its fair market value. On June 21, Ned sold the stock to a friend for $26,000.
a.What are the tax consequences to Merle and Ned?b.Would Ned recognize any gain if he sold the stock for $41,000?
What will be an ideal response?
| a.???? | Merle realizes a loss of $15,000 [i.e., $25,000 (amount realized) – $40,000 (adjusted basis)], which is disallowed because the stock was sold to a related party. Ned realizes a gain of $1,000 [i.e., $26,000 (amount realized) – $25,000 (adjusted basis)] on the sale to a friend but does not recognize any gain. Ned’s gain of $1,000 is less than Merle’s previously disallowed loss of $15,000. |
| b.?? | Ned would realize a gain of $16,000 [i.e., $41,000 (amount realized) – $25,000 (adjusted basis)]. Gain of $1,000 would be recognized [i.e., $16,000 (gain realized) – $15,000 (previously disallowed loss)]. |
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