On February 12, 2018, Nelson sells stock (basis $175,000) to his son Wayne for $150,000, the stock's fair market value on the date of the sale. On October 21, 2018, Wayne sells the stock to an unrelated party. In each of the following independent cases, determine the tax consequences of the transactions to Nelson and Wayne. a. Wayne sells the stock for $140,000. b. Wayne sells the stock for $180,000. c. Wayne sells the stock for $165,000.
What will be an ideal response?
a. Nelson: $25,000 disallowed loss; Wayne: $10,000 capital loss.
b. Nelson: $25,000 disallowed loss; Wayne: $5,000 capital gain ? in a gain situation, the related party's basis is increased by the previously disallowed loss ($180,000 ? $150,000 basis ? $25,000 disallowed loss to Nelson).
c. Nelson: $25,000 disallowed loss; Wayne: $0 capital gain ? same as (b) but the increase in basis is only allowed to the extent of the gain ($165,000 ? $150,000 basis - $15,000 of the $25,000 disallowed loss to Nelson).
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