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…

Choice "b" is correct. 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:

https://kxbjsyuhceggsyvxdkof.supabase.co/storage/v1/object/public/file-images/AICPA_CPA-Regulation/page_26_img_1.jpg

Choice "a" is incorrect. There would be a zero gain or loss if the selling price were between the adult

child's basis and Gibson's purchase price, but this is not the case in the facts.

Choice "c" is incorrect. This answer option uses the fair market value of the stock at the date of

purchase as the basis. As is discussed above, the rules do not provide for this treatment. [$18,000 SP

- $14,000 FMV = $4,000]

Choice "d" is incorrect. This would be the answer if the basis were Gibson's purchase price of

$12,000; however, because the stock sold for more than Gibson's child's basis and the child had a

disallowed loss on the sale to Gibson, Gibson is allowed to use his child's original basis of $16,000 as

his basis for the stock on the date of the second sale. [$18,000 SP - $12,000 PP = $6,000]