Problem 5-14 (LO. 2, 3)

Brittany Callihan sold stock (basis of $184,000) to her son, Ridge, for $160,000, the fair market value.

a. What are the tax consequences to Brittany?

Brittany will have a $ loss that is not deductible .

Feedback

The Code places restrictions on the recognition of gains and losses from related party transactions. Without these restrictions, relationships created by birth, marriage, and business would provide endless possibilities for engaging in financial transactions that produce tax savings with no real economic substance or change.

b. What are the tax consequences to Ridge if he later sells the stock for $190,000?

A realized gain of $30,000, with $6,000 recognized as a gain for tax purposes.

What are the tax consequences to Ridge if he later sells the stock for $152,000?

A recognized and realized loss of $8,000.

What are the tax consequences to Ridge if he later sells the stock for $174,000?

There is no recognized gain to Ridge and the $10,000 of unrecognized loss is permanently lost.

Feedback

Correct

c. Complete the letter to Brittany in which you inform her of the tax consequences if she sells the stock to Ridge for $160,000. Explain how a sales transaction could be structured that would produce better tax consequences for her.

Nellen, Young, Raabe, & Maloney, CPAs 5191 Natorp Boulevard Mason, OH 45040

June 21, 2019

Ms. Brittany Callihan 32 Country Lane Lawrence, KS 66045

Dear Ms. Callihan:

As you requested in your note, I am providing you with the tax consequences of the proposed sale of stock to your son Ridge. Although you would have a potential loss of $, you would not be able to recognize this loss on your tax return. The tax law disallows the recognition of losses between certain related parties.

If you do sell the stock to Ridge, his tax basis for calculating gain or loss on a subsequent sale by him would be $. However, if he should sell it at a gain, he could use your disallowed loss to reduce his gain.

Therefore, from a planning perspective, you should sell the stock to an unrelated party .

If you would like to discuss this further, please let me know.

Sincerely,

Ellen Allen, CPA

Tax Partner