Question

Marilyn owned 500 shares of Ibis stock that she purchased several years ago for $25,000. This year, she sold 200 of the shares to her brother for $7,000, its fair market value, when she wanted money for some plastic surgery. Determine Marilyn’s realized and recognized gain or loss on the sale and her basis in the 300 shares remaining. Determine her brother’s basis in the purchased stock and his realized and recognized gain or loss if he sells the shares for $12,000 the following year to an unrelated party.

Answer 1

Marilyn’s basis in the shares sold = $10,000 [(200/500)x $25,000]. She has a realized loss of $3,000 ($7,000 - $10,000) but she can recognize none of it because the sale was to her brother. Her basis in her remaining 300 shares is $15,000 ($25,000 - $10,000 sold). Her brother’s basis in the shares he purchased is the purchase price of $7,000. When he sells the stock for $12,000, he has a $5,000 realized gain ($12,000 - $7,000). He only has to recognize $2,000 of the gain, however, as he can offset his sister’s unrecognized $3,000 loss against his $5,000 gain.45. Related Party Transaction