534
33. (a) The requirement is to determine the recognized
gain or loss on AIice's sale of the stock that she had pur-
chased from her father. Losses are disallowed
on sales or MODULE 37 TAXES: TRANSACTIONS IN PROPERTY
exchanges of property between related
taxpayers, including
family members. Any gain later realized by the related
transferee on the subsequent disposition of the property is
not recognized to the extent of the transferor's disallowed
loss. Here, her father's realized loss of $30,000 - $20,000 =
$10,000 was disallowed because he sold the stock to his
daughter, Alice. Her basis for the stock is her cost of
$20,000. On the subsequent sale of the stock, Alice realizes
a gain of $25,000 - $20,000 = $5,000. However, this real-
ized gain of $5,000 is not recognized because of her father's
disallowed loss of $10,000.
34. (b) The requirement is to determine the amount of
gain from the sale of stock to a third party that Martin should
report on his 2010 income tax return. Losses are disallowed
on sales of property between related taxpayers, including
family members. Any gain later realized by the transferee
on the disposition of the property is not recognized to the
extent of the transferor's disallowed loss. Here, Fay's real-
ized loss of $15,000 - $11,000 = $4,000 is disallowed be-
cause she sold the stock to her son, Martin. Martin's basis
for the stock is his cost of $11,000. On the subsequent sale
of the stock to an unrelated third party, Martin realizes a
gain of $16,000 - $11,000 = $5,000. However, this realized
gain of $5,000 is recognized only to the extent that it ex-
ceeds Fay's $4,000 disallowed loss, or $1,000 ..
35. (c) The requirement is to determine among which of
the related individuals are losses from sales and exchanges
not recognized for tax purposes. No loss deduction is al-
lowed on the sale or exchange of property between members
of a family. For this purpose, an individual'sfamily in-
cludes only brothers, sisters, half-brothers and half-sisters,
spouse, ancestors (parents, grandparents, etc.) and lineal
descendants (children, grandchildren, etc.) Since in-laws and
uncles are excluded from this definition of a family, a loss
resulting from a sale or exchange with an uncle or between
in-laws would be recognized.
36. (a) Losses are disallowed on sales between related
taxpayers, including family members. Thus, Daniel's loss of
$3,000 is disallowed on the sale of stock to his son, William.
William's basis for the stock is his $7,000 cost. Since Wil-
liam's stock basis is determined by his cost (not by reference
to Daniel's cost), there is no "tack-on" of Daniel's holding
period. Thus, a later sale of the stock for $6,000 on July 1
generates a $1,000 STCL for William.
37. (c) The requirement is to determine the amount of
loss that Rego Corp. can deduct on a sale of its trailer to a
50% shareholder. Losses are disallowed on transactions
between related taxpayers, including a corporation and a
shareholder owning more than 50% of its stock. Since Al
Eng owns only 50% (not more than 50%), the loss is recog-
nized by Rego. Since the trailer was held for more than one
year and used in Rego's business, the $2,000 loss is a Sec.
1231 loss. Answer (d) is incorrect because Sec. 1245 only
applies to gains.
. B. Capital Gains and Losses
38. (a) The requirement is to determine when gain or
loss on a year-end sale of listed stock arises for a cash basis
taxpayer. If stock or securities that are traded on an estab-
lished securities market are sold, any resulting gain or loss is
recognized on the trade date (i.e., the date on which the trade
is executed) by both cash and
accrual method taxpayers.
39. (b) The requirement is to determine the amount of
an $8,000 net long-term capital loss that can be offset
against Lee's taxable income of $100,000. An individual's
net capital loss can be offset against ordinary income up to a
maximum of $3,000 ($1,500 if married filing separately).
Since a net capital loss offsets ordinary income dollar for
dollar, Lee has a $3,000 net capital loss deduction for 2009
and a long-term capital loss carryover of $5,000 to 2010.
40. (d) The requirement is to determine the amount of
excess of net long-term capital loss over net short-term
capital gain that Sol Corp. can offset against ordinary in-
come. A corporation's net capital loss cannot be offset
against ordinary income. Instead, a net capital loss is gener-
ally carried back three years and forward five years as a
STCL to offset capital gains in those years.
41. (d) The requirement is to determine the proper treat-
ment for a $24,000 NLTCL for Nam Corp. A corporation's
capital losses can only be used to offset capital gains. If a
corporation has a net capital loss, the net capital loss cannot
be currently deducted, but must be carried back three years
and forward five years as a STCL to offset capital gains in
those years. Since Nam had not realized any capital gains
since it began operations, the $24,000 LTCL can only be
carried forward for five years as a STCL.
42. (b) The requirement is to determine the holding
period for determining long-term capital gains and losses.
Long-term capital gains and losses result if capital assets are
held more than twelve months.
43. (a) The requirement is to determine the treatment
for the sale of the antique by Wald. Since the antique was
held for personal use, the sale of the antique at a loss is not
deductible.
44. (c) The requirement is to determine the capital loss.
carryover to 2011. The NSTCL and the NLTCL result in a
net capital loss of $6,000. LTCLs are deductible dollar for
dollar, the same as STCLs. Since an individual can deduct a
net capital loss up to a maximum of $3,000, the net capital
loss of $6,000 results in a capital loss deduction of $3,000
for 2010, and a long-term capital loss carryover to 2011 of
$3,000.
B.1. Capital Assets
45. (c) The requirement is to determine the item that is
included in the definition of capital assets. The definition of
capital assets includes property held as an investment and
would include a manufacturing company's investment in US
. Treasury bonds. In contrast, the definition specifically ex-
cludes accounts receivable arising from the sale of inven-
tory, depreciable property used in a trade or business, and
property held primarily for sale to customers in the ordinary
course of a trade or business.
46. (b) The requirement is to determine the amount of
Hall's capital assets. The definition of capital assets in-
cludes investment property and property held for personal
use (e.g., personal residence and furnishings), but excludes
property used in a trade or business (e.g., limousine).