Question

For each of the following independent transactions, calculate the recognized gain or loss to the seller and the adjusted basis to the buyer.
Note: If an amount is zero, enter "0.

a.Bonnie sells Parchment, Inc. stock (adjusted basis $17,000) to Phillip, her brother, for its fair market value of $12,000.

b. Amos sells land (adjusted basis $85,000) to his nephew, Boyd, for its fair market value of $70,000.

c.Susan sells a tax-exempt bond (adjusted basis $20,000) to her wholly owned corporation for its fair market value of $19,000.

d. Ron sells a business truck (adjusted basis $20,000) that he uses in his sole proprietorship to his cousin, Agnes, for its fair market value of $18,500.

e. Martha sells her partnership interest (adjusted basis $175,000) in Pearl Partnership to her adult daughter, Kim, for $220,000.

How to compute the Buyer's Adjusted Basis?

Answer 1

Answer:

(a) Gain or loss to the seller:

= Adjusted basis - Fair market value

= $17,000 - $12,000

= $5,000 (Loss)

No loss will be recognized since the B and P are brothers. As per section 267, such loss is disallowed.

Hence, Loss of $5,000 will not be recognized.

Fair market value is considered as adjusted basis to buyer. Hence, the adjusted basis for the buyer is $12,000.

(b)

Gain or loss to the seller:

= Adjusted basis - Fair market value

= $85,000 - $70,000

= $15,000 (Loss)

Transaction a and b are not related party as per section 267.

Fair market value is considered as adjusted basis to buyer. Hence, the adjusted basis for the buyer is $70,000.

(c)

Gain or loss to the seller:

= Adjusted basis - Fair market value

= $20,000 - $19,000

= $1,000 (Loss)

Recognized loss to seller = $0, since s owns whole stock of corporation.

Fair market value is considered as adjusted basis to buyer. Hence, the adjusted basis for the buyer is $19,000.

(d)

Gain or loss to the seller:

= Adjusted basis - Fair market value

= $20,000 - $18,500

= $1,500 (Loss)

Recognized loss to seller = $1,500, since R and A are not related party as per section 267.

Fair market value is considered as adjusted basis to buyer. Hence, the adjusted basis for the buyer is $18,500.

(e) Gain or loss to the seller:

= Adjusted basis - Fair market value

= $175,000 - $220,000

= $45,000 (Gain)

Recognized loss to seller:

= $175,000 ÷ 2

= $87,500, since M and K both are related parties as per section 267.

Purchase price of interest is considered as adjusted basis to buyer. Hence, the adjusted basis to buyer is $220,000.