Question

Chris owns 70 percent of ABC Corporation. ABC Corporation had acquired land known as Parcel A in 1984 for $68,000 and held Parcel A for investment purposes. During the current taxable year, ABC Corporation sold Parcel A to Chris for $65,000 which amount was equal to the fair market value of Parcel A. Shortly after receiving Parcel A, Chris sold Parcel A to his friend from college for $73,000. How much gain or loss is realized and recognized by the respective parties as a result of each of the sales

Answer 1

Answer:

ABC

Realized Gain (loss) = ($300)

Recognized Gain (loss) = $0

Chris

Realized Gain (loss) = $8,000

Recognized Gain (loss) = $5,000

Explanation:

Seeing as Chris owns 70% of ABC Corp which is more than 50%, that would make them related parties. As they are related, certain Transaction must be treated differently.

In this scenario for instance, ABC sold Land to Chris, for this reason, they are not allowed to recognize any losses that occur from the sale.

ABC sold the land for $65,000 with a basis of $68,000.

= 65,000 - 68,000

= -$3,000

They REALIZED a loss of -$3,000. However they are not allowed to recognize this loss so the RECOGNIZED cost will be $0.

Chris then sells the land to an unrelated party for $73,000.

Chris's REALIZED GAIN is,

= 73,000 - 65,000 (the new basis)

= $8,000

However, because Chris is related to ABC Corp, he can deduct the original loss from his Realized gain.

= 8,000 - 3,000

= $5,000

Chris's RECOGNIZED gain is therefore $5,000.