Question

On January 15 of the current taxable year, Merle sold stock with a cost of $40,000 to his brother Ned for $25,000, its fair market value. On June 21, Ned sold the stock to a friend for $26,000.

a. What are the tax consequences to Merle and Ned?

A. Merle recognizes a capital loss of $15,000, and Ned recognizes a capital gain of $1,000.

B. Merle recognizes a capital loss of $15,000, and Ned does not recognize any gain or loss.

C. Merle does not recognize any gain or loss, and Ned recognizes a capital gain of $1,000.

D. Merle recognizes a capital loss of $15,000, and Ned recognizes a capital loss of $1,000.

Answer 1

Merle recognizes a capital loss of $15,000, and Ned recognizes a capital gain of $1,000.

Step-by-step explanation:

To determine the tax consequences to Merle and Ned, we need to consider the rules regarding the sale of stock. When Merle sold the stock to Ned for $25,000, which is less than its fair market value of $40,000, he recognized a capital loss of $15,000. Merle's loss is deductible against any capital gains he may have.

When Ned sold the stock to his friend for $26,000, he recognized a capital gain of $1,000, which is the difference between the selling price and the fair market value at the time of the sale.

Therefore, the tax consequences are that Merle recognizes a capital loss of $15,000, and Ned recognizes a capital gain of $1,000.