Final answer:
The correct answer is that Shannon recognizes no gain; Norma recognizes no loss for tax purposes due to the disallowed loss on a sale between related parties; and Henry's adjusted basis for the stock is $20,000, which includes the disallowed loss from Norma that is transferred upon Shannon's sale.
Step-by-step explanation:
When dealing with the sale of stocks and determining capital gains or losses, there are specific tax rules that apply, especially when selling to a family member. In this case, Norma sells her stock to her sister Shannon for less than its adjusted basis, which would typically result in a loss for Norma. However, if Shannon later sells the stock for more than what she paid, but less than what Norma's adjusted basis was, Shannon's gain cannot exceed the loss that Norma was not allowed to recognize due to the sale being between related parties.
Therefore, the correct answer is:
- Shannon recognizes no gain, because her selling price is less than Norma's disallowed loss adjusted basis.
- Norma recognizes no loss for tax purposes when she sells the stock to Shannon, because loss recognition is disallowed on sales between related parties.
- Henry's adjusted basis for the stock would be Shannon's purchase price ($16,000) plus any disallowed loss of Norma's that Shannon can recognize ($4,000), totaling to $20,000. This is because Shannon's basis gets increased by the disallowed loss if she subsequently sells the stock at a gain, in effect transferring Norma's original basis to Henry.
Thus, the correct answer is:
C) Shannon recognizes a gain of $0; Norma recognizes a loss of $0; Henry's adjusted basis is $20,000.