Case Study

 

Marilyn owns land that she acquired three years ago as an investment for $250,000. Because the land has not appreciated in value as she anticipated, she sells it to her brother, Amos, for its fair market value of $180,000. Amos sells the land two years later for $240,000.

  1. Explain why Marilyn’s realized loss of $70,000 ($180,000 amount realized − $250,000 adjusted basis) is disallowed at the time of the sale to her brother.
  2. Explain why Amos records neither a recognized gain nor a recognized loss on his sale of the land.
  3. How does the related-party disallowance rule affect the total gain or loss recognized by the family unit?
  4. Which party wins and which party loses, in a federal income tax sense?
  5. How could Marilyn have avoided the loss disallowance on her sale of the land?

  Please provide sufficient justification by citing applicable IRS codes and tax rules. You should include a cover page and references page in APA format. Your memo should not exceed two pages. 

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