Sadie sold 12 shares of stock to her brother, George, for $640 16 months ago. Sadie had purchased the stock for $880 two years earlier. If George sells the stock for $1,120, what are the amount and character of his recognized gain or loss in the current year?

Gain on sales $240

Explanation:

Proceed $1,120

Less basis $880

Gain on sales $240

Sadie's loss of $ 240 is deferred and her brother receives a dual basis in the stock.

Therefore If he sells the stock at a gain, he receives a $880 carryover basis from Sadie and If he in turn sells the stock at a loss he receives a $640 cost in the stock.

Hence Sadie's basis and holding period are transferred to George, so he receives a $240 which is ($1,120 proceed less $880 basis) long-term gain on the sale.

Therefore the amount and character of his recognized gain or loss in the current year

Is $240