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Can someone please check my answer to the following question.

Jill bought 500 shares of stock on October 22,2005 for $30,000. On March 25, 2006 she gave half the shares to her sister when the fair market value was $55 per share. If Jill's sister sells the property for $14,000, what is her gain or loss?

My answer : 250 gain
My work: 30000/500= 60 per share
500 shares/2= 250 shares
14000-13750=250 gain

This is fairly complicated question. First of all, Jill gave a gift worth $13750. She should have paid a gift tax. In 2006, the annual exclusion was $12000. The presence of a gift tax really mucks things up.

For now, lets ignore the gift tax.

To solve the problem, you need to figure out the sister's basis in the stock. As I understand the IRS rules concerning gifts, for a sale to have a gain, the price per share would need to be ABOVE the donor's basis or ($60 per share in this example). For the sale to be a loss, the price per share would need to be BELOW the fair market value at the time the gift was received ($55 in this example). Sales prices between these two amounts have neither a gain or loss. Since the sales price is 14000/250=$56, I assert there is no gain or loss.

Go to Pub 17 for more details. (Find the section discussing the basis of property received as a gift.)

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