Terry owns Lakeside, Inc. stock (adjusted basis of $80,000), which she sells to her brother, Jake, for $64,000 (its fair market value). Eighteen months later, Jake sells the stock to Pamela, a friend, for $78,000 (its fair market value). What is Terry's recognized loss, Jake's recognized gain or loss, and Pamela's adjusted basis for the stock?

Terry's Recognized Loss Jake's Recognized Gain (Loss) Pamela's Basis

A. $ - 0 - $ - 0 - $78,000

B. $ - 0 - $14,000 $64,000

C. $ - 0 - $14,000 $78,000

D. $16,000 $14,000 $78,000

E. None of these.

D. $16,000 $14,000 $78,000

Explanation:

Step 1: Determine Terry's adjusted basis

Terry's adjusted basis=$80,000

Step 2: Determine Terry's recognized loss

Terry's recognized loss=Terry's adjusted basis-fair market value at sale

where;

Terry's adjusted basis=$80,000

fair market value at sale=$64,000

replacing;

Terry's recognized loss = (80,000-64,000) = $16,000

Terry's recognized loss=$16,000

Step 3: Determine Jake's recognized gain

Jake's recognized gain=Fair market value at sale-Jake's adjusted basis

where;

Fair market value at sale=$78,000

Jake's adjusted basis=$64,000

replacing;

Jake's recognized gain = (78,000-64,000) = $14,000

Step 4: Determine Pamela's Basis

Pamela's Basis=fair market value at sale=$78,000