On May 1, 2012, Daniel Wright owned stock (held for investment)
purchased two years earlier at a cost of $10,000 and
having a fair market value of $7,000. On this date he sold the
stock to his son, William, for $7,000. William sold the stock for
$6,000 to an unrelated person on July 1, 2012. How should William
report the stock sale on his 2012 tax return?

(a) Losses are disallowed on sales between related taxpayers,
including family members. Thus, Daniel’s loss of $3,000
is disallowed on the sale of stock to his son, William. William’s
basis for the stock is his $7,000 cost. Since William’s stock basis
is determined by his cost (not by reference to Daniel’s cost),
there is no “tack-on” of Daniel’s holding period. Thus, a later sale
of the stock for $6,000 on July 1 generates a $1,000 STCL for
William.