Warsham Inc. sold land with a $300,000 basis to Sara Phillips for $117,000 cash. Sara owns 68 percent of Warsham's outstanding stock. Which of the following statements is true?

Question

Quizplus · Accepted Answer

Warsham cannot recognize its $183,000 realized loss on the sale on its current year tax return because the transaction is between a company and a related party (Sara owns 68 percent of Warsham's outstanding stock). Tax laws generally disallow the recognition of losses on sales or exchanges of property between related parties to prevent tax avoidance strategies that involve shifting losses to reduce taxable income.