Diane receives a gift of stock from Sue on July 2,2013,when the stock was trading for $20,000.Sue paid $4,000 for the stock several years ago.Sue pays a gift tax of $500 on the transfer.Diane's basis in the stock is:

Question

Quizplus · Accepted Answer

The gift tax paid by Sue is not relevant for determining Diane's basis in the stock. 
Diane's basis in the stock is the same as Sue's basis (i.e., $4,000) because it was a gift and not a sale. 
However, since the stock was worth $20,000 when it was gifted to Diane, she will owe capital gains tax on the difference between the gift value and her eventual sale price.

Therefore, the correct answer is C) $4,400, which is Sue's original basis ($4,000) plus half of the gift tax paid ($250, since gift tax is split between the giver and receiver), for a total adjusted basis of $4,250. When Diane sells the stock, she will owe capital gains tax on the difference between the sale price and this adjusted basis of $4,250.

Diane Receives a Gift of Stock from Sue on July