Interesting, but delightfully easy tax question.

[Quixote]

A received a quantity of grain from his tenant B as his share of a crop. A gave the grain to his relative, C. The grain has a FMV of less than $12,000, so the federal gift tax is not a consideration. C sold the grain. What is C's basis in the grain? C asked several people and received answers ranging from "Your basis is $0.00" to "The sale is not a taxable event, so your basis is irrelevant." The latter was from someone at the IRS.

I discovered to my delight that the answer is remarkably simple, assuming IRS Pub. 225 is accurate.

I'll post my answer tomorrow.

[jcolvin2]

(Without checking the pub or any other authorities)

As a donee, C receives a carryover basis from transferor A. A had basis because he received the grain as "rent" (reportable as income by A) from B. C receives basis in an amount equal to the FMV of the grain on the day that A received the grain from B.

[Revised to reflect typo - A (donor) & B (renter) were switched in my original answer.]

[Arthur Rubin]

As a donee, C receives a carryover basis from transferor B. B had basis because he received the grain as "rent" (reportable as income by B) from A. C receives basis in an amount equal to the FMV of the grain on the day that B received the grain from A.

Exactly. For what it's worth, the result might be the same if C bought the grain from B, if B and C are closely related.

[Judge Roy Bean]

A received a quantity of grain from his tenant B as his share of a crop. A gave the grain to his relative, C. The grain has a FMV of less than $12,000, so the federal gift tax is not a consideration. C sold the grain. What is C's basis in the grain? C asked several people and received answers ranging from "Your basis is $0.00" to "The sale is not a taxable event, so your basis is irrelevant." The latter was from someone at the IRS.

I discovered to my delight that the answer is remarkably simple, assuming IRS Pub. 225 is accurate.

I'll post my answer tomorrow.

Is C a farmer who actually took possession of the grain?

[The Operative]

Without looking at the rules, my opinion is that 'A' receives the grain as rent and therefore 'A' would have income on the day he sells the grain with a cost basis of $0 or the FMV on the day he receives it if he stores it for his own consumption. If he transfers the grain to 'C', the value of the grain, and subsequently the amount of income to 'A', would be the FMV on the day of the transfer to 'C'. The cost basis in the grain for 'C' would be the FMV of the grain on the day it was given to him.

If 'A' intends to keep the grain...
1. 'A' receives grain as rent from 'B'.
2. 'A' records income as the FMV of the grain on the day of receipt.

If 'A' intends to sells the grain...
1. 'A' receives grain as rent from 'B'.
2. 'A' records as income the amount for which he sells the grain.

If 'A' gives the grain to 'C'...
1. 'A' receives the grain as rent from 'B'.
2. 'A' gives the grain to 'C'.
3. 'A' records as income the FMV of the grain on the day of the gift.
4. 'C' sells the grain at a later time. 'C's cost basis in the grain is the FMV on the day of receipt.

[Quixote]

A received a quantity of grain from his tenant B as his share of a crop. A gave the grain to his relative, C. The grain has a FMV of less than $12,000, so the federal gift tax is not a consideration. C sold the grain. What is C's basis in the grain? C asked several people and received answers ranging from "Your basis is $0.00" to "The sale is not a taxable event, so your basis is irrelevant." The latter was from someone at the IRS.

I discovered to my delight that the answer is remarkably simple, assuming IRS Pub. 225 is accurate.

I'll post my answer tomorrow.

Is C a farmer who actually took possession of the grain?

C is not a farmer. He never saw the grain. The gift and later sale were both done via account entries at a cooperative.

C told me that he had spoken with at least half a dozen people before he reached me and had received all sorts of bizarre answers. He was a bit suspicious when the answer turned out to be so simple.

By the way, Pub 225 comes into this only because it clarifies that A has income (or at least revenue) equal to the FMV of the gifted grain, something I was not sure of before I looked it up.

[jcolvin2]

It must be simple if I was able to puzzle it out. But I am not a tax wonk, I swear.

If you want to blow the guy's mind let him know he might be able to sell the grain for less than the FMV and write off the "loss" on his taxes. Money in his pocket and a "loss" he can take on his taxes.

I could be wrong.

Why would you want to sell something for less than FMV? Assume that FMV of an item (and its basis) is $A, and the taxpayer sells the item for $(A-B). This might generate a loss of <$B>. If the taxpayer was in the 33% bracket, the maximum benefit of the loss (which in the case of the grain would probably be a capital loss) would be (0.33 X $B).

I would rather sell the item for the full FMV of $A. The additional $B in my pocket today is worth far more than a potential benefit of (0.33 x $B) on next year's tax returns achieved by selling the asset for $(A-B).

[Judge Roy Bean]

A received a quantity of grain from his tenant B as his share of a crop. A gave the grain to his relative, C. The grain has a FMV of less than $12,000, so the federal gift tax is not a consideration. C sold the grain. What is C's basis in the grain? C asked several people and received answers ranging from "Your basis is $0.00" to "The sale is not a taxable event, so your basis is irrelevant." The latter was from someone at the IRS.

I discovered to my delight that the answer is remarkably simple, assuming IRS Pub. 225 is accurate.

I'll post my answer tomorrow.

Is C a farmer who actually took possession of the grain?

C is not a farmer. He never saw the grain. The gift and later sale were both done via account entries at a cooperative.

C told me that he had spoken with at least half a dozen people before he reached me and had received all sorts of bizarre answers. He was a bit suspicious when the answer turned out to be so simple.

By the way, Pub 225 comes into this only because it clarifies that A has income (or at least revenue) equal to the FMV of the gifted grain, something I was not sure of before I looked it up.

I'm no tax wonk, but my next question: Is C filing as a person or a company/corp? My guess is Pub 17 Ch 13 is the definitive section.

[webhick]

The basis doesn't matter, because A & C are Swishamacalitans. And Swishamacalia doesn't have taxes.

[jg]

The general rule for computing gain on the sale of a gift is that the recipient must use the lesser of fair market value at the time of the gift (FMV) or the donor's basis for computing gain. If the sales price is between the donor's basis and FMV there is no gain or loss to the recipient.

Applying that rule to the facts given (and presuming that the grain did not change in value between the time of the gift and the time of the sale - that is FMV = donor's basis = sales price) the recipient has neither gain nor loss, but generally does need to report the sale.