Wanda bought 5 acres of land near Antler Mountain 13 years ago for $5,000. Recently, the U.S. Forest Service announced that a new ski area would be built on Antler Mountain next year. Wanda receives a telephone call from a representative of Omni Ski Corporation offering her $100,000 for the property. She rejected the offer saying she plans to hold onto the property for her grandchildren. What are the tax effects of these events?
I.Wanda will not report income because of the increased value of the property on her tax return for this year.
II.Realization occurs when the offer is given to Wanda.
III.Ability to pay occurred when the offer was extended to Wanda.
IV.Recognition only occurs when a sale is completed because of the realization concept.

Question

Wanda bought 5 acres of land near Antler Mountain 13 years ago for $5,000. Recently, the U.S. Forest Service announced that a new ski area would be built on Antler Mountain next year. Wanda receives a telephone call from a representative of Omni Ski Corporation offering her $100,000 for the property. She rejected the offer saying she plans to hold onto the property for her grandchildren. What are the tax effects of these events?
I.Wanda will not report income because of the increased value of the property on her tax return for this year.
II.Realization occurs when the offer is given to Wanda.
III.Ability to pay occurred when the offer was extended to Wanda.
IV.Recognition only occurs when a sale is completed because of the realization concept.
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Quizplus · Accepted Answer

I. Wanda will not report income because the increase in property value is unrealized until she sells the property. IV. Recognition of income for tax purposes only occurs upon the completion of a sale, aligning with the realization concept. II and III are incorrect because realization and the ability to pay principle do not apply merely because an offer is made.

Wanda Bought 5 Acres of Land near Antler Mountain 13