The Blue Utilities Company paid Sue $2,000 for the right to lay an underground electric cable across her property anytime in the future.
A)Sue must recognize $2,000 gross income in the current year if the company did not install the cable during the year.
B)Sue is not required to recognize gross income from the receipt of the funds, but she must reduce her cost basis in the land by $2,000.
C)Sue must recognize $2,000 gross income in the current year regardless of whether the company installed the cable during the year.
D)Sue must recognize $2,000 gross income in the current year, and when the cable is installed, she must reduce her cost basis in the land by $2,000.
E)None of these.

Question

Quizplus · Accepted Answer

The payment of $2,000 is considered an advance payment for the right to use Sue's property in the future. Such payments are not recognized as gross income until the year of the actual use or installation of the cable. However, since the payment is related to the property, it must reduce Sue's cost basis in the land by $2,000.

The Blue Utilities Company Paid Sue $2,000 for the Right