Patti sells a painting that has a fair market value of $9,000 to James for $6,000. Which of the following statements about the tax effect of the sale is/are correct?
I.If James is an employee of Patti's, no income is recognized from the sale.
II.If James is Patti's brother, James does not recognize any income from the sale.
III.If Patti is an art dealer and she sold the painting to James because she needed cash quickly, James does not recognize any income from the sale.
IV.If James owns 60% of Patti's company, James does not recognize any income from the sale.

A)Only statement II is correct.
B)Only statement III is correct.
C)Only statements II, and III are correct.
D)Only statements II, III, and IV are correct.
E)Statements I, II, III, and IV are correct.

Question

Patti sells a painting that has a fair market value of $9,000 to James for $6,000. Which of the following statements about the tax effect of the sale is/are correct?
I.If James is an employee of Patti's, no income is recognized from the sale.
II.If James is Patti's brother, James does not recognize any income from the sale.
III.If Patti is an art dealer and she sold the painting to James because she needed cash quickly, James does not recognize any income from the sale.
IV.If James owns 60% of Patti's company, James does not recognize any income from the sale.
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A)Only statement II is correct.
B)Only statement III is correct.
C)Only statements II, and III are correct.
D)Only statements II, III, and IV are correct.
E)Statements I, II, III, and IV are correct.

Quizplus · Accepted Answer

I is incorrect because the fact that James is an employee of Patti's does not affect the tax treatment of the sale. 
II is correct because if James is Patti's brother, then the sale between them is considered a gift rather than a taxable transaction. 
III is correct because if Patti is an art dealer, then she is likely in the business of selling paintings, and the sale to James at a discounted rate may be seen as a business decision rather than a taxable transaction. 
IV is incorrect because James' ownership of Patti's company would not affect the tax treatment of the sale of the painting.

Patti Sells a Painting That Has a Fair Market Value