Elizabeth sells a painting that has a fair market value of $9,000 to Jonathan for $6,000. Which of the following statements about the tax effect of the sale is/are correct?
I.If Elizabeth is an art dealer and she sold the painting to Jonathan because she needed cash quickly, Jonathan does not recognize any income from the sale.
II.If Jonathan owns 60% of Elizabeth's company, Jonathan does not recognize any income from the sale.

A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Question

Elizabeth sells a painting that has a fair market value of $9,000 to Jonathan for $6,000. Which of the following statements about the tax effect of the sale is/are correct?
I.If Elizabeth is an art dealer and she sold the painting to Jonathan because she needed cash quickly, Jonathan does not recognize any income from the sale.
II.If Jonathan owns 60% of Elizabeth's company, Jonathan does not recognize any income from the sale.
​
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Quizplus · Accepted Answer

In the given scenarios, Jonathan does not recognize any income from the sale in either case. In the first scenario, the fact that Elizabeth sells the painting at a discount due to her need for quick cash does not create income recognition for Jonathan; he is simply purchasing an asset at its offered sale price. The second scenario's details about ownership percentages and income recognition are not relevant to the basic principles of income recognition from purchasing an asset below market value. The key point is that purchasing an asset below its fair market value does not in itself generate taxable income for the buyer.

Elizabeth Sells a Painting That Has a Fair Market Value