On September 1, of the Current Year, James, a Cash-Basis

question 106

Multiple Choice

On September 1, of the current year, James, a cash-basis taxpayer, sells his cottage to Bill, also a cash-basis taxpayer, for $100,000. James' basis in the cottage is $65,000. The real property tax year is the calendar year. Real estate taxes on the property for the year are $3,650 and are payable in November of the current year. The sales agreement does not provide for apportionment of real estate taxes between the buyer and seller. Assume Bill pays all of the real estate taxes in the current year. The effects of this sales structure will be:

• A) \[\begin{array} { | l | l | l | }
• \hline\text { Taxes allocated to James } & \text { Taxes allocated to Bill } & \text { Effect on James' Gain } \\
• \hline \$ 0 & \$ 3,650 & \text { no effect on gain } \\
• \hline
• \end{array}\]
• B) \[\begin{array} { | l | l | l | }
• \hline\text { Taxes allocated to James } & \text { Taxes allocated to Bill } & \text { Effect on James' Gain } \\
• \hline \$ 3,650 & \$ 0 & \text { decrease gain by } \$ 1,220 \\
• \hline
• \end{array}\]
• C) \(\begin{array}{|l|l|l|}
• \hline\text { Taxes allocated to James } & \text { Taxes allocated to Bill } & \text { Effect on James' Gain } \\
• \hline 2,430 & \$ 1,220 & \text { increase gain by } \$ 2,430 \\
• \hline
• \end{array}\)
• D) \[\begin{array} { | l | l | l | }
• \hline\text { Taxes allocated to James } & \text { Taxes allocated to Bill } & \text { Effect on James' Gain } \\
• \hline \$ 1,220 & \$ 2,430 & \text { increase gain by } \$ 1,220 \\
• \hline
• \end{array}\]

---

Definitions:

Marginal Cost

The financial requirement to produce an additional unit of a product.

Inelastic

Describes a situation where the demand for a good or service is relatively unresponsive to changes in its price.

Market Power

Market power is the ability of a firm or a group of firms to raise and maintain prices at above-normal levels, influencing the terms and conditions of a particular market.

Elastic

Describes how the amount of a good that is demanded or supplied changes in reaction to a price adjustment.