Patti Sells a Painting That Has a Fair Market Value

question 1

Multiple Choice

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.

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Definitions:

Market Price

The present rate at which a commodity or service is available for purchase or sale in the marketplace.

Binomial Model

An option-valuation model predicated on the assumption that stock prices can move to only two values over any short time period.

Exercise Price

The specified price at which the option holder can buy (in the case of a call option) or sell (in the case of a put option) the underlying asset.

Binomial Model

A mathematical model for pricing options that uses a discrete-time framework to trace the evolution of option prices over time.