Identify Tax Issues
Sample Solution
Tax Issues for Each Scenario:
Scenario 1: Victoria and the Stock Sale
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Capital Gains Tax: Selling the stock for a profit triggers capital gains tax. Since Victoria bought the stock for $2,000 and sells it for $5,000, she has a capital gain of $3,000 ($5,000 - $2,000). Depending on how long she held the stock (short-term or long-term), this gain will be taxed at either her ordinary income tax rate (32%) or a potentially lower capital gains rate.
Full Answer Section
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Use of Capital Gains for Education Expenses: While there's no direct tax deduction for using capital gains to pay for education expenses, Victoria might not owe significant taxes depending on the type of stock and holding period.
Scenario 2: Lester Partnership and the Land Purchase
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Allocation of Purchase Price: The Lester Partnership needs to determine the tax basis for the land separately from the buildings. Since they only wanted the land, they might need to justify the full purchase price ($260,000) being allocated to the land for tax purposes. The IRS might question if a fair market value allocation was made for the unwanted buildings and farmhouse.
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Demolition Costs and Scrap Sales: The demolition cost of $20,000 can be deducted as a business expense for the partnership. However, the proceeds from selling the scrap lumber for $12,000 need to be subtracted from the demolition cost, reducing the deductible expense to $8,000 ($20,000 - $12,000).