ABC Corporation owned a rental property with aujusted basis of $ 300,000 and fair market value of

$1,000,000 in 2017. ABC had acquired this property in 2007, rented it out, and performed all

activities related to its rental. ABC sold an option to Joe to purchase this property any time in the

next five years for $1,000,000. The option was priced at $100,000. Upon purchase of the property,

Joe intended to rent it out and perform all rental activities himself. In 2018, due to a decline in the

real estate market, the fair market value of the property was only $800,000. Joe sold the option to

Sue, who was hopeful the market would recover soon, for $30,000.

In the following scenarios, please make the required determinations. Please cite your authority for

the conclusions reached.

A. Determine the amount and character of the gain to ABC Corporation on the sale of the option to

Joe.

B. Determine the amount and character of the gain or loss on the sale of option by Joe to Sue.

C. Assume that by 2020, the real estate market had a remarkable improvement, and the fair market

value of the property increased to $1,500,000. Sue promptly exercised her option and purchased

the property for $1,000,000. At the time of sale, ABC Corporation had an adjusted basis in the

property of $ 250,000. Determine the amount and character of gains or losses to ABC and Sue, and

the basis of the property in Sue's hand.

D. Assume instead that the real estate market continued to decline, and Sue allowed the option to

expire in 2020, when the fair market value of the property was only $400,000 (ABC's adjusted basis

was $250,000). Determine the amount and character of gains and losses to ABC and Sue.

E. Would your answer be any different in part D if the property subject to the option was the stock

of XYZ corporation, a wholly owned subsidiary of ABC Corporation?